The fintech landscape has radically changed in the last few years. In 2015, the market was product-led: successful fintech startups were solving narrow problems, such as payments or lending, extremely well. Fast forward to 2020, and mapping this more mature market requires a different lens: instead of that vertical focus, we believe that today’s fintech landscape is shaped by seven horizontal trends (see Figure 1).
- #FinancialPrimacy. To position themselves as a financial hub -- a single place where customers can solve most of their financial “jobs to be done” -- some more established fintechs have added new offerings. We’ve seen this in both the consumer market where a player like Acorns has expanded from savings into checking accounts and retirement planning, and in the business market where Gusto now offers everything from payroll to 401k. Most of these startups have followed a similar path towards financial primacy that matches their funders’ stage-investing approach: First, solve a narrow problem incredibly well to demonstrate product-market fit; then hack growth to reduce customer acquisition costs and demonstrate scalability; and finally monetize the customer base with a broader range of products to demonstrate positive unit economics. Even as they’ve rolled out new product lines, these fintechs have maintained a “jobs to be done” focus with their UX, trying to create a seamless interaction among spending, saving, and investing.
- #EmbeddedFinance. While #FinancialPrimacy involves disrupting financial services by digitizing the user experience and/or the underlying processes, #EmbeddedFinance is about disrupting the technology architecture of the financial services industry. Leveraging low-cost, on-demand infrastructure (think the cloud), some fintechs sell end-to-end financial capabilities like Know-Your-Customer (e.g. Onfido, Alloy), Anti-Money Laundering (e.g. Ayasdi, Unit21), Investing (Atomic), or even entire financial products (e.g. Guideline with 401ks or Gradvisor with 529s), on an off the shelf basis, and charged for “as-a-service”. Some fintechs like nCino, Galileo, and UrbanFT go even further, bundling capabilities into larger suites that are effectively an entire Bank-as-a-Service offering. The result of all this: Any company, in any industry can easily embed financial services within their user experience. So now a consumer can open a full-fledged checking account with T-Mobile.
- #AutonomousFinance. Since core financial services and capabilities can be embedded, fintech founders are focusing on how to use the zero-marginal cost of software to tackle higher-value problems. The first manifestation of this is #AutonomousFinance: AI-driven financial services that make decisions and/or take actions on a user’s behalf. #AutonomousFinance shifts the cognitive load of routine financial tasks from individuals to algorithms. Most of those tasks can be looked at as mathematical or statistical problems, and as such can be translated into software. Autonomous finance offerings today include Digit with savings, JustInvest with tax loss harvesting, LifeYield with tax liability minimization, and Astra, that allows users to build autonomous “If This Then That” rules on top of their existing financial accounts to automate payments, savings, or investments. We expect the combination of #FinancialPrimacy and #AutonomousFinance to yield the first Personal Finance Operating System: a financial plan on auto-pilot, where individuals or advisors define the goals, but the day-to-day navigation is performed by algorithms.
- #MassMarketInstitutional-GradeInvesting. Fintech founders are also focusing on the “democratization” of alternative assets or sophisticated portfolio strategies previously only available to ultra-high-net-worth individuals and institutional customers. From real estate to private companies to car collections, technology has enabled the fractionalization of asset classes so that they’ve become accessible to investors at much lower minimums, and in an almost frictionless experience. And it’s not just alternative assets: Complex portfolio strategies, such as liability-driven investing or autoregressive conditional heteroskedasticity (ARCH) – I cannot even pronounce it – for which Robert Engle won a Noble Prize, have been translated into code and are accessible to mass-market investors, directly or via advisors.
- #Full-LifeAssets. Researchers are finding that as people live longer, the traditional blueprint of a three-stage life -- education, accumulation, decumulation -- no longer applies. The expectation of a longer life changes how and when people make milestone decisions like marriage, having children or retiring. More choices lead to reshuffled priorities and life stages. Some people choose to live frugally and retire at 35, others take a gap year to reset at 45, maybe get a new degree at 55, or start a new business at 65 or 75. Reshuffled life stages lead to a more considered approach for the assets needed to live a fuller life, like Vitality, Productivity and Transformational Assets (see Figure 2). To reflect this focus on a broader range of assets like Vitality, startups such as Healthdom allow users to build personalized health plans, and others like Genivity or Foxo Bioscience use health and epigenome data to integrate healthcare expenses and life expectancy into the long-term financial planning process. Other startups like Yayzy, Mattrvest or Aspiration, allow customers to incorporate Transformational Assets like purpose, into their daily financial life in the form of Environmental, Social and Governance (ESG) impact.
- #FinancialReinvention. The history of fintech is largely about startups digitizing existing financial services, either by adding a better user experience, or by digitizing underlying processes to drive down costs. Ultimately though, the financial product being offered remained pretty much the same -- a digital checking account is still just a checking account. But now some fintechs have turned their energy to inventing entirely new products, like Aire and Lenddo with alternatives to the standard credit score, or Edly and Clearbanc with new fixed-income products. These fintechs are creating entirely new products so that they can reach underserved markets like growth-stage companies or unbanked individuals, and service customers at any stage of life, from children (with parent-controlled debit cards by Greenlight or Step) to the elderly (with financial abuse prevention by EverSafe).
- #MoneyAsSoftware. Today, money is represented by lines of code in financial institutions’ core systems, and we mostly interact with those lines of code via digital interfaces. But now those core systems are being redesigned by both startups and incumbents. For instance, money movement rails are being redesigned by large financial institutions (e.g. Visa B2B Connect), bank consortia (e.g. European Payment Initiative) and regulators (e.g. FedNow in the US, Open Banking in Europe). Central Bank Digital Currencies are being considered by 80% of the world’s central banks, with China leading the way. If money is digital, perhaps the most fascinating part is the programmability of money, something that is already technically possible -- see Ethereum Smart Contracts. What could be coded into money itself? Perhaps government stimulus payments could be programmed to only work for certain purchases. Or money could stop working if it finds itself stored in the ledger of a sanctioned entity.
Over the coming months we will write dedicated post that explores each of these seven trends more deeply. And we’d love to hear from you: What do you think of these trends? What are we missing?