One guy’s perspective on FinTech
Financial Technology (FinTech) is more widespread than ever and is gaining momentum. If one takes a step back and takes a lay of the land its hard to find a space that FinTech has not penetrated. From my perspective, there are four big buckets of FinTech — payments, consumer credit, investing, and APIs. Each space has several massive players that are all founded on the basis of Technology.
In the payments space, the two big players that immediately come to mind are Stripe and Block (formerly Square). Here, each FinTech basically makes the process of completing transactions, sending and receiving money, etc. easier. Founded in 2002, Stripe provides APIs that developers can use to build-in payment processing capabilities on their websites. In return for that service, Stripe takes a cut of the transaction dollar amount. And now, Stripe is making moves into underwriting, modeling, and offering other payment-related services to merchants. For example, Strip can now help merchants identify fraudulent transactions to avoid chargebacks and has recently started using their transaction data to underwrite small business loans. Block is similar and has a presence in the physical world offering elegant Point of Sale terminals for businesses. Block has also been making further inroads on the consumer space as well — their Cash App facilitates peer to peer money transfers and has 36 million monthly active users in December 2020 and in January 2022 Block bought Afterpay (a BNPL provider) for $29 billion. Currently, Stripe is valued at $7.4 billion and Block’s market capitalization is $70.4 billion.
In the Consumer Credit space, the movements have been even more exciting. In Q4 2021, Americans had roughly $15.6 trillion in outstanding debt and FinTechs have been eager to grab a slice of the market. Here, SoFi is probably the most well-known FinTech. SoFi was founded in 2011 by four Stanford graduate students who wanted to provide more affordable student loan options. They quickly expanded to offer pretty much every other type of loan. And now, in addition to student loans SoFi underwrites Personal, Home, and Car loans. Their expansion has been relentless — outside of loans, SoFi offers credit cards, investing services, checking and savings accounts, and insurance. And now SoFi is a full fledged bank when they secured their bank charter earlier this year. Currently, SoFi’s market capitalization is $6 billion.
The magnitude of change within investing is similarly huge. From retail investing to roboadvisers the disruption has been never ending. When thinking about FinTechs in the investing space, obviously Robinhood comes to mind and its popularity among the retail investor crowd is clear. One only has to recall the GameStop story from 2021 to see how widespread and well-received Robinhood actually is. And along the roboadviser dimension, Betterment and Wealthfront are the key players. Each firm offers to automatically manage an individual’s assets in exchange for a fee based on the dollar value of assets managed. Betterment now has $22 billion under management with roughly 500,000 accounts. Robinhood currently has a market capitalization of $10 billion and Wealthfront was purchased by UBS for $1.4 billion in January 2022.
Finally, FinTech APIs. In my opinion, these API service providers do not get the popularity and reception that they deserve. After all, they are the services that underpin the actual work going on behind the scenes. My favorite in this space is Plaid. Plaid enables businesses and applications to connect to individuals bank accounts in a seamless and consistent manner. For example, Robinhood uses Plaid APIs to allow their users to connect to their bank accounts and move money between Robinhood and non-Robinhood accounts for trading. Plaid has been widely adopted by the industry and now major banks, such as Capital One and Goldman Sachs-Marcus, use it to give their customers access to their checking and savings accounts on other platforms. And the function is critical — Plaid offers a consistent and secure way for developers to access banking information regardless of the actual underlying bank. In 2020, Visa attempted to acquire Plaid for $5.3 billion but had to abandon the effort due to the privacy and antitrust concerns cited by the United States Department of Justice. This month, Plaid raised a $425 million Series D at a valuation of $13.4 billion
FinTech is fascinating, fast-moving, and never sleeps. The opportunities to improve how we interact money, something that affects everyone pretty much all the time, are endless. I can’t wait to see what’s next.
