Fintech

Rainbow or storm?

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Two parts of rainbow on mint background. Front view.
Image Credits: Anna Efetova (opens in a new window) / Getty Images

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Some fintech companies are weathering the storm better than others and seeing an end in sight. In particular, startups using AI to fight money laundering and fraud seem to be enjoying tailwinds.— Anna

Consolidation ahead

If you are a freelancer in Europe, you have probably heard of Qonto, a challenger bank for individual and small businesses that now boasts of 400,000 customers in France, Italy, Spain and Germany.

I had a call with CEO Alexandre Prot earlier this week, and he used a metaphor I found quite telling to describe the current state of fintech in Europe: a rainbow in a storm. “There are people who see the rainbow, and then there are people who still see the storm,” he said.

Klarna’s Q2 earnings, for instance, were unexpectedly good. Only a few months after lowering its valuation and conducting layoffs, the European BNPL giant reported a profitable month “as revenue and GMV continued to grow.”

Qonto, too, is in the rainbow camp. Having raised more than $709 million to date, it presumably doesn’t have to worry too much about running out of cash. And since it’s not focused on loans, it isn’t overly concerned with rising interest rates, either. But Prot is aware that for many fintechs, “unfortunately, there’s still a lot of turbulence ahead.”

As usual with startups, turbulence means consolidation. Qonto already bought German competitor Penta earlier this year and is open to other opportunities, Prot told me.

Just to be clear, Qonto’s acquisition targets don’t necessarily have to be struggling companies; for instance, our conversation also touched on Ramp’s move to nab Cohere.io, an AI-powered customer support tool of which it was already a paid customer.

As the generative AI craze rages on, Ramp acquires customer support startup Cohere.io

I am curious to see which startup Qonto might acquire in the next few months, if any. But even if it doesn’t, there are plenty of other players willing to write checks to companies applying AI to fintech.

AI against fraud

AI applied to fighting fraud seems to be one of the hottest segments within AI-powered fintech. At least, anecdotally. For one, I spotted two startups doing just that in Y Combinator’s latest batch: Accend and Greenlite.

YC alums tend to go on and raise a fair amount of funding, but these two will join a group of already-quite-well-funded competitors. One of them is ThetaRay, a startup out of Israel that just nabbed $57 million for its AI-based anti-money-laundering (AML) platform. Another one is Strise, which is doing something similar out of Norway and which just raised a $10.8 million Series A round.

ThetaRay nabs $57M for AI tools to fight money laundering

Venture capital interest for this category is more than a week old, though. Last year, Sardine picked up $51.5 million to sniff out fishy fintech transactions. The U.K.’s Quantexa raised $129 million at a unicorn valuation in April. Hawk AI raised a $17 million Series B in January.

It’s not just VCs, either; Stripe acquired Bouncer in 2021 to integrate it into its AI-based anti-fraud technology toolset. Meanwhile, Oscilar’s co-founders poured $20 million into their company, which is using AI to help financial institutions protect online transactions from fraud and theft. Ring any bells?

While this isn’t new, I find it noteworthy that interest has waned since Google Cloud announced the launch of its own Anti Money Laundering AI solution in June. But perhaps that was to be expected; after all, just because Google starts doing something doesn’t mean it is committed to it in the long-term or will be the best at it. What it shows, though, is that there is demand for it.

When it comes to fighting fraud, financial institutions have a renewed incentive to up their game. Two months ago, ​​the U.S. Federal Reserve fined Deutsche Bank $186 million for failing to sufficiently address concerns with regard to money-laundering control.

But sanctions aside, it is only logical not to leave the AI advantage to threat actors. If fraudsters and money launderers are using AI, there’s a good chance AI can help catch them, too.

If the opportunity doesn’t sound big enough for that many startups, though, it’s worth keeping in mind that a new market could soon open up for them in adjacent spaces.

Per VC firm Atomico, which led Strise’s Series B, “there will also be further growth opportunities for [the company] with the passage of the EU’s Digital Services Act, where large marketplaces such as Amazon will need to verify each seller, meaning KYC [Know Your Customer] will encompass everything from partners and suppliers to potential ESG policies of businesses.”

There’s definitely quite a lot that the DSA might soon change for European citizens and for companies operating in the region, including foreign tech giants, so it will be interesting to see if this actually results in new opportunities for some startups — and if it does, which ones.

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