Fintech Trends in Q4 2020

Verticalization, B2B, and Real Estate

2021 UPDATE: Only a few weeks into 2021 and our Q4 2020 update must already be updated for 2021 developments:

• The successful IPO of fintech Affirm (co-founded by Peter’s PayPal co-founder Max Levchin) almost doubled in value to $23 billion on its debut January 13th. Affirm has successfully shown that fintech startups can accelerate online sales for even big firms like Walmart, Shopify and Peloton.
• The announced SPAC of SoFi (I was an early investor) on January 7th at almost $9 billion was another sign that consumers are looking to use more fintech. These may well herald a boom in new fintech listings.
• Palantir, which Peter co-founded, isn’t exactly a fintech but it is a big deal for unstructured data which will be a significant driver for fintech startups. After its IPO in Q4 its valuation jumped to over $50B ahead of demo day for Gotham and Foundry.
• Fintech could see $100bn in liquidity in 2021 (which to us means a bunch of successful, talented fintech entrepreneurs and engineers have the liquidity and freedom to launch new startups!)
• Perhaps most telling on how much has changed in just one year, Visa announced it was acquiring fintech API startup Plaid.com for $5.3 billion on January 13th 2020 — but this was effectively blocked by the DOJ on January 12th 2021 and Plaid.com is reportedly getting new funding offers at $15bn!
• JPMorgan Chase CEO Jamie Dimon pithily said banks should be “scared sh — less” about the fintech threat. He also regrets calling bitcoin a fraud (more on that).
• An international comparison of payment systems — worth reading the thoughtful analysis of leading fintech payment firms in the US (Stripe), China (Ant) and other countries. And of course Stripe’s $100B valuation and Ant’s defenestration by the Chinese government.
• We look forward to seeing how the Biden administration thinks about CFBP/SEC/OCC fintech regulation.

Emerging Ideas in Fintech for 2021

We have reached the end of an unprecedented year, when a virus became a pandemic and wreaked global havoc. Among investors, fears of a complete market collapse quickly morphed into fears of a new bubble forming in almost every major asset class — equities, real estates, and cryptocurrency (even COVID-19 can’t fight the Fed).

Amid all this 2020 was perhaps the best year ever for fintech companies and the first year that fintech truly became the new financial software for economies. Stay-at-home orders and quarantines have meaningfully accelerated consumer adoption of digital financial products. Companies with online digital financial services took market share from offline-first legacy players. We believe that fintech in 2021–2022 will echo consumer software trends in 2009–2010: in both cases a crisis accelerated changes in consumer behavior and shattered the status quo.

The pandemic has shown us that we are still in the early innings of fintech’s proliferation. We predict an accelerated fintech breakout in the coming years and highlight three new trends:

Financial inclusion goes vertical

Even before COVID-19, financial services were failing too many people. An estimated 25% of Americans were unbanked or underbanked. In addition, 72% of Americans do not have 6 months of expenses saved, and 57% of Americans do not feel financially secure. The pandemic revealed that the 75% of those who were not underbanked, when push comes to shove, were not necessarily fully banked (or even, it turns out, well banked). Average Americans who did not face daily financial difficulties have, especially in times of duress, still faced significant financial gaps during COVID-19, and many of them turned to fintech. A McKinsey report found that fintech banking services increased by 21%, fintech payment services increased by 7%, fintech investment services increased by 23% and fintech lending services increased by 25%. This was most true in Southern states, among minority communities and among younger GenZ (18–23 years old) customers.

Early-wage access is a great example. On a recent earnings call, Visa chief executive Alfred Kelly said demand for earned wage access from supermarket, quick-serve restaurant, healthcare, and hospitality workers had more than doubled in the fourth quarter compared to the same period last year. This is one of the areas that has been unlocked by the pandemic and continues to accelerate with the rise of the gig and creator economy.

We have regularly trashed most neobanks in our memos (and had strong and underappreciated reasons to do so). In the pre-pandemic period, financial inclusion pretty much referred to generic services from neobanks who offered horizontal financial services against traditional banks at a cheaper price with better UI — but burned piles of cash marketing low-margin products in the process. In the post-pandemic, we see the encouraging rise of vertical neobanks with a focus on specific segments, functions, or needs. We even almost invested in one of them that helps consumers with good habits earn 3% on savings (HMBradley)!

Bringing customized best-in-breed products for target verticals

Neobanks, for certain demographic/segments, are offering good financial services for the first time. For example, Step provides a mobile banking service aimed at teen users age 13 to 18 by offering them an FDIC-insured bank account without fees. The app is adding 7,000 to 10,000 new accounts per day on top of its existing 500,000+ active users. Oxygen, a digital bank focused on the financial needs of freelance workers — artists, musicians, designers, writers, real estate agents, and engineers — has, since its relaunch in February, grown volumes and revenues by 10x. We love that neobanks have begun to focus on underserved segments first, where they can offer vastly superior services, rather than falling for the VC-fueled TAM (i.e., market size) trap of attacking the larger near-prime/prime millennial market first.

Low friction as the new “low fees”

Reduced fees have been the main battleground for financial inclusion — challenger banks for spending, mobile wallet for payment ,and P2P for financing. Now, the solution extends to low friction, flexible services, especially to the point of payroll. In a recent development, remote payroll outfit Deel has launched a service enabling users to withdraw paychecks in cryptocurrency. We foresee more and more innovative solutions in payroll fintech in 2021.

Bottom-up fintech services on the rise

One benefit of accelerated fintech adoption is that services with a “product-led” bottom-up sales approach have started to gain traction, with meaningful recurring revenues and lower customer acquisitions costs. Flex, which enables users to choose flexible schedules for bill payment, is quickly gaining traction with its inaugural service which allows workers to spread rent payments across the month. Quo, whose membership service curates financial tools and products to build financial wellness for lower- and middle-class Americans, has built a >50k waitlist in three months. Provide, which offers finance options for healthcare practices, has funded more than 1,000 practices since the pandemic began.

B2B Fintech: White-Label + SME + Automation

Since the pandemic, consumers have become accustomed to world-class products and services from the comfort of their own homes — resulting in behavioral shifts that would have otherwise taken a decade. As the world prepares for economic recovery, merchants cannot afford not to scale aggressively into this new demand. However, they face the challenge of how to take advantage of this growing customer base with a scalable, seamless, and secure payment experience.

In 2020, full-stack payment service providers (PSPs) like PayPal, Square, Stripe, Adyen, and Marqeta fully enjoyed rapidly growing customers and transaction volumes on top of record-high stock prices. They provide the quickest and most convenient option to incorporate payments for enterprises and merchants. However, merchants must also give up a lot — including critical data collection and loss of control over key parts of customer experience. To allow online sellers to fully control user experience/control and maximize revenue, we are expecting explosive demands for a new breed of solutions that fix these gaps post-pandemic.

Customizing your solutions: White-label fintech payment solutions

Fintech-as-a-service (FaaS) platforms allow businesses to offer a native-branded experience to customers. It also offers significantly lower fees — FaaS charges on a transaction volume basis, whereas PSP charges based on transaction values — and customized solutions for authorization and checkout. Moov Financial’s open-source platform allows banks, SaaS companies, and fintech providers to deploy basic financial services via embedded payments infrastructure. In contrast, Syntera is developing a tool to connect certain financial institutions such as credit unions and community banks with fintech companies.

Digitizing SMEs: Building a fintech stack

Small businesses accept, on average, 11 forms of payment, most of which are not covered by Stripe or Square. In addition, PSPs usually cover payment solutions at the point of sales, leaving upstream and downstream activities such as payroll, inventory management, invoicing, and accounts receivables for third-party providers. Autobooks provides a turnkey service for financial institutions to white-label small accounting, invoicing, bill payment, and payment acceptance systems for small businesses.

Automating back office: Monitoring goes real time

As we noted in our last memo, virtualizing the SME back office has become an important theme to reduce friction into what looks like an accelerating economic recovery. As more and more layers of technology are added to SMEs’ value chain, they also need a data pipeline that connects the firm’s consolidated view on money flow with the different SaaS applications servicing HR, procurement, and sales and accounting. Modern Treasury builds payments operations solutions that automate the full cycle of money movement — from payment initiation, through approvals, to reconciliation — all from one app and API. Digits is building a software platform for businesses to facilitate the processes related to financial reports, and transaction records and eliminate tedious, manual work to keep updated and empower people of all backgrounds and skill sets to visualize, understand, and manage their businesses.

Accelerated digitization for real estate tech

The pandemic has been a shock to the real estate market, which has increasingly turned to digital solutions. Along the entire journey from buying to selling of residential real estates, fintech can provide a mix of better data, greater control, more adaptability, and better customer experiences — all without leaving your home office.

Real estate is the world’s largest asset class, worth $277 trillion — three times the total value of all publicly traded equities — but technology adoption and digitization have been slower than in other asset classes. Since the pandemic, though, companies in real estate are finally adopting new technologies, and 81% of real estate organizations now plan to use new digital in traditional business processes. This is unlocking a trillion-dollar opportunity.

Empowering transaction processes with digital platforms

Working from home (and eating from home, drinking from home, streaming from home…) during COVID-19 makes housing more important but also makes it harder to buy or rent a new home. New breeds of startups combining fintech and real estate tech are emerging to facilitate growing demand to do these things digitally. Steadily lets landlords purchase insurance through a mobile platform without going through an agent. Notarize enables consumers and businesses to sign and notarize official documents digitally; the company experienced a 400% increase in uptake for the first three months of the lockdown. HouseCanary is a home valuation fintech pioneer providing trusted property valuations to enable frictionless experience in buying, financing, and improving homes.

Strong tailwinds for liquidity solutions

Home equity liquidity services have been available for a while, but are now enjoying a strong tailwind. Noah provides homeowners with upfront financing, in return for a percentage of the home’s future appreciation or depreciation. Its platform also provides “instant pre-qualification” — in less than two minutes, with “three simple questions.” EasyKnock (where I was an early investor) is becoming well-known for its signature sales leaseback program, Sell and Stay, which allows people with a home valued between $100K and $1M to sell to EasyKnock and then lease back as a tenant with the option to buy back the house later.

Written by Phin Upham

December 2020

Updated February 2021