The Thesis
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The Thesis

10 Trends in Fintech

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Fintech has seen enormous growth over the past decade, but I feel we’re just scratching the surface. Here are 10 trends that describe the headwinds in the world of fintech.

#1 New investment avenues will become more mainstream.

The FTSE would have returned a modest 2–3% CAGR in the past 5-years, even after adjusting for the pandemic. This, combined with the negligible interest earned on savings, leaves the consumer hunting for potentially better investment avenues.

The FTSE performed worse than the housing index from 2015–2020
… and significantly underperformed alternative investments like private equity
… and of course, crypto :)

And I see a major trend towards creating new investment opportunities, and providing easier access to asset-classes which were earlier inaccessible to the majority of the population:

This could manifest itself in many ways:

  • Making investments in crypto as easy as investing in stocks
  • Improving access to assets like homes and luxury cars through fractional ownership
  • New lottery-like gamified savings instruments
  • Providing access to earlier inaccessible Private Equity investments
  • P2P lending to earn better interest than bank deposits
  • Social Impact investing
#1 enabling new investment avenues

#2 “No-code” in Financial Institutions

A friend of mine who works in a back-office of a bulge-bracket fund, was telling me about her role. My reaction to that was, “but why do they need you for that? Can’t this be automated?”. And it wasn’t just her, there were at least 200 other people in the company performing mundane, and easily automatable tasks! But there are a few factors stopping this:

  • The exact set of processes that they perform are unique to them, so no off-the-shelf solution works
  • Trying to get internal IT teams to automate them would probably take ages, and complicate the already complex IT architecture even more
  • There are always InfoSec concerns with bringing in external software
  • These processes keep undergoing minor iterations very regularly (e.g. if the database they subscribe to changes their format/ row-headers etc.)

This seems like a perfect set-up for ‘Financial Services InfoSec compliant no-code services’ that can help decentralize this automation process, while keeping the CIO happy. This can potentially save millions of dollars worth of manpower costs, apart from reducing the time to output for such reports by several orders of magnitude.

No/low-code for Financial Services

#3 A neobank account for me

While Revolut, Monzo and Starling have built their neobanks by being 10X better than traditional banks, I believe that is not where the next neobank will come from. Instead of building a lowest-common-denominator bank for a wide user-base, I can see many more “successful” banks focused on meeting the needs of a narrow(er) customer segment in the best possible way. Some examples of these banks could be:

  1. Focused purely on startups (managing runway)
  2. For creators, to help manage receivables from multiple sources like “buymeacoffee” etc.
  3. For teenagers, with seamless workflows to help parental guidance
  4. A new type of joint bank account with workflows which can help early-stage teams

While the first generation neobanks relied on a better user-journey and technical chops, the new generation of banks will go a step further by building deep understanding of the specific customer segment, and creating tailored journeys for them.

There’s a neobank for everyone

Of course, all this will be possible due to a new trend …

#4 Banking Primitives as a Service

A big trend, guiding feasibility and pace of new customer-segment focused neobanks is BPaaS companies. There are companies like ComplyAdvantage, Plaid etc. which provide elements of the banking stack as a service already. But very soon, we will see almost all elements of the banking stack being provided as a service. In fact, companies will go beyond this, and start building “Primitives” — building blocks of various levels of the banking stack from scratch. These will ensure even more flexibility to assemble the next FinTech to suit their customer segments.

Building the building-blocks of FinTech

#5 Remote working puts new demands on Fintech companies

As remote working in some form, becomes acceptable, companies will increasingly tap into global talent pools instead of restricting to employees from their country/ region. This will make the task of managing finances for multi-country employees extremely complex. There will be space for new companies to build solutions for multi-country employees across:

  1. Payroll
  2. Benefits
  3. Expenses
  4. Tax and Compliance

Specifically, there is a right to win for companies that can build a better and more seamless journey than current solutions — that focus on just integrating payroll services of partners in different countries in one patchwork interface.

International payroll for a global workforce

#6 Improving lending for low-income groups

Around 1.5Mn or ~7% of UK’s workforce is paid the minimum wage, with ~1Mn workers on zero-hour contracts. Further, a sizable 1 in 10 adults in UK is a gig-economy worker — that’s ~4.7Mn people! These workers face several issues:

  1. They often have lumpy income received at the end of the month, but high-value expenditure (e.g. breakdown of scooter, illness) might happen anytime during the month
  2. They are usually thin/no-file customers stuck in the loop of “no credit score → no access to debt → no credit score”

There is a huge opportunity, and need to provide access to smart and responsible debt (e.g. through income discounting) and a roadmap to build a credit score for this segment.

The lending low-income groups need

#7 Personal finance will become smarter … and nicer

The debt statistics for UK paint a concerning picture.

  • The total debt of UK population is £1.7trillion, or £32,000+ per adult, out of which >10% is unsecured.
  • One person is declared unsolved every 5 minutes, and a property is repossessed every 16 hours!
  • What is more, ~£20Bn of student debt in the UK will be written off in 2021.

Clearly, a large proportion of debtors are unable to manage their borrowings; and herein lies the opportunity. There are several avenues for them to better manage their financial position — refinancing debt, choosing the right type of debt, or even through savings by optimizing their expenditure (e.g. switching plans for subscriptions where they’re overcharged). But the hard-part is aggregating these insights under one roof, and providing actionable recommendations, if not “automating” the journey of managing the “debt-roadmap”.

But learnings from 1st generation personal finance apps tell us, that the new solutions need to not only help them “do better”, but also make them “feel better” about their debt, to ensure adoption and usage.

Personal finance — intelligent and automated

#8 BNPL as a more intelligent alternative to credit cards

So far there have been no alternatives to credit cards that offered a better journey for the customer or merchant. This probably explains the high credit card APR (18%+) for customers and interchange (~2%) for merchants. But buy-now-pay-later (BNPL) has the potential to change that.

By solving a real problem for the customer at the point-of-sale, BNPL is credited for improving conversions by >40%, AOVs by >80%, and retentions by 20% in a few pieces of research.

This allows them to charge even 2X of the fees charged by Visa/MasterCard.

But more importantly, BNPL is set up to have SKU-level data — an advantage which traditional credit cards don’t have. And that can help them build a three-way association with the customers, merchants, and “Brands” who might leverage this to selective discount/promote specific SKUs. Especially for customers who need a “pay later” option, these discounts could be very attractive, and improve the impact metrics (conversion, AOV and retention) even further!

BNPL — the new credit card

#9 The rise of embedded finance, and “fintech”ization of SaaS companies

While one impact of BaaS/BPaaS is the creation of segment-specific neobanks; the other and equally important trend is “embedded finance”. These same elements of the fintech stack can be leveraged by existing non-finance companies to provide lending/payments or many other financial products to their customers.

This is different from simple cross-sell, in that instead of redirecting to a partner’s portal, the financial product is embedded in the company’s software. Further, the product is owned by the company itself, and hence it claims not just a referral fee, but the entire upside (or downside) from the product.

  • Imagine, who better to provide a paycheck discounting service than a payroll player?
  • And who better to provide supply chain finance than a supply-chain SaaS player?

These types of companies can leverage their data and deep-integration into the customer’s operations, to provide them with the best-possible financial product.

SaaS players, especially those focused on a specific vertical would be obviously more suited for this, but I believe this trend will go beyond them. This will also change the operating economics of SaaS companies — by adding more revenue sources per customer, they can justify going after smaller customers as well, for whom the LTV/CAC equation didn’t work out earlier.

“Every company will be a fintech company”

#10 The unbundling of personal insurance… and commercial insurance finally catching up

On the individual/personal insurance front, I see a continuation of the trend of making insurance more customized to suit different segments of customers. Some examples

  • Motor insurance for customers driving less often
  • Health insurance for fitness conscious customers
  • Insurance specifically for startups
  • Better general insurance for immigrants

But while we have 1-min motor/health insurance issuance, commercial insurance lags behind massively in leveraging technology to simplify it. But I see that changing, as usage of IoT and AI makes commercial insurance underwriting faster, cheaper and better. This will make it more feasible for insurance companies to offer affordable commercial insurance to a segment of smaller-scale customers as well.

Unlike on the personal front where we saw new insurance companies come up, I feel commercial insurers will still prevail and the opportunity lies in SaaS companies enabling them to adopt technology better.

Insurance is evolving

Conclusion

I am very excited about all of these trends (and ones which I haven’t noticed yet). I will be spending a lot of time exploring these in greater detail. Do point out if there are any other big trends driving fintech in the near future (apart from DeFi).

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Thesis on some upcoming sectors ripe for disruption. Views are personal.

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Sahil Patwa

Sahil Patwa

Investor @ Picus Capital, previously built grocery delivery @ Swiggy, and led digital transformations @ BCG.

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