The Rising Importance of Brand and Collaboration in Consumer Finance
Thesis
The financial technology (fintech) sector has been in the spotlight for much of 2021. From the frenzy of the GameStop saga to the increased velocity of non-fungible token (NFT) sales, the future of financial technologies has captivated both journalists and everyday individuals alike. I believe this heightened awareness speaks to the fact that there is continued consumer interest in fintech, and several areas where fintech startups can continue to disrupt in 2021 and beyond. More specifically, I believe fintech startups who lean into “brand” and “collaboration” will see an opportunity to unlock demand from a segment of the population that may have been slower to embrace our traditional banking institutions.
Market Overview and Trends
It is apparent that global society is primed to continue adopting fintech solutions. Today, over 5 billion people have a mobile phone; 80% of them are smartphones with internet access. 64% of consumers worldwide have used one or more fintech services or platforms. 52% of U.S. consumers wish their financial institution would invest more in mobile banking. Further, we have continued to see significant funding for fintech startups: venture capitalists poured $44.4bn into fintechs in 2020, up from $1.1bn in 2009.
This enduring consumer interest is a key element driving an expanding opportunity set, as the global fintech market is anticipated to grow at a CAGR of about 20% over the next four years. The market value is expected to grow to $305bn by 2025.
What’s reassuring is that the fintech sector is actually quite expansive, encompassing payments, lending, investing, and insurance globally. There are large fintech players in countries from the U.S. (e.g., PayPal) to China (e.g., Ant Group). This gives thoughtful venture capitalists much room to play in and explore more granular theses in sub-sectors without fear of there being a prohibitively narrower opportunity set. For example, the title insurance sub-sector has been estimated to be a $14bn industry. Were an investor to develop conviction in the future prospects of this space, that is a large enough total addressable market for there to arise a promising young upstart whose market potential is large enough to justify a venture capital investment.
Industry Map
The fintech sector can be broken down into the following verticals:
Fintech startups are providing tech-enabled financial services to a population that largely believes the established financial players have been ripe for a makeover.
“Many [fintechs] are capitalizing on people’s long-simmering distrust of the big banks, especially after the 2008 financial crisis. Often, the start-ups offer slick and easy-to-use apps, no physical branches and low or no fees. And they are building on people’s growing familiarity over the past decade with tech tools and digital payments, a shift that has accelerated in the pandemic.” — Erin Griffith
Forward-Looking Opportunities
While fintech has seen a rise in recent years, there still remain key areas for future growth in 2021 and beyond.
The two-pronged rise of brand and collaboration within finance will make way for fintech upstarts who are able to capitalize on this consumer demand. Mark Goldberg of Index Ventures said it best:
Among financial players, the battleground for consumer finance has shifted from the actual underlying technologies employed to brand. The once-novel technologies that helped fuel innovation in this area have matured, and the rise of infrastructure companies such as Stripe and Plaid have made it easier than ever to build new financial capabilities. Simply building products will not be enough for fintech upstarts to stand out in 2021.
One startup that has realized the power of brand and influence is Step, a debit card provider aimed at teenagers. Introduced last September, Step rose to the top of the app store on the back of a partnership with social media influencer Charli D’Amelio — who boasts over 116 million TikTok followers, and over 41 million Instagram followers. Step, which specifically targets teen users aged 13 to 18, realized that one way to step over stodgy financial incumbents is by appealing to the identities of its users.
Further, in another example of brand and appeals to identity, Square Cash recently created a new clothing line. Dubbed “Cash by Cash App,” the apparel maker will try and tap into the popular streetwear release model of limited edition drops, offering items such as tees, pants, and sweatshirts. Customers will get a 25% discount when they pay with a Cash Card or through Cash App. Though a bit of an odd development now, this may be a sign of where the broader industry is headed.
Related to the rise of brand is the rise of collaboration in consumer finance. Apps such as Venmo have made paying bills and splitting meals a social affair. People post snapshots of their Robinhood portfolios on Twitter. Talking about one’s finances was once considered taboo, but today’s Gen Z and millenials are prone to publicly bemoan their heavy loads of student debt or boast about their latest stock trades on online forums like WallStreetBets.
New attempts at collaborative fintech are emerging; Braid CEO Amanda Peyton writes:
“We need more collaborative financial tools. These tools aren’t new banks necessarily, but rather, they live on top of our primary accounts and allow us to transact around money together … Our financial products must adapt, whether the banks want them to or not. The problem is too big, and too important. The emergence of groups as more than a social entity, but a cultural and financial one, will hopefully push demand for these products.”
There is room for startups to go beyond bill splitting, individual personal finance, and simple spousal joint accounts. Upstarts can trailblaze and introduce new ways to borrow collectively, trade securities with others in one group trading account, and easily track group expenses. Fintech still has much to learn from products such as Figma, Airtable, Pitch, and Notion.
Beyond brand and collaboration, there remain other promising developments within fintech:
The growth of embedded finance will broaden the net of potential fintech winners for investors to fund. Embedded finance is making it easy for any company to become a fintech, so savvy fintech investors will have an expanding opportunity set.
Fintech infrastructure startups are primed to disrupt many antiquated processes that power payments. Investors will see a growing number of API-driven startups that layer automation on top of enterprise systems of record.
Final Thoughts
The future of fintech looks bright. There are opportunities for fintech startups to add value and capture market share, and consumers seem increasingly interested in the world of finance. In January we saw retail traders take over entire news cycles with their stock trades, enabled by platforms such as Robinhood. February saw WallStreetBets star Roaring Kitty appear before Congress. March saw NFT sales smash records. April and May saw fintech startups raise large financing rounds to enable their accelerating growth. What will tomorrow hold?
