Where top VCs are investing in fintech

Over the past several years, ‘fintech’ has quietly become the unsung darling of venture.

A rapidly swelling pool of new startups is taking aim at the large incumbent institutions, complex processes and outdated unfriendly interfaces that mar billion dollar financial services verticals, such as insurtech, consumer lending, personal finance, or otherwise.  

In just the past summer, the startup community saw a multitude of hundred-million dollar fintech fundraises. In 2018, fintech companies were the source of close to 1,300 venture deals worth over $15 billion in North America and Europe alone according to data from Pitchbook. Over the same period, KPMG estimates that over $52 billion in investment pour into fintech initiatives globally. 

With the non-stop stream of venture capital flowing into the never-ending list of spaces that fall under the ‘fintech’ umbrella, we asked 12 leading fintech VCs who work at firms that span early to growth stages to share where they see the most opportunity and how they see the market evolving over the long-term.

The participants touched on a number of key trends in the space, including rapid innovation in fintech infrastructure, fintech companies embedding themselves in specific verticals and platforms, rebundling and unbundling of financial services offerings, the rise of challenger banks and the state of fintech valuations into 2020.

Charles Birnbaum, Partner, Bessemer Venture Partners

The great ‘rebundling’ of fintech innovation is in full swing. The emerging consumer leaders in fintech — Chime, SoFi, Robinhood, Credit Karma, and Bessemer portfolio company Betterment — are moving quickly to increase their share of wallet with their valuable customers and become a one-stop-shop for people’s financial lives.

In 2020, we anticipate continued entrepreneurial activity and investor enthusiasm around the infrastructure and middleware layers within the fintech ecosystem that are enabling further rebundling and a rapid convergence of product themes and business models across the consumer fintech landscape.

Many players now look like potential challenger bank models more akin to what we have seen unfold in Europe the past few years. Within consumer fintech, we at Bessemer are more focused on demographically-specific product offerings that tap into underserved themes, whether that be the financial problems facing the aging population in the US or new models to serve the underbanked or underserved population of consumers and small businesses.

Ian Sigalow, Co-founder & Partner, Greycroft

What trends are you most excited in fintech from an investing perspective? 

I suspect that many enterprise software companies become fintech companies over time — collecting payments on behalf of customers and growing revenues as your customers grow. We have seen this trend in many industries over the past few years. Business owners generally prefer a model that moves IT expenditures from Operating Expenses into Cost of Goods Sold, because they can increase prices and pass their entire budget onto the customer.

On the consumer side, we have already made investments in branchless banking, insurance (auto, home, health, workers comp), cross-border payments, alternative investments, loyalty cards/services, and roboadvisor services. The companies we funded are already a few years old, and I think we will have some interesting follow-on activity there over the next few years. We have been picking spots where we think we have an unfair competitive advantage.

Our fintech portfolio is also more global than other sectors we invest in. This is because there are opportunities to achieve billion dollar outcomes in fintech, even in countries that are much smaller than the United States. That is not true in many other sectors.

We have also seen trends emerge in the US and move abroad. As an example we seeded Flutterwave, which is similar to Stripe, and they have expanded across Africa. We were also the lead investor in Yeahka, which is similar to Square in China. These products are heavily localized —tin for instance Yeahka is the largest processor of QR code payments in the world, but QR code payments are not popular in the US yet.

How much time are you spending on fintech right now? Is the market under-heated, over-heated, or just right?

Fintech is about a quarter of my time right now. We continue to see interesting new ideas and the valuations have been more or less consistent over time. The broader market doesn’t impact us very much because we tend to have a 10 year holding period.

Are there startups that you wish you would see in the industry but don’t?

I am sure there are!

Matt Harris, Partner, Bain Capital Ventures

I’m most excited about a powerful trend we’re seeing away from pure-play fintech and towards fintech becoming an embedded functionality in all sorts of technology companies. You can see early signs of this in merchant payments, where that functionality is more and more integrated into business software companies.

This is why we’re seeing companies of all types launch banking products, most recently Uber for its drivers, as a way of capturing meaningfully more revenue from their existing base. Ultimately I believe the world is undergoing a major shift where the majority of financial services are provided by technology companies on an embedded basis, and that this transformation is going to create enormous value.

Like it or not, I spend all of my time on fintech, and have for nearly 20 years — I find it endlessly fascinating, and quite varied across all of its subsectors: payments, lending, insurance and investing. The level of heat varies by sector. Payments is always quite hot, with corporate and VC money continuing to pour into the sector and startups like Stripe demonstrating the enormous demand for seamless payments infrastructure.

In lending, its transactional and commodity nature make it a tough business and therefore it’s cooled off a ton. Insurance is peaking right now (and may be overheated?) as startups have figured out how to use things like automation and digital tools to create efficiencies, meet changing customer expectations and go ‘full stack’; and investing is steady as she goes.

Angela Strange, General Partner, Andreessen Horowitz

What trends are you most excited in fintech from an investing perspective?

Sounds boring, but infrastructure is the most exciting! The cost and complexity of getting a new fintech company off the ground has historically limited both the number of companies that can get started and the diversity of people who enter the sector.  

As a parallel — it used to also be hard to start a software company. As I’ve written before, 20 years ago, if you had a great idea for an online business, it would take significant time and capital to launch. First you’d buy some servers and some networking gear; next you’d have to buy software licenses; then develop a custom web server, a database, a front end server to handle requests… etc. Then came Amazon Web Services — and the next 10 years transformed all of that to a few simple clicks by providing all of those capabilities as a service. Today, you can launch a new company with little more than an idea, a laptop, and a credit card. 

The Amazon Web Services Era is coming to financial services. But it won’t just be one company — it will be multiple companies each providing different layers of the financial services “stack” — as a service.  

For example: with Synapse.fi you simply choose which of their services you’ll need (for now; you can add more later), such as user deposit accounts, ACH transactions including same day & Remote Deposit capture, Debit Card processing & issuing, and KYC data & compliance checks. Pre-Synapse, those alone would have been a half dozen different partnerships, more code to link them together and likely even more code to modernize the systems enough to do what you want to do. All this and you haven’t even gotten to building your new idea! 

It’s getting faster and cheaper to start a fintech company — which means we’ll see lots more in the future. By dramatically lowering the cost & complexity of launching a new fintech — more new ideas will get started (imagine if Airbnb had had to spend 2 years and considerable expense before even being able to try to prove that there was a market of people that wanted to sleep in strangers’ homes!), and a much broader set of entrepreneurs will be able to enter the market. I expect to see a new crop of companies founded by a diverse set of entrepreneurs addressing still up-tapped problems especially around the underbanked.

How much time are you spending on fintech right now? Is the market under-heated, over-heated, or just right?

100% on fintech/insurance/real estate. I think we are just getting started. These sectors are ~20% of GDP and new companies are just scratching the surface of the opportunity. If you look at the insurance industry alone — 1 in 10 companies in the Fortune500 is an insurance company – all of which were built before World War 2! If that’s not a market that is ripe for innovation then I don’t know what is. 

Not only that — the opportunity for new financial services cos outside the US is even larger than it is here. Globally, 2-3 BILLION people are un/underbanked. And even those that are served by the larger name-brand financial institutions have to put up with much higher fees and often terrible user experiences. The challenge (and opportunity!) is that unlike in the US where there are a whole new set of companies focused just on the infrastructure layer to help make starting your fintech even easier, this layer does not yet exist in many countries around the world. And in the US, you have to battle incumbents who have nearly infinite resources to spend pricing you out of market. In many other countries in the world, while it might be tougher to get started, once you do — it’s actually a lot cheaper and easier to get distribution. In certain countries — huge swaths of the population are completely neglected by incumbent financial companies — yet are eager to better participate in financial services and thus very likely to adopt new providers. 

One way to think of it is this: look at the percentage of the population in a given country with a credit card and compare to the percentage with a smartphone. In Colombia for example, 14% have a credit card while 80% have a smartphone! This is a massive opportunity for new fintechs to offer financial services to individuals by piggybacking on the technology they already have in their pocket. This is not unique to Colombia and there are many, many countries where the opportunity is available to build something with tremendous impact.

Are there startups that you wish you would see in the industry but don’t?

I continue to think there is more opportunity for infrastructure companies. Where are the large banks spending a disproportionate amount of time & capital? As fintechs scale — they will face some of the similar challenges & cost…or they could just use your new infra company as a service. 

There still exists a large opportunity to build more affordable services for the underbanked. Financial services are still too costly, with too many unpredictable fees for millions of Americans and hundreds of millions worldwide.

Adam Valkin, Managing Director, General Catalyst

Fintech continues to be of very high-interest to our firm. There are a number of large and fast-growing players taking advantage of tremendous opportunities. We are fortunate to have some of these in our portfolio such as Stripe, Gusto, Monzo, Rapyd, Digit, and Fundbox.

We continue to spend a significant portion of time in this area as we believe the best is yet to come through the considerable possibilities for value creation and growth on a global scale. But, we are not alone in holding this view. It is a hot and highly contested space to invest in.

We are excited by a number of areas within fintech…

Next-gen banking: We are fascinated by contemporary consumer-facing banks that offer a materially better customer experience with a compelling hook. Founders around the globe are questioning the status quo of high fees, low transparency, and unnecessary friction and are building the experiences they themselves would want. The result so far has been the creation of some of the fastest-growing companies in history like GC-backed Monzo, as well as Nubank and Uala.

What’s most remarkable here is that the growth of these next-gen banks is largely happening through avenues that legacy banks haven’t enjoyed in decades: customer love that drives word of mouth and strong engagement through products that match modern needs, convenience, and payment-driven virality.

Global payments: We have seen massive growth in global online commerce driven by companies such as GC-backed Stripe, as well as Square, Shopify and others that simplify and remove friction for online (and offline) payments. It’s worth noting that these are some of the largest Internet companies created in our current era. The next frontier is facilitating payments for billions of people in the emerging world. Earlier this year we co-led a Series B financing in Rapyd, a company that’s building a platform for its partners to accept and disburse payments using market-appropriate methods like cash, bank transfers, mobile money, and e-wallets. There’s incredible diversity in the way payments are made around the world and a lot of work is yet to be done. We believe there’s green field here.

SMB payments: In the US, most small businesses still make and receive payments via an invoicing process and many struggle to manage their AR-AP turnover. Using data and machine learning, Fundbox, another GC company, helps SMBs smooth cash flow tension and manage credit. Given that SMBs make up more than 90% of all enterprises in the US and across the world, we believe there is a broad set of opportunities in this market.

Rob Moffat, Partner, Balderton Capital

What trends are you most excited in fintech from an investing perspective?

Open banking and PSD2 feels like a trend that will finally come of age in Europe in 2020. And that is also picking up in the rest of the world with the rise of Plaid and similar initiatives across Australia and Asia.

There is the chance for ‘open payments’ to become a mainstream new payments method, similar to iDEAL or Sofortuberweisung in Netherlands and Germany. They offer lower cost, lower fraud and zero chargebacks. However as always launching any new payment method is hard.

There are a number of interesting European companies in this space, including our portfolio company Gocardless.

More generally the move to API-driven financial services will increase fragmentation and lead to an ecosystem of best-in-class products. I believe this will also include a comprehensive front end with all your money in one place, offering holistic advice. This could be Revolut or Monzo for some people, for others it will be a pure aggregation layer such as Cleo.

I continue to be very excited by insurance. Have been talking about this for years but we are now finally starting to see insurtech businesses such as Lemonade, Root, Zego and Wefox generate significant premiums and continue to grow very fast.

As the first VC investor in Revolut we continue to be impressed by the rapid growth of neobanks at low CPA, with high utilization and retention and good unit economics.

We see employers increasingly taking responsibility for the financial wellbeing of their employees, with services such as Wagestream and Earnin.

How much time are you spending on fintech right now? Is the market under-heated, over-heated, or just right?

I spend 3/4 of my time in fintech. Market feels about right for now, feels slightly more bullish in Europe (and Latam) than North America which is about right given that America is quite a backwards market when it comes to financial services…

Are there startups that you wish you would see in the industry but don’t?

I’d love to see more companies giving real long term financial advice including provision for retirement, taking into account all of someone’s circumstances. Tough as this is hard tech to do but I think being better than the average financial advisor is well within the bounds of current AI.

Gen X have a huge pension gap and we aren’t getting any younger…

Brendan Dickinson, Partner, Canaan Partners

What trends are you most excited in fintech from an investing perspective?

Two things — first financial platforms that are earning a customer’s trust — either businesses or consumers — and becoming habitual parts of that user’s life are positioned to expand very quickly. These platforms use technology to solve a significant and recurring pain point for the customer. But the key is that the customer develops a meaningful and trusting relationship with a service far beyond the simple transfer of funds that occurs in the background.

Solving this pain gives these companies access to customer data that means they can in offer additional services that are superior to alternatives by virtue of their unique insight into the consumer. This combination of trust and data allows the platform to compete effectively with incumbents on experience AND cost despite incumbents having broader reach and lower costs of capital.

Second, we remain excited about infrastructure opportunities. Plaid, EVEN Financial, Bond and others have made great progress making fintech API-read/write-able, but huge swaths of other areas remain open to opportunities – identity, trading, servicing, insurance.

How much time are you spending on fintech right now? Is the market under-heated, over-heated, or just right?

I still spend the majority of my time in fintech. It’s one of the largest markets in the world. Given the scale of the opportunity there are many more investors focusing here than there were 10 years ago when Canaan led the Series A for Lending Club, one of the first big players in the space. As to the question of whether it is overheated, a number of series A rounds were completed this year at valuations over $100M, with little to no revenue or no product. I’ll let you decide.

Are there startups that you wish you would see in the industry but don’t?

I’d love to see more platforms for vertical specific-use cases. That fact that most workers all have a computer in their pocket provides an opportunity to use technology in new ways – with the opportunity to acquire data and sell financial products on the backend. These companies could start solving shift management, safety monitoring, employee retention or employee income smoothing, but ultimately can become massive by owning the financial relationship with these workers.

Also, consumer fintech has primarily focused on consumers in the wealth accumulation phase (people ages 20-40), but we’ve seen relatively little innovation targeting those in the deaccumulation phase (people 60+). This is a market that is increasingly online and exploding in size, and I’d love to see more here.

Plus any other thoughts you want to share with TechCrunch readers.

The companies that will succeed in this next phase of fintech will not simply repackage the same types of products that are already out there and innovate solely how they are marketed to consumers. They will offer novel financial products in a brand-forward, mobile-first, trust-building way that give them the ability to become much more to their users.

Manuel Silva, Partner, Santander InnoVentures

At Santander InnoVentures, we spend 100% of our time thinking about what new tech-enabled business models have the potential to change the way banks operate and serve their clients. That naturally brings us to being 90%+ fintech investors: technologies that banks can use to improve operations, new channels to address old and new customer needs, or companies with differential capabilities that we can combine with the unique assets of Santander.

For the ~10% non-fintech companies we look at, we are interested in how the boundaries of the financial services industry are changing from a competitive and product/needs definition perspective. If you consider banks or banking as enablers of customer journeys and experiences, we are excited to see what comes out from crossing over different industries and customer needs. That takes us to look at areas like proptech, logistics, mobility, adtech, cybersecurity, ecommerce and potentially edtech, agtech and healthtech in the future.

Thematically, we are interested in a few things:

  • Startups tackling ‘boring’ banking processes: we have invested in credit underwriting, mortgages application technologies, alternative payment rails, etc. but there are still lots of processes to reinvention areas such as (very broadly) loan collections, credit card issuance, collateral management, etc.
  • Technologies that create and enable new ecosystems: trends such as open banking, platform economies, or the emergence of the gig economy offer great opportunities for banks to power new, emerging ecosystems
  • Blockchain applications to reinventing large pieces of banking and market infrastructure: we have invested heavily there, especially as it related to capital markets, but there are many other applications in workflow management, identity and data analytics
  • Emerging customer needs: again, very broadly, what new customer needs are appearing at the adjacency of traditional financial services, and what should banks be doing about it

Ruth Foxe Blader, Managing Director, Anthemis

What trends are you most excited in fintech from an investing perspective?

We’re very focused on a trend we call ‘Embedded Finance,’ where financial services experiences move out of banks or insurance agencies and into real life. Emerging technology allows us to embed all kinds of transactions in situ. We are looking at startups focused on these ’embedded’ opportunities, often linked to serving emerging customers and emerging risks.

How much time are you spending on fintech right now? Is the market under-heated, over-heated, or just right?

Anthemis is a leading global sector-focused firm, so I spend 100% of my time on fintech and Insurtech. That said, we define both of these categories extremely broadly. Finance is the nervous system of society. We are interested in numerous adjacent sectors because we always see the finance or insurance opportunity. Fintech is not over-heated. The financial services industry has a massive number of problems and inefficiencies that emerging technology can address.

Are there startups that you wish you would see in the industry but don’t?

Venture investing is tricky because there are so many elements to success, not just creating a solution to a big problem. I’d like to see teams get better at low-cost customer acquisition, real growth-hacking. There are many brilliant teams creating innovative solutions to real problems, but they need to solve for capital trajectory. It can take a while to build an interesting business.

Plus any other thoughts you want to share with TechCrunch readers.

At Anthemis, we are committed to supporting a diverse group of founders focused on problems worth solving. I’m glad to see increased attention to the long-standing problem of discrimination in tech funding. But the industry can and needs to do better. Successive waves of fintech (and Insurtech) have addressed different segments of the value chain. The challenge has been for fintech startups to move beyond distribution and prove the ability to achieve scale in a sustainable way. B2B has always been an interesting space for fintech, given that banks and insurers are unlikely to attract the talent in-house necessary to build real 21st century technology companies. That said, banks and insurers are very hard to sell to. We are interested in supporting all great founders taking new approaches to really big problems in finance.

Sean Park, Chief Investment Officer, Anthemis

At Anthemis, we’re most excited about opportunities in embedded finance: the idea that all major industries find a point of intersection with financial services, which we view as the nervous system of the global economy. To us, opportunities in fintech are not limited to innovations that are expressly about moving money from one point to another but extend to sectors like energy, mobility, and agriculture whose transformation relies on the accessibility, efficiency, and transparency of the underlying financial system.

One of our investments, kWh Analytics, is in the business of renewable energy, yet it enters the fintech domain because its technology is able to minimize risk and increase equity returns of solar energy production. I’m on record saying I think the next major financial crisis will likely be catalyzed by banks having to write down hundreds of billions of dollars of ‘safe’ loans related to fossil fuels. This won’t happen overnight, but the orderly unwinding and repricing of this risk will help accelerate the cost advantage of the renewable energy stack. So, we’re particularly optimistic about broader opportunities in renewable energy.

We have always been wary of models that are purely transactional and are therefore excited about holistic financial wellness as a growing trend. In consumer finance, while many new models are oriented around how to better sell financial products to younger consumers, we’re looking out for those that incorporate financial wellness into their products, delivering a meaningful impact on consumer financial health.

Beyond embedded finance, we’re keeping an eye on innovative business models that form themselves around the new and emerging technological and regulatory frameworks, such as open banking and APIs.

Amol Helekar, Principal, TCV

We are active investors in fintech, helping founders and teams scale their businesses in banking, payments, mortgage, insurance, asset management, specialty finance, and capital markets technology. We think we’ll continue to see innovation in all those areas.

One of the trends we are excited to invest in is the growth of digital-first lending and payments businesses that address under-served needs in emerging markets. Behind this trend, we’ve seen the rapid growth of a number of innovative fintech platforms including the rise of challenger banks in regions such as Latin America, as well as growth of digital cross-border payment and money transfer services.

These platforms boast superior digital-first experiences for the customer and better risk underwriting & compliance processes than incumbent competitors. They often lead with a much-needed offering (credit cards, e.g. for Nubank and B2B payments for Payoneer) and become the end-customer’s preferred vendor for financial services — which in turn enables them to cross-sell other financial services products, such as personal loans or working capital advances. Over time, we believe such companies are well-positioned to disrupt legacy incumbent banks and achieve significant scale in the process.

Another trend we’re excited about is the growth of payments and financial services cross-sold through vertical market software and point-of-sale solution leaders. Companies such as Toast (restaurant point-of-sale solution), ServiceTitan (SaaS for home service industry), and Clio (SaaS for legal industry) have been able to successfully execute on this strategy. These companies’ customers regard their software as the system of record for managing operational workflows.

As a result, since these platforms have visibility into core financial data like cash flow or invoices, they are well positioned to cross-sell payments and other financial services to their customers. TCV has invested more than $1.5 billion in fintech since inception in 1995, and we are excited about partnering with companies in the future.

Jim Robinson, General Partner, RRE Ventures

With fintech, here are three points that guide how I think about it all…

1) As the famous quote goes, ‘business is about bundling or unbundling’. New networks create opportunities to unbundle incumbent offerings. In fintech (especially post the financial crisis, where traditional companies curtailed or even eliminated parts of their stacks) much of the value created over the last decade has been in startups picking off parts of those stacks. This won’t last forever, and eventually we will see a re-bunding of services and products (consolidation). But not yet.

Meanwhile, many non-fintech companies, worn down by the lethargy and friction of securing services (or their customers securing services), are themselves becoming financial institutions of a sort. From ride-sharing to food delivery, durables purchases and medical services, an array of businesses (not all startups) are themselves offering ‘financial services’ in one form or another. This is most true in the developed world, but private industry in developing countries are stepping in as well. Financing, lending, investing, insurance and payments are all good examples.

2) Asset digitization (i.e. blockchains / crypto) seems murky and ill-defined to most today. In 5 years they will be obvious to all. Digital value transfer, along with the ability to atomize and fractionalize all asset categories (and ownership in general)… from buildings and bridges, to stocks, bonds, loyalty points and ultimately money itself, is here to stay. This is moving slowly now but will explode in similar fashion to the derivatives world circa 1980’s. Regulatory authorities globally will struggle to keep up, issues will arise, but value will transfer with less friction, cost and time, and more completely than many think. Nothing is immune, just as no major industry has been immune to the internets of information and entertainment. Those that have the heft to forestall progress (governments, some incumbents) will do so for short periods of time. Stopping it is out of the question. They won’t want to anyway; already some are realizing the many benefits derived from programmable, strippable economic systems.

3) The real battle — largely undiscussed today — I like to sum up with a famous chinese proverb… ‘the hills are high, and the emperor is far away’. For all of human history, this has been true. The costs of policing disparate populations are so high, central authorities have had to compromise on those edicts they can practically (and with regularity) enforce. We are entering an era where this will be far less true, as populations increasingly tether to and fully depend on digital access. ‘Behavior’ will be increasingly incentivized or punished by controlling the inputs and outputs. Identity, communications, mobility and wealth (i.e. resources in barter, money or proxies in everything else) are the four key legs of freedom. If I rank and score you based on your ‘behavior’ (more accurately, how it differs from an ideal model), and throttle your access to anything important (work, transportation, communications capability, access to friends/family, knowledge, and your money, then my ability to enforce rises to levels never before seen, and at scale. In effect, ‘the hills will be low, and the emperor will always be nearby’. Yes, Big Brother. What is different this time is the toolset to realize it… Tanks, Aircraft Carriers and Warfighters are atomic and can only be so many places at a time. Not so in our increasingly connected world.

If we get this wrong, all central powers will have the possibility of enforcing essentially anything they like. Who will go all in, and who will show restraint by respecting freedoms? The answer is, in some ways it doesn’t matter. Because, as Warren Buffett famously observed about businesses, ‘I like to invest in companies that are so simple to run any idiot can do it. Because sooner or later, one will’. Same with countries. And sometimes, rather than an idiot, you get a sociopath. Tempted by a full control suite over your identity, comms, mobility and money, your privacy could be permanently compromised.