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The Massive (Though Less Flashy) Opportunity In FinTech

By News Creatives Authors , in Small Business , at September 8, 2021

As the Managing Partner of MGV, Marc Schröder is focused on working with world-class tech entrepreneurs and establishing the MGV legacy. 

The FinTech market has been on a tear lately, even more so than most other startup sectors. Since the start of the year, CBInsights is reporting that 1 in every 5 venture dollars has gone to FinTech startups, and the more than $70 billion in exit dollars this year demonstrate just how much parts of this startup ecosystem have matured. In particular, startups in the customer acquisition and underwriting space have seen tremendous growth, as illustrated by Affirm’s and Blend’s IPOs this year.

Novel applications of AI and the use of data ranging from individual banking histories to social media presences have widened the lending market. FICO scores are no longer the only means of assessing creditworthiness. Petal, for instance, issues credit cards without looking at FICO scores at all. These groundbreaking advances are giving more people than ever access to credit, and quick-acting algorithms are making the underwriting process fast and streamlined for customers.

Online shoppers are now financing vastly more purchases than they once were with simple checkout integrations from buy-now-pay-later companies like Affirm, Klarna and many others. This type of fintech impact represents the glamorous side of lending innovations, where startups are unlocking enormous new markets by streamlining existing processes while ingraining themselves into the fabric of the consumer economy. That side of the coin is rightfully exciting and draws an enormous amount of investor interest. But, it’s not the only area that’s ripe for disruption.

Much of lending remains very manual, particularly in the post-funding environment, which leaves lots of room for technological innovations to disrupt or to streamline big banks’ bread and butter offerings. We’ve seen artificial intelligence leveraged in a number of ways to evaluate prospective customers for loans, but it can also be used to help manage existing customers.

Kabbage, acquired by American Express last summer, uses AI to look at real-time banking and accounting data to continuously assess customers’ financial standing and give lenders insights into how best to work with those customers to ensure repayment of loans. One company that my venture capital firm invests in applies conversational AI to the high volumes of correspondence that lenders and collectors have with customers, delivering insights that save agents time and help them take the best actions on accounts. This eliminates most compliance errors on the lenders’ end and helps minimize customer complaints by encouraging agents to reach out to customers based on their stated preferences. As a result, the collections process becomes more humane for borrowers and efficient for lenders.

The pandemic has been a huge boost for fintech companies as well. Plaid conducted a survey, which found that, although the majority of respondents used fintech prior to Covid-19, after the pandemic hit, Americans reported using more fintech tools, and more frequently. In fact, 59% said they use more apps to manage their money now than they did before 2020.

In a recent article from The Fintech Times, Antoine Hucher with Jupiter Asset Management confirmed this data, saying: “We see Fintech as an enabler of post-pandemic recovery, with exciting long-term opportunities for the sector. One risk that should not be overlooked, however, is the fact that technology stocks may be negatively impacted should we see a durable increase in interest rates. Overall, we retain a positive outlook on emerging sub-segments, including cashless transactions, AI, online lending, crypto and digital currencies.” Clearly, there’s a ton of action at all levels of the market, but the best value for investors will be unlocked by companies that figure out how to enable the big players to take advantage of the innovation.

The less flashy areas ripe for innovations in fintech like collections, banking as a service, digital infrastructure, treasury automation, back-office and downstream operations don’t garner the same attention as massive unlocks of global purchasing power, but they’re key components to the future of lending and are extremely profitable, needed disruptions. Spotting the best startups in these spaces certainly requires a deeper understanding of the lending and fintech markets, but as an investor, I’d recommend that one look beyond the flashy fintech companies in order to find the companies that will power the future of the industry.

Visa alone has a $509 billion market cap, and these incumbent players have shown they won’t be shy with acquisitions in order to gain a competitive advantage over each other. This is great for founders of fintech companies since there is obviously a very massive and liquid market of buyers out there. Venture capitalists also recognize this, which is why the valuations for fintech startups have gone through the roof.

Despite the red hot market, there is still enormous value yet to be unlocked. Combine this with the massive inflows of capital into ventures, and you’ve got a thriving ecosystem for fintech innovation. It’s going to be exciting watching how all of this astonishing new tech finds its way into the market!

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