Many small businesses who tried to apply for a Paycheck Protection Program loan during the early days of the pandemic can tell you what a nightmare it was. I know, because it happened to my mother.
In addition to my family’s tea company, which I wrote about here, my mother operates her own small business supplying corporate snack rooms. When people stopped going to the office, her business hit a wall. She needed a PPP loan to pay employees while waiting for the stay-at-home orders to lift.
She initially applied for a loan from a bank my family has done business with for decades, one of the country’s five largest. Then she waited. And waited. And waited. After it was clear her application was going nowhere, I polled my Twitter followers to learn more about FinTech companies helping small businesses with PPP loans. A few folks mentioned Cross River Bank, a FinTech startup. I recommended my mom apply for a PPP loan through Cross River, and roughly a week later, they disbursed the funds to her account.
One reason why my mother had such a hard time getting a loan from the traditional bank was that they gave priority to larger customers that were well established. As a result, they ended up disbursing billions in PPP money to larger enterprises instead of the SMBs the CARES Act intended to help.
Cross River, which has enabled more than 100,000 SMBs to obtain PPP loans, is a powerful example of how FinTech is eating the lunch of the bigger institutions. But it’s hardly the only one. At Lightspeed, we’ve invested in companies offering FinTech infrastructure and commerce enablement, including Affirm, BlueVine, Carta, Faire, Finix, and Synctera. These startups are bringing banking and other services to under-served communities around the world, as well as new tools enterprises can use to glean insights from financial data.
One subcategory we’re particularly excited about is FinTech infrastructure, which we believe will have a breakout year in 2021. Here are three key trends we see emerging:
1. Enterprises will adopt white-label payments infrastructure
Unless you’re a cash-only business, you need a way to process credit cards, wire transfers, checks, and so on. You have three options:
Build your own solution. This gives you total control of payments, but it requires an enormous investment in engineering resources, as well as regulatory expertise.
Outsource to a full-stack payment service provider (PSP) like Stripe, PayPal, or Marqeta. This is currently the quickest option to incorporate payments, but it comes at a price. PSPs come out of the box with value-added services such as authorization, anti-fraud, or program management. In exchange for these services, PSPs collect most of the data. It’s a more convenient option for startups, but they give up control over a crucial portion of the customer experience. If a user encounters a problem with a transaction, they talk to the PSP’s support team, not yours.
Use API platforms to white-label FinTech infrastructure. A white-label platform allows your business to connect with best-of-breed service providers to wrap around core payment processing. At the same time, white-label platforms allow you to offer a native-branded experience to your customers. This option offers several key advantages:
- Fees are often substantially lower than with PSPs.
- White-label payments infrastructure automates payment operations, reducing your headcount.
- You can customize authorization rules for your particular business or vertical, instead of relying on a one-size-fits-all solution.
- You gain control over the customer support experience — most importantly, the ability to deal with the sensitive issue of chargebacks and remediation.
Given all of that, it seems self-evident that white-label FinTech infrastructure will become the preferred payments strategy and begin to displace full-stack payment solutions for large enterprises.
2. CFOs will look to startups to integrate real-time data
Despite the emergence of ERP systems in the 1990s, most CFOs lack the tools to make effective decisions in real-time. Reconciling financial records still involves a lot of manual data entry, which is time-consuming and error-prone. CFOs often have to wait for the books to close before they can see how well the business is performing, introducing even more delays.
CFOs need a consolidated view of all the money flowing in and out of the business — including payroll, accounts payable, accounts receivable, and taxes — and they need it in real-time. They also need a data pipeline that connects the CFO’s accounting software with the different SaaS applications serving HR, procurement, sales, and accounting.
There are now a growing number of API-driven solutions that layer automation on top of enterprise systems of record. Some use APIs to move data seamlessly between business applications. Others extract data from the CFO’s accounting software to generate insights. A third cohort of FinTech solutions, which we consider the most interesting, intercepts payment flow from an organization’s bank accounts and uses the data to create real-time KPI dashboards.
These new tools can supercharge the CFO’s decision-making process. We expect more to emerge as the new year unfolds.
3. The next FinTech unicorns will be global infrastructure companies
With all the FinTech activity in the US, it’s easy to forget that much of the action is taking place outside our nation’s borders. Of the 67 FinTech unicorns identified by CB Insights, 29 are based in Europe, Latin America, or APAC. Unlike their US counterparts, many of these startups have had to create custom solutions to augment their core infrastructure.
With low penetration rates of banking outside the US, we believe apps with embedded finance will continue to sprout. And when they do, they will seek out fintech infrastructure providers to scale up faster. As alumni of the first wave of FinTech companies branch out to found their own startups, this ecosystem will continue to expand.
FinTech is surging because consumers, SMBs, and enterprises require financial solutions that address their needs in real-time. If today’s big banks can’t do that, these FinTech companies will rise to displace them. And if you don’t believe me, ask business owners like my mother.
If you’re starting a related company or love talking about payments and financial infrastructure, don’t hesitate to email me at email@example.com.
Note: The Fintech Infrastructure Landscape has been updated to reflect Lightspeed’s recent investment in Synctera.