This article was co-authored by TFX Industry Advisor Board Members Brendon Dibella, Kevin Hesselbirg, and John Stoner.
There is a reasonably well-known curse that is reputed to be ancient and of Chinese origin; it goes something like this:
“May you live in interesting times”
But the saying is apparently not ancient – Quote Investigator reports that “The earliest strong match known to QI appeared in a March 1936 newspaper report in “The Yorkshire Post” of West Yorkshire, England.” It may not even be Chinese, as it appears that Robert F. Kennedy helped make the expression popular in a speech at the University of Capetown, South Africa in June of 1966. And we happen to believe that as it relates to the Fintech sector … which is clearly experiencing incredibly interesting times in terms of innovation and change … the future isn’t cursed at all.
In fact, our sense is that technology is significantly changing the way traditional financial services companies operate and engage with their consumers – creating all kinds of “interesting” opportunities. Throughout the next year, we expect to see strong, continued innovation through the application of technology in financial services, enabling a wide variety of improved capabilities from enhanced security to completely digitized currency. Fintech companies innovate and adapt rapidly to appeal to the needs of consumers, while also seeking to solve problems for banks and traditional financial institutions that they have not yet solved on their own. The significant success of and demand for fintech companies in the financial services sector is being facilitated by a new generation of consumers who are primarily familiar with a world that is almost entirely digital. In a sector that is poised to have exponential growth and that we believe will have a significant impact on our society, here are the top trends that we believe will shape the fintech industry in 2022 and beyond.
Flexibility, Personalization, and Automation – During a time of such rapid innovation amongst competitors, the development of omnichannel capabilities will be of the utmost importance in order to provide consumers maximum flexibility in the way they manage their financial lives. There is great value in a company having the ability to offer the same set of services to customers across all accessible channels, both digitally and offline. Consumers want to have the choice of how to access services and process transactions on their own time, and in their preferred location. Success in this space will require innovation for streamlined technological processes and a nuanced understanding of consumer segments and the value proposition that resonates with each.
Fintech companies will capitalize on this opportunity by focusing on younger generations of consumers who are already comfortable with the digital ecosystem and value highly personalized experiences rather than products that are designed for masses of users. The most advanced fintech companies are already strategizing how to fill those needs with individualized products such as payment systems that collect data about users in real time and analyze how their financial habits compare to those of their peers, whether they should apply for a loan, and more.
Automation of services and real time payments will continue to grow in importance as the financial industry becomes increasingly digital. For example, Crowdz, an invoice finance platform for SMEs that enables access to cash flow that might otherwise be caught up in lengthy payment terms, understands how valuable successful automation practices can be. This TFX portfolio company is focused on speeding up cash flow with its automated tools that put money on a company’s books in record time, and the company is also working on a one-stop business payment solution that frees up time so customers can focus their efforts where they most need it – on making money.
Innovation By Traditional Financial Institutions – As fintech companies have established themselves as viable players in the financial-services sector, mainstream banks have also started to offer fintech-inspired services in efforts to meet their consumer’s demands. It’s interesting to note that a recent study from Cornerstone Advisors found that 47% of bank and credit union executives see fintechs as a significant threat in the coming decade as compared to 36% just a year ago. But rather than viewing this innovation as competition, many banks will instead embrace the new product developments by fintechs as complementary to their own services, or choose to develop and release their own new product offerings. Small to medium size banks are perhaps at the greatest risk of losing consumers entirely to fintechs, because even though they can be more agile, in general they have fewer resources available to develop new technology compared to larger banks.
StreetShares has an expertise focused uniquely on offering complementary solutions for this niche area. Through its platform, this TFX portfolio company provides community banks and credit unions with next-generation technology to serve the full suite of banking needs of U.S. small business owners. Traditional banks and small to medium financial institutions must continue to be able to re-invent themselves to grow alongside fintech offerings that seem to be changing almost on a constant basis. This includes faster payments, access to cryptocurrency investments, and migration to the cloud, among other capabilities.
We believe it is important to note that the outlook for the dynamic between fintechs and traditional banks is not as simple as the disruptor completely taking over. For example, some fintechs have invested in buying or embracing a traditional financial institutional model (as evident with SoFi and Chime) or have found a synergistic relationship with them. We believe successful fintechs will need to recognize the role of government regulation within financial services, and leverage the groundwork established by traditional entities. While we anticipate some evolution of government regulation on fintechs, their ability to fully take over is less evident. Instead, we anticipate a convergence where the most successful financial institutions are those that embrace the future of fintech with the legitimacy of a traditional player.
Embedded Products – Building off of competition and innovation between banks and fintech companies, we expect to see more and more non-financial institutions (such as Apple, Starbucks, etc.) offer embedded financial services as well as the continuous release of new product offerings from fintechs. According to Bloomberg, Apple is developing a new service that will enable small businesses to accept payments directly on their iPhones without the need for additional hardware. This comes after the company paid about $100 million in 2020 for a Canadian startup called Mobeewave that developed technology for smartphones to accept payments with the tap of a credit card. It will be important to watch whether or not Apple will require merchants to use their platform, Apple Pay, to use the technology as an indicator of viability for other fintechs that already provide similar technology.
Utilizing their technological advantage, lower cost structure, and ability to roll out new offerings at a faster pace, fintechs will continue to introduce new products frequently. Fintechs will work to differentiate themselves from traditional, large banks that typically have more resources and power by introducing features that banks generally do not. This includes analysis of customers’ spending and saving patterns, credit building products and lending products specifically geared toward consumers who banks don’t typically target, like younger people or individuals with poor credit history. We will also see fintechs bet on newer services such as helping users with their savings goals, cryptocurrency investing and crowdfunding.
Firms looking to disintermediate the traditional brick and mortar institutions present a differing risk profile and generally require ‘reeling in’ when it comes to goals. On the other hand, there are large firms with significant resources, like an Apple Bank, that are simply looking to leverage its products to disintermediate MasterCard and Visa’s duopoly.
Security and Data – While advancements in fintech companies have the potential to increase access to services for businesses and individuals, these capabilities cannot reach their maximum potential unless top-notch security is in place. Cybersecurity risks have risen in all aspects of society from politics to the industrial manufacturing sector, but we expect to see the emphasis on security become ever more prevalent, to include more regulation for best practices in the financial services industry.
In addition to data security, the increasing amount of information that companies have access to through customer data will lead to the development of new ideas to leverage it in ways that are beneficial to the owner of the data. There is currently a massive opportunity to capture and be able to analyze the information associated with transactions and payments that so far remains under-leveraged. For example, a TFX portfolio company, Vemo Education, leverages user data in partnering with colleges and universities to develop targeted financial and analytics solutions. The company works with schools to build income-based financing programs and analytics solutions which in turn improve education access and affordability for students without sacrificing their own financial health.
Next Generation- A 2021 survey from EY found that 51 percent of Gen Z consumers name a fintech company as their most trusted financial brand, while only 23 percent name a national bank. The most important factor in shaping trends in the fintech industry will be how companies prioritize attracting consumers from younger generations, particularly Gen Z and millennials. These generations are already accustomed to regular use of payment apps such as Venmo and investing platforms like Robinhood. To attract this valuable consumer base, fintechs will rush to push out products and services that appeal to these generations in particular while also marketing themselves to align with causes closely associated with these populations, such as social consciousness and climate change. Popular offerings such as buy now, pay later providers like Affirm and platforms designed for users to share experience and advice about investing as a form of social media entertainment will continue to grow in prevalence. Gen Z’s interest in cryptocurrency investing will also remain a driving factor.
Last month, UBS announced it is buying online wealth adviser Wealthfront for $1.4 billion in order to reach wealthy young people and manage more money for customers through their devices. Wealth managers and banks across the country will invest heavily in digital tools to attract younger customers that tend to prefer digital advice rather than giving control of their finances to a traditional advisor.
Fintechs are roiling the market – in some cases complementing banks and, in some cases, competing with them – and banks are working hard to navigate the dynamic of constant change. Regardless, fintechs will continue to be relevant contributors in the traditional system and motivated to fulfill the supply side of the innovation demanded by new generations of consumers seeking an improved digital experience. Some will be so good at it that they will in fact be disruptive, while some will merely push banks to find solutions that meet the demand for the innovation the “challengers” are setting forth.
During a time of such high-impact innovation, TFX is proud to be supporting some of the true emerging leaders in fintech. These companies – like Crowdz, StreetShares amd Vemo Education – are on the cutting edge of these developments and have also been launched by veterans who are smart, disciplined and tenacious entrepreneurs who impress us every day with their deep understanding of how to win in fintech and how to make a positive impact in society overall. Interesting times, indeed … and we’re proud to be their thought-partners and champions.