Unbundling, Rebundling, and Innovation in the FinTech Industry
Andrew Lee — Principal, Antler
One of the benefits of being a pre-seed investor sitting at the trailhead of entrepreneurship is increased visibility into trends as they take root. Having made a number of FinTech investments at Antler US over the past 12 months, we’re often asked to prognosticate on the future of the FinTech industry. Financial services have matured a great deal over the past ten years, and observers often wonder what that means regarding future innovation and consolidation within the industry. Before discussing which trends will likely emerge in the coming years, it’s important to touch on the evolution of FinTech and Financial Services over the past 20 years.
In the late 90s and early 2000s, banks were to financial service customers what supermarkets are to grocery shoppers. Nearly all available services and products — from mortgages to wealth management, to cash transfer — could be found at your local bank. Few people compared services and prices or shopped around for the best option, as most individuals trusted and relied on their local, brick and mortar banks for all services. The process of finding financial services and products was certainly convenient, but not optimal for product quality, customization, or usability.
In the mid to late 2000s, the financial landscape began to change. Open APIs and the growth of cloud infrastructure lowered traditionally high barriers to entry in the finance industry and accelerated the digitalization of traditional finance. This digitalization reduced customer acquisition costs and lessened dependence on brick-and-mortar offerings.
The Global Financial Crisis damaged traditional financial services in a variety of ways, but the loss of consumer trust has proven to be the most impactful and enduring. The GFC also led to increased regulations on the banking industry, with the Volker rule dealing the largest blow. The Rule restricted how banks were allowed to invest and trade, and the business lines in which banks could participate.
This powerful combination of technological advancement, falling barriers to entry, distrust of traditional finance, and government regulation created the perfect environment for financial innovation to take place off of Wall Street — known as “unbundling”.
As a result, FinTech startups began popping up everywhere, disrupting nearly every line of traditional finance. These startups began as single-service businesses, initially focused on addressing a single problem, and expanding from there based on their users’ needs. Some of these startups offered products/services similar to those offered by banks, while others developed entirely new, innovative offerings. Over time, these startups grew, launched new business lines, entered new markets, made strategic acquisitions, and evolved into power players in the financial services industry.
Within the past few years, we’ve seen growth in FinTech M&A activity, fueled by increasing customer acquisition costs, competition for market share, and the drive to keep consumers on-platform indefinitely. This movement, known as rebundling, has also been buoyed by consumers’ preference to utilize a handful of financial platforms as opposed to the 20+ applications that most of us have installed on our smartphones.
The FinTech industry now sits in an intriguing position where rebundling and consolidation activity will increase over the coming years, but the industry will continue to rely on young startups to drive innovation. Following the steps of the FinTech firms that emerged roughly ten years ago, this new generation of startups will continue to be the most reactive to and understanding of customer needs and will be the quickest to build fitting products and services.
Coinciding with early-stage innovation, established FinTechs (as well as traditional finance incumbents) will continue to search for ways to increase market share and increase the time users spend on their platforms. This will drive firms to be increasingly aggressive in their search for strategic acquisition targets — leading to M&A activity occurring earlier than ever before in the FinTech startup lifecycle. In the coming years, expect to see established firms acquiring the most innovative FinTech startups, as young as Series B or even Series A.
The current market dynamic will equate to high levels of activity at both ends of the FinTech startup funnel. While we will continue to see significant early-stage venture investment in the industry, we will also see increasing acquisition rates of the most innovative early and mid-stage FinTech firms. FinTech is mature relative to many other tech sectors, and you can expect the industry’s unique dynamics to cause a blur of innovation and M&A activity over the coming years.
NOTE: I’m always interested in hearing what others are up to. If you’re building something or just interested in chatting FinTech, send me a note at andrew@antler.co.
Andrew Lee is a Principal at Antler US.
Read more insights from the Antler US team here.
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