The hard truth about not owning a crystal ball
Since the advent of the word “fintech”, anyone tried to play the little game of tarot to predict the next-gen finance trends. Everyone has heard of banks going out of business, GAFAM taking over consumer finance, financial institutions teaming up with fintech, the fintech ‘bubble’ and so on…
To be fair, last year we also embarked on the hard task to publish our first article guessing the fintech and insurtech trends that would shape the European landscape in 2019.
The clock is ticking and the 365-day period has now passed: I find myself doing the math to see what we got right and wrong. Well… I would say we got roughly half of our guesses right. That’s the hard truth of not owning a crystal ball, but also the fun part of working in VCs. Surprises and wrong predictions are our cup of tea.
Let’s run a short recap:
a) European Neobanks conquering the world — 25% right
The guess about plans to expand beyond the EU borders is right. However this seems to be taking longer than expected. Rumors say N26 mission to conquer the US seems to be harder than expected, while Revolut stayed strong in its home markets while preparing another mega round to properly fuel its official launch in the US, Canada, Singapore and Japan. Also, the proliferation of local players in foreign markets is making it harder for European companies to build up their brand overseas.
b) PSD2 finally getting tangible — 25% right
PSD2 is live but only the UK has embraced a true open banking model. Continental Europe appears to be lagging behind. If we were right about the consolidation of API providers and spread in the number of services leveraging on PSD2 standards, we again overestimated the time needed to see the full-blown effect throughout the Continent (or better, regulator granted FIs a 4-months+ reprieve to get compliant with PSD2)
c) Identity management & fraud detection hotter than ever — 100% right
The idea behind this thesis is that the combination of PSD2 and GDPR (alongside other regulatory texts) would raise the need for solutions that prevent and protect consumers’ data as well as reduce the risk for financial providers. As a confirmation we have seen a crescent interest for KYC solutions (see fundraise of Onfido and Yoti), data anonymization solutions (see Privitar), fraud prevention (see Featurespace and GuardSquare).
d) Towards a home buying, selling & financing (r)evolution — 60% right
We rightfully predicted that mortgage brokerage (Trussle, Pretto, Molo Finance), ibuyer models (Nested, Casavo) and “alternatives to deposit” (flatfair) would get more relevant. On the contrary, we have been too optimistic in betting on the surge of mortgage alternative solutions (Virgil, Unmortgage) and fully automated rental-management platforms (Rentify, Goodlord, Bellman).
e) Other interesting trends — 50% right
i. Increasing spread of credit products with subscription-like models
We have missed out on the “market serendipity”
iii. Growth of index-based insurance products/services
Apart from Descartes Underwriting, we have slightly missed the shot here. However, in our defence, the US market has definitely been way more active in the space 😁
Macro trends and takeaways from 2019
2019 has been (yet) another exceptional year for Fintech, both in Europe and globally. Based on CB Insights report for the 3rd quarter of 2019, there are now 58 VC-backed fintech unicorns worldwide, while global fintech funding topped $24.6B. That is more than 2017’s total, but in terms of the number of deals, we see a contraction vs 2018 (the record year for Fintech).
What about Europe in particular? In 2019, we have tracked roughly 500 deals and a total raised amount of €7bn. Find below some high-level stats.
In 2019 Europe scored 20 mega-deals, mostly in the UK (11) and Germany (5). With Klarna and Lendify, Sweden has two. The first French startup in terms of fundings this year is PayFit, with 70 million euros raised.
Prediction from outer space: how will 2020 fintech and insurtech ecosystems look like?
As pointed out by Nik Milanovic in its recent article, Fintech — as well as insurtech — stayed “heavily verticalized, recreating the offline branches of financial services by bringing them online and introducing efficiencies”. The ground seems now mature for the next leap: the rebundling of financial services, to reach the holy grail of finance, what Angela Strange from a16z calls “Google Maps for money” (aka autonomous finance).
We share this “finance on autopilot” vision. However we all are aware that this looks like the end of the journey, hence a mid to long-term vision. As the development of fintech seems to mirror the evolution of computers and the internet, at BlackFin, we are all steamed up to take a role in this (r)evolution!
Let’s now get back to the present. What to expect for 2020? Brexit is real, WeWork not so much, postponing IPOs seems fashionable (see Robinhood and Lemonade), general macro-economic context should prompt caution. Speaking for fintech, the number of seed investments is reducing, in favour of consolidation rounds in more mature companies (of which some with gigantic — and sometimes unreasonable — valuation). What should we expect then for the next 12 months?
We have tried, for the 2nd time, to undust our crystal ball and hint at some trends that will characterize the first year of the new decade. There you go!
💶 Happy Lending
At the dawn of fintech, lending was one of the first segment new ventures aimed at disrupting (see Funding Circle or Lending Club). Lending yet remains today one of the most lucrative, hence addressed, topics. This is true both for consumers and SMEs / enterprises.
In the past 5 years we have seen attempts to “disrupt” the lending business, both at product level (e.g. payday loans) and at distribution level (e.g. digital mortgages, point-of-sale lending).
We believe that, during 2020, we will witness an increased offering of lending products. In particular, those that bear a lower credit risk and that ties directly to customer habits.
In this sense, we are going to see an increased interest towards European point-of-sale (POS) lenders (e.g. Alma in France, ScalaPay in Italy, and ViaBill in Denmark). Europe has proven to be a very hard market to expand, due to a very granular (e)commerce ecosystem, but, above all, due to its patchwork of regulations. This is particularly true in a heavily regulated industry like finance. With this in mind, you can see how there is an untapped opportunity for European-based POS lenders.
Also, a number of alternative lenders will be stepping to the scene to fill the gap left by new economies / business models (i.e. gig, on-demand, e-commerce, SaaS).
Directly from the US to our tables, we will soon also have a taste of revenue-based finance, i.e. lending paid back with a company’s revenue. Following the success of Clearbanc, we believe a number of similar projects will take off in Europe as well, probably starting from the largest tech hub (London, Berlin, Paris) to move to other less tech-dense areas.
Lastly, we will very soon see booming platforms allowing employees and freelancers respectively to access instantly their earned wages before the pay day, and achieve better financial stability. This kind of facility is already provided by several banks in different geographies. However, the interesting part is that fintechs are now tackling this opportunity as well, bringing the “tech” piece into it. This means better connectivity with payroll and HR systems, higher flexibility (both for employees and employers) and re-designed UX and service model...
📈 It’s all about the CFO
It is not new that at SME level, far too many finance tasks are still manual, from reconciling accounts to building forecasts to chase unpaid credits. The same goes with larger enterprises but with a different flavour: software exists but the overall workflow is clunky.
This is the main reason that why 2020 (and so the years after) it’s gonna be all about the CFO role, with the aim of automating low-value tasks and enriching core information with additional data.
It is likely that the innovation stream will start both bottom-up (i.e. SMEs) and top-down (i.e. Tier 1 corporates), converging somehow in the middle. The first push came from card expense management platform (e.g. Pleo, Spendesk) and SME banks (e.g. Qonto, Tide). More recently, we have seen few attempts to tackle the SMEs segment via cashflow forecasting tools (e.g. Agicap in France and Futrli in the UK), dunning and debt collection software (e.g. Dunforce in France and Likvido in Denmark), data enrichment solutions (e.g. Xelix in the UK).
On the large corporate front, the battle is tougher as the sale processes are longer and more complex, and large software providers “control” the market. Nevertheless, there certainly are opportunities. We have seen examples around treasury management (AccessPay in the UK), cash forecasting (Cashforce in Belgium) and FX cockpits (Just Technologies in Norway).
Less tied to the CFO roles, other adjacent areas like advanced payroll management and procurement are under discussion.2020 could showcase some interesting change also in those segments.
🏢 Incumbents keep on fishing for innovation
There are no doubts incumbents won’t be leaving their roles of protagonists any time soon. On the contrary, they seem to be more and more willing to team up with B2B fintech and insurtech to streamline their internal workflows, add new features to their products, better leverage on their data sets, level up their tech stacks.
We believe 2020 will see a growth in B2B propositions and therefore a bunch of new opportunities for incumbents to innovate. We think two topics are probably going to be hot in the next 12 months: privacy and documents retrieval/extraction.
Privacy has always been a constant theme in the financial industry due to high sensitivity of the data FIs are managing and the consequent strict and punitive regulations. For these reasons many incumbents found hard time collaborating with service providers (the likes of fintechs or insurtechs) due to the high costs and lengthy processes of setting test areas where to run applications in protected environment with anonymized customers’ data. Companies like Privitar paved the way and new opportunities will arise to help incumbents exploiting ’ “dormant” data via technology solutions (e.g. sharding or synthetic data).
Data extraction from documents, as well as document retrieval, is one of a big pain for an industry that, up to now, has produced trillions of documents and stored them either in physical vaults or the depth of tangled IT legacy systems. Companies like Eigen Technologies and Omni:us have offered compelling solutions to bridge these problems. The sophistication of ML techniques has opened up a new array of opportunities to further support FIs in their digitalisation path (see for instance reciTAL and Evolution.ai).
🔮 …and finally few other hints of what 2020 could have in store for us
We thought of sharing here some other thoughts on what to expect this year.
We will probably see:
- An increasing interest from software companies (Uber, Deliveroo, etc.) and platforms to add the “fintech” revenue stream in their books, offering in the meantime a seamless all-in-one experience to their users. This means one great opportunity for banking API providers as well as fintech platforms like Wirecard, Marqeta, Adyen, Stripe.
- Cornered to a “low margins vs high CAC” paradigm, digital insurance brokers and MGAs will attempt the “full-stack shuffle” to capture higher value from their customers and untie from slow and rigid partnerships with carriers.
- The underserved (or badserved) niches will be the next target of both insurtech and fintech. From the banks and platform for kids (see Kard, GoHenry or gimi) to those for the Elderly (Kindur, Clover Health). Private banking is also buzzing (see 220). Insurtech will be focusing more and more on the SME segment (see Coverflex and SingularCover).
If you want to hear more about our predictions or feel like sharing some thoughts on our guesses, feel free to pick our brains. Reach us here.