Revealing FinTech Infrastructure’s Silent Revolution
How ‘background enablers’ benefit both consumers and businesses
VC investments in FinTech reached a global record high in H1 2021 (KPMG), and the European ecosystem is flourishing. In fact, most VC money in Europe is being invested in FinTech (Statista). Innovation is happening at all ends — but how can you navigate this, and where do we see the landscape of early-stage FinTech companies evolving?
In this post, you’ll get a 2-category framework to view Fintech, meet four exciting new companies we invested in, and identify some key trends across the industry.
🔎 See a 2-category lens on Fintech
First off, there are predominantly two types of FinTech companies: the ones owning the customer relationship (both in B2C & B2B), and the ones who are enablers in the background.
A. We’ve all experienced the first type of FinTech innovation over the past two decades — tech companies disrupting core financial services which make our lives easier: in retail and business banking, loans, investing, insurance, and accounting. The tech revolution in both financial and insurance services puts customer-centricity, lean processes, and data first. Earlybird backed numerous challengers at the earliest stages, now in their scaling phases — N26, Interhyp, Smava, Getsafe, Payhawk, Nuri, or recently Ottonova. Thinking about the incumbents’ remaining market share (Capgemini report here), there is still enormous potential for disruption in this category, with new creative challengers popping up.
B. However, from our perspective, today’s landscape of early-stage FinTech companies is dominated by a more silent revolution — one that puts the spotlight on ‘FinTech infrastructure’. Those companies serve as enablers in the background, radically reducing the cost and complexity of offering financial services. CBInsights and A16z call it the ‘AWS Moment of Financial Services’.
Recent exits and funding rounds serve as role models for the next generation: in the US, we saw SoFi’s $ 1.2bn acquisition of Galileo (here), and nCino’s IPO. Looking at Europe, Tink’s acquisition by Visa (here), or the funding rounds of Truelayer (here), Mambu (here), and Thought Machine (here) stood out.
💥 How does FinTech infrastructure drive innovation and what makes it exciting from a VC perspective?
- Impact: infrastructure players are on a mission to lower entry barriers and time to market — for both FinTechs and other businesses launching financial services. Customers can focus on their core product and relationship to end-users, without worrying about operations in the background. This reduces innovation cycles while improving the quality and breadth of products. It also allows tapping into new customer groups and driving financial inclusion, e.g. when infrastructure helps with international expansion or increased data quality to serve ‘thin file customers’.
- Scalability: in principle, FinTech started as a business model itself. The core product of ‘FinTech infrastructure’ is, however, software. This allows for efficient scaling while avoiding typical FinTech challenges, such as managing debt facilities.
- Margins: infrastructure companies outperform traditional FinTechs with attractive SaaS models showing high margins and predictable revenues. Typically, these are combined with fees on transaction volumes passing through their platform.
- Stickiness: an infrastructure layer is typically deeply embedded into existing customer flows and all transaction data is collected through the infrastructure provider. Oftentimes, customers even rely on regulatory licenses held by their infrastructure providers.
🔑 Key trends to observe: How do ‘background enablers’ from our portfolio benefit consumers and businesses with infrastructure?
1) Orchestrating & harmonizing data sources for lending decisions:
Imagine this: Many expats have experienced being considered as a ‘thin file customer,’ paying high fees or not accessing financial products at all — even a phone contract can be a challenge when entering a new country. Not only for expats but for anyone applying for credits, poor data quality is a problem. Lenders need seamless access to a wide range of standardized data sources to improve decision-making processes. However, reality shows a fragmented landscape of data sources in FinTech, including government APIs such as HMRC, payroll providers, and open-banking enabled transaction data. With increasing API providers, not only does that mean more data formats to be normalized and managed, it also means more data silos and higher maintenance costs. New FinTechs and APIs help access different parts of data more efficiently (such as Tink or Truelayer mentioned above), but the result is a fragmentation of customer data needing to be reconciled across different channels, verified, and re-typed in multiple systems. To solve this, our London-based portfolio company Sikoia has built a meta-layer on top of various API providers and data sources — aggregating, homogenizing, and orchestrating customer data at a global scale. Read more here & here.
2) Benefitting SMBs with Embedded Finance Products:
“Every company will be a FinTech company” has become a widespread macro trend (A16z): Software businesses can provide the most customized financial products right when the customer needs them, embedded into their usual products — for instance, Uber can offer seamless early payments to their drivers within the Uber app. Embedded Finance drives convenience, accessibility, and adoption of financial services (Sifted) — a trend that is being accelerated through API-based FinTech infrastructure. Berlin-based Finmid was founded by a team of former N26 executives building an embedded finance tool that will be marketed toward software firms. They follow a focused approach in helping software companies offer financial products to SMB customers, with a simple plug-and-play solution. Read more here.
3) Bringing liquidity to corporates via new financial instruments:
Short-term financing for corporates is widely fragmented and inefficient today with $65 trillion+ in annual transaction volumes globally. Common financing methods, such as factoring, come with high fees and local restrictions. Our Swiss portfolio company FQX is here to change this. They developed the infrastructure for the so-called ‘eNote’ — a truly disruptive short-term financing & payment instrument that is unlocking liquidity in trade finance and money markets. An eNote represents an unconditional promise to pay (“I’ll pay you this much, on this date”) which is enforceable in 165+ countries and can be flexibly sold and transferred to any third party. Just like PayPal for consumers, eNotes can be integrated into banks or FinTech platforms. As a first-mover, FQX has the potential to become the de-facto standard for eNotes globally. Read more here.
4) Enabling FinTechs to offer investment products at scale across countries:
Retail investing is clearly on the rise (Finextra). However, launching an investment product has been a challenge, especially when having international ambitions. Traditional securities infrastructure is outdated and regulatory complex, being dominated by national players across Europe. Our portfolio company Upvest taps into this opportunity with the first plug-and-play pan-European securities API. Upvest helps FinTechs to launch investing products for consumers, integrated into their core website or app. They serve customers with a modular all-in-one API, including all regulatory licenses needed for a Pan-European scale. Based in Berlin, the company has grown to a team of 50 FinTech experts & engineers. Read more here.
Backing these fresh companies and expanding our FinTech footprint is one of the fastest ways we see ourselves to be part of this quiet revolution. If you are working on a related solution, we’d love to hear about it.
