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In 2020 we published the trends for people who love fintech but not the bullsh*t. People loved them, so leapfrogging 2 years of health pandemics and financial panics, we take a look at what happened? What's happening now? and what will be next?
Viability > Vanity
We’ve seen a broader cultural shift in venture-backed software businesses globally, reflected in the fintech sector. Impending recessions and a shift to a more balanced top/bottom-line imperative by some of the larger venture funds has created greater scrutiny on cash consumption and the pathway to profitability.
Klarna, Curve and other high profile fintechs have administered wide-spread lay-offs, citing the economic climate and need for focus alongside the widening losses associated with reversing into the full banking value chain.
The ‘monthly subs’ group of Starling, Revolut and Monzo et al, all launching in the pre-paid space are facing the same challenges, struggling to become fully fledged banking experiences, accounting for much of the drop off.
What’s (who’s) next?
The three-horse race of the neobanks in the UK, namechecked above now welcome a new runner with JP Morgan's Chase digital bank, powered by 10x Technology's neo-core. They've attracted 550k customers, secured £8bn in deposits and proved the value of taking a bank-first (as opposed to UI-first) approach to building a challenger brand. It makes for an interesting case study for other incumbents looking to launch a neo-bank as they’ve successfully rolled over and retained their brand equity. In doing so they’ve set a template for how incumbents might think about joining the fintech race, adding to the growing trend of more bankers and less UX designers.
There has been consolidation on both sides of the issuing and acquiring chasm. Payment companies are arguably leading the charge as Square, Klarna and Shopify have all started to bundle issuer services alongside their payment acceptance core, using pre-settled funds as a platform to launch broader financial services.
Issuers have also begun to tack payment acceptance onto their core propositions. Tide, Revolut and Monzo have launched micro-merchant functionality with sizable programmes underway within incumbent banks.
At the smaller end of the SMB market, fintechs are expanding their roles to encompass admin assistants on top of financial management services. Accounting integrations, payroll, invoice management and expenses have all made their way into product ecosystems with heady promises of saving small businesses time and expense.
Segment players are by default, niche. Revenues haven’t delivered the promise so it begs the question: are they viable without being a bank? Expect to see more segment-based rebundling propositions from banks.
A new flavour of rebundling will abstract all the complexity into a single entry point to simplify services and usability.
Here come the techfins?
The pace of innovation away from the core of incumbents has slowed. Incumbents and challengers are still offering product hierarchies riddled with complexity and flush with overlap so lacking in clarity. There’s work to be done in establishing coherent product ecosystems to reform the product and organisational silos that exist within large businesses.
Having filed IP applications we anticipate Amazon will offer more for merchants in the way of embedded services. As the aggregator of world’s content, Google may re-enter the game with a new direction and Apple will go hard on the evolution of Apple Pay.
The techfins will stay put as facilitators of commerce. They’re not keen to evolve into banks with their inherent baggage of KYC compliance, arrears and sector casualties. You can’t achieve SaaS-like economics in a bank and revenues can’t keep in step with costs.
Like Ships in a Harbour
Covid helped drive card payments forward, crunching a more typical ten years of behaviour change into a year. eCommerce spend, cashless experiences and a resulting uptick in contactless transactions have given card payments the upper hand against its old enemy - cash. This has resulted in some high profile fundraises and significant valuations: Primer raised $50m at an implied valuation of $425m (with <50 employees in October); SumUp raised $624m at an $8.5bn valuation having consistently grown revenues 60% per year. With SoftPOS still in its infancy, Apple's moves still opaque, and the macroeconomic tailwinds driving cash displacement still in play, we’re likely to see a lot more activity. At least a couple of the UK's Big 5 incumbents have made statements about their wish to do more in the space.
We’re seeing verticalisation of the market. ISO’s have done well by selling basic propositions which are less about distribution and more about market fit.
Industry specific solutions for business as diverse as dentists to restaurants are increasingly complex setups serving varying needs so interoperability is paramount.
This could be the year we actually become omnichannel. Soft POS market share will exchange hands but the true areas of growth will emerge when Stripe and Shopify launch their POS solutions, marking the shift to an omnichannel world.
The SMB rush
£425m of BCR funding has spawned a number of new lending and banking services for small businesses, but it’s still unclear whether this has ‘moved the market’. Class35’s research across 200+ businesses revealed that access to capital doesn’t present a significant barrier but a common fear of debt or failure and a lack of relevance do.
Funding of verticalised software businesses continues at pace, but SMB banking and lending product efforts remain generic and industry agnostic. There still seems to be a huge opportunity for integrated vertical fintechs, in the way that Coconut, Tide or Anna Money provide for freelancers and SMEs.
Commercial - usually prepaid - interchange revenues have placed less of an onus on making traditional banking models work, so providers haven't launched much of note. At the same time, SMBs are incredibly resistant to lending with an end result of a lack of lending flow.
Challengers and incumbents will continue in their shift from interchange to diversified revenues, using workflow as a basis for lending. The battle is whether the design of lending solutions will be sufficient to overcome the significant behavioural barriers to mass adoption.
The BNPL Bubble
BNPL - debt without collateral is still driving volume but the big players are facing rising non-payments. Default rates are running to almost double that of credit cards which begs the question Is it any better?
Klarna just closed a round at $30bn - in the shadow of its previous valuation of $45bn and they’ve just laid off 100 people.
It's just a matter of time before the music stops for BNPL. Regulatory scrutiny is closing in as missed payments have increased significantly with 41% of BNPL customers missing a payment over the last year.
As the aftermath of the pandemic hits, many consumers are using BNPL for lending rather than convenience to manage the cost of living. The rate of default and impact on young people will ring alarm bells attracting further intervention from the FCA as they tighten the screw on retail BNPL.
The big opportunity for B2B BNPL lies in cashflow management. The category could more appropriately be rebranded as an Installment Product offering staggered payments with a slower repayment schedule. This is where the huge opportunity lies for SMBs who want to invest in kit and manage cashflow - a perennial and even growing concern.