Fintech Trends in Q1 2021
Fintech’s Moment
One of our manifestos for fintech is democratizing access to financial services by lowering fees and barriers for adoption. However, despite massive investment and innovation around fintech, the US still shows the highest transaction costs for financial services among developed countries.
In “Fintech comes to America at last,” The Economist argued that thanks to the pandemic, America is finally showing meaningful adoption of digital payments, a path where most European and Asian countries lead. In the past quarter, the volume of transactions on PayPal was 36% higher than a year earlier. The number of people using Square’s digital Cash App rose by 50% to 36 million during 2020.
Yet despite the rise of innovative firms, fees for American consumers have yet to fall by much. Square charges 2.6% on the average transaction; Stripe’s fee nears 3%; and the average interchange fee stands at 1.76%. By contrast, China’s big fintech firms charge below 0.5%, with fees kept low by a fierce price war. Europe tackled fees with regulation via fee caps and transparency (PSD2), and the European average stands at under 1%. Fintechs still often have little choice but to rely on America’s duopoly credit-card networks to connect merchants, banks, and consumers. Visa and Mastercard continue to demand a high rent of roughly 1.5% on average.
In January 2021, Visa and Plaid called off an agreement, announced about a year ago, that would have seen the consumer credit giant take over the data-focused fintech API startup. The Department of Justice filed suit to block the deal in November 2020, arguing that the combination would “eliminate a nascent competitive threat that would likely result in substantial savings and more innovative online debit services for merchants and consumers.”
At Haymaker, we think this was a defining moment where fintech undergoes structural innovation in the US. America’s own effort at instant payments, backed by the Federal Reserve and known as FedNow, is to launch in 2023. Plaid secured $425 million Series D funding at a $13.4 billion valuation, 2.5x of what Visa offered a year ago, just two months after a deal to be bought by Visa fell apart. Fintech is booming, but it’s still in the early innings of its journey.
Here are some of the trends that we are watching in fintech innovation this quarter.
Proactive financial inclusion: Financial literacy
In the past five years, investors infused at least $535 million into 89 known deals with fintech startups that described themselves as offering savings platforms for children, young people, and parents. Of that, $344 million was raised just in 2020. For example, Greenlight Financial Technology, founded in 2014, guides parents to teach children how to save with its app and debit card products. The fintech company secured a $1.2 billion valuation after closing on $215 million in Series C funding last September, led by Canapi Ventures and TTV Capital.
Teen mobile banking app Step targets children aged 13 to 18. CJ MacDonald, co-founder and CEO, believes that financial literacy starts with a bank account. Step launched its free FDIC-insured bank account and Step Card in October 2020 and then secured a $50 million Series B round led by Coatue in December 2020. Another startup, Copper Banking, also targets teens, and the app’s median age is 14. The company focuses on distribution through schools and is working with schools in Texas, California, and Florida to educate students about bank accounts, debit and credit cards, and saving.
Many children may have rarely set foot inside a bank branch. The earlier fintechs have access to a customer, the more impact can be expected over that customer’s eventual financial path. With active education around financial literacy at early ages, we should expect more digital-savvy and actively engaging customers for financial inclusion in the next decade.
Financial literacy for kids
UK-based kids’ money management app gohenry has raised $40 million in a funding round led by Edison Partners and joined by Citi Ventures. Founded in 2012, the pre-paid debit card and app is designed for young people aged 6 to 18. It allows a parent to manage their children’s pocket money while teaching them financial responsibility. Children can earn their coin by completing weekly or one-off tasks set by the parent and create savings goals.
Financial literacy for 401(k)
Capitalize, the New York–based startup, aims to build a platform that makes it virtually painless to locate misplaced 401(k) accounts, select and open IRAs, and consolidate retirement plans — for free. In February 2021, Capitalize raised $12.5 million in a Series A round to help grow that platform. Canapi Ventures led the round, with participation from existing backers including Bling Capital, Greycroft, RRE Ventures, and Walkabout Ventures.
Financial literacy for saving
Yotta is a mobile application where a user links their external bank account, deposits money into their Yotta savings account, and, instead of earning interest on these savings balances, earns tickets ($25 each). Each ticket gives them a chance to win prizes ranging from 10 cents up to $10 million. Yotta raised a $13.2M Series A, led by Base10 Partners with participation from Y Combinator, Core Innovation Capital, and Slow Ventures.
Fintech automation is here to stay
While the “access” element is still a considerable part of fintech’s focus today, automation is increasingly sharing the spotlight. In particular, tools that help people automate personal finance tasks like bill-paying and budgeting have become popular time-savers. The pandemic has upended many people’s sense of security, and tasks like signing up for automatic bill payments may need to play second fiddle to manual oversight of accounts and slowly chipping away at credit card debt for the time being.
Fintech automation for startups
Bookkeeping fintech Zeni launched the first AI-powered finance concierge for startups, making its intelligent bookkeeping, accounting, and CFO services available to businesses across the United States. The company also announced in March 2021 that it has raised $13.5 million in funding. Its Series A was led by Saama Capital with participation from Amit Singhal, Sierra Ventures, SVB Financial Group, Liquid 2 Ventures, Firebolt Ventures, Dragon Capital, and Twin Ventures
Zeni has processed more than $300 million in transactions in its first year and is on track to process a total of $1 billion in transactions in the next 12 months.
Fintech automation for legacy finance teams
Cube, a NYC-based FP&A platform for modern finance teams, raised $10 million in Series A funding. The round was led by Mayfield, with participation from Bonfire Ventures and Operator Collective. Cube automates the manual workload associated with spreadsheet-based planning and analysis by connecting existing spreadsheets and source systems to its cloud platform and system of record, saving users time, reducing errors, and ensuring that the right data is instantly accessible to the right users.
Fintech automation for insurance underwriting
AgentSync leverages automation and technology to build AgentSync Manage, its tech-forward producer management system. The product is built on the Salesforce platform and offers direct integration with the National Insurance Producer Registry to enable carriers, agencies, and MGAs to grow and scale. Customers include Hippo Insurance, Lemonade, Hub International, Embroker, iptiQ (a subsidiary of Swiss Re), Beam Dental, Centene, and Rippling, among others.
Its recently closed Series A funding of $20 million was led by Elad Gil and David Sacks’ Craft Ventures, with participation from Marc Benioff, Caffeinated Capital, Operator Collective, and Nine Four Ventures. The round brought the company’s valuation to $220 million.
The battleground for fintech transactions is shifting
Visa was the first major network to officially announce that it will allow the use of the cryptocurrency USD Coin to settle transactions on its payment network. Traditionally, if a customer chose to use a Crypto.com Visa card to pay for a coffee, the digital currency held in a cryptocurrency wallet needed to be converted into traditional money. The cryptocurrency wallet deposited traditional fiat currency in a bank account, to be wired to Visa at the end of the day to settle any transactions, adding cost and complexity for businesses.
Visa’s move is no surprise, as finance firms including BNY Mellon, BlackRock Inc, and Mastercard Inc take steps to make more use of cryptocurrencies for investment and payment purposes. We believe this is natural evolution, because fintech’s first and foremost mission is to bring seamless and frictionless transactions across currencies, platforms, and geographies. The last decade’s fintech innovation has evolved around building payment stacks — PayPal, Square, and Stripe. The upcoming evolution will connect separated legacy systems, such as commerce and cryptocurrencies, with digitally built payment systems.
‘Checkout’ is the new battleground for payment
The battle for the checkout page is in full swing, with digital wallets competing with credit/debit cards, which compete with BNPL solutions, which compete with crypto solutions, which compete with other checkout solutions. The need to provide merchants with tools to prevent fraud and reduce cart abandonment presents a user experience challenge that is becoming a popular space to attack.
Fast is a device- and platform-agnostic solution that is consumer-focused and marketed as the “world’s fastest checkout.” The “Fast Checkout” button is available on the BigCommerce and WooCommerce platforms with their total merchant reach of over three million, despite Fast only releasing its product in September. The company raised a $102 million Series B funding round led by Addition and Stripe, with participation from existing investors Index Ventures, Susa Ventures, Sugar Capital, and Jaren Glover.
Digital asset for transactions finally debuted in the mainstream
Ember Fund, a mobile “hedge fund” app for cryptocurrency investing, is fundamentally changing the way people invest in cryptocurrencies. The technology allows anyone from around the world to buy into a managed portfolio of cryptocurrencies with just a few taps. Ember is fully decentralized/non-custodial, meaning its thousands of users have custody of their own assets.
Eco is a digital global cryptocurrency platform that can be used as a payment tool around the world for daily-use transactions. It is not controlled by any single individual, organization, or nation. Its mission is to distribute the majority of the economic value generated by the Eco platform to its community to create a more equitable distribution of resources. Eco raised $26 million in funding, which was led by Andreessen Horowitz’s a16z Crypto with participation from Activant Capital, Founders Fund, Coinbase Ventures, Slow Ventures, Tribe Capital, Valor Capital Group, and over one hundred other funds and angels.
Written by Phin Upham
March 2021
