Where are the greatest innovations in Fintech happening right now? How has COVID-19 impacted the Fintech sector? What does the regulatory environment look like? And what does Bitcoin’s price rise mean for the sector’s future? These questions and more were the focus of a well-attended Fintech Roundtable on February 10, co-sponsored by insurtech innovator Vouch and Burkland.
Moderated by Burkland’s Ruben Austin, the roundtable’s panelists were a mix of startup executives and venture capitalists whose insights and opinions reveal a sector growing both in visibility and capital as well as in breadth and depth. On the startup side, attendees were joined by Chris Lavery, former Burkland fractional CFO and current CFO for distributed ledger startup Ava Labs, and Travis Hedge, CEO of insurance innovator Vouch. Investors included Thomas Rush from Consensys, Trevor Taniflum from FS Vector, Sheel Mohnot from Better Tomorrow Ventures, and Kathleen (Kat) Utrecht from Core Innovation Capital.
A unique question started off the conversation: What is the most interesting Fintech company you’ve seen recently? Interestingly, the panel’s answers immediately illustrated a fundamental shift underway in the Fintech space – companies building entirely new financial infrastructures or experiences instead of solving for the friction inherent in an existing, traditional financial process. Pipe, for instance, was mentioned by Vouch’s Hedge as helping companies and investors turn recurring revenue into an asset. FS Vector’s Taniflum, meanwhile, noted progress in autonomous banking that innovates the actual banking function instead of just offering traditional financial services wrapped in a cool app. Core’s Utrecht also called out the growing trend of fintech companies using technology to build long-term, scalable solutions to public problems – Padsplit, for instance, doing privatized affordable housing, or Healthsherpa.com delivering a private version of healthcare.gov. In a similar vein, Consensys’ Rush mentioned Fractal, working on driving liquidity to various protocols to place crypto assets where they can earn the greatest return.
Fintech Then and Now: Changes From Five Years Ago
When asked about the largest changes in the sector over the past five years, the panelists were divided between technical direction and the industry’s size and focus. “The biggest shift is going from creating better banking system interfaces to rebuilding the actual system,” said Rush. “There are more ambitious challenges compared to five years ago,” echoed Vouch’s Hedge. “It’s about innovation at the distribution layer versus innovation at the full stack layer. This shift is only possible now because technology in the sector has created the framework to allow wider adoption of the core functionality.”
“There are more ambitious challenges compared to five years ago. It’s about innovation at the distribution layer versus innovation at the full stack layer.”
The VCs on the panel agreed that the sector’s size and complexity have blossomed in the past five years, with each noting the sheer number of deals in Fintech as the main difference. “Valuations are also much higher,” said Core’s Utrecht when discussing the Fintech deal landscape. “The sector has widened over the period – insurance wasn’t even a thing in Fintech five years ago, now we have insurtech – and multiples are huge now.” Exits should remain impressive, the panelists noted, which makes it easier to stomach the higher valuations.
“Valuations are also much higher…and multiples are huge now.”
An interesting aspect raised by several of the panelists was unbundling. Five years ago, they discussed, financial innovation had everything to do with unbundling financial services from large legacy players like banks, brokerages, and insurance companies. Now, with so much focus on bringing technology to underlying financial infrastructure, the question becomes how much will be re-bundled. “Fintech started with the premise that big banks couldn’t innovate quickly enough,” explained FS Vector’s Taniflum. “Now we’re seeing Fintech companies emerge as specialist innovators able to modernize a particular element of a wider function, but it’s tough to make a profit as a specialist. Now every fintech is becoming a bank, so the unbundling/bundling question is an intriguing one.”
“It’s interesting how many of our portfolio companies have bought a bank or are becoming one. It remains to be seen whether this is a good move…”
“It’s interesting how many of our portfolio companies have bought a bank or are becoming one,” echoed Utrecht as the conversation moved towards Fintech’s regulatory hurdles, arguably one of the most unique aspects of the industry. “It remains to be seen whether this is a good move; one of the core advantages of Fintech startups used to be they weren’t weighed down by the same capital requirements and regulations as banks, so they could move faster. Now they’re bringing these obligations on, so it will be interesting to see if it’s ultimately worth it.”
The regulatory environment looms large in any Fintech conversation, and our Roundtable was no different. “Money and time are often interpreted as the costs of compliance,” said Taniflum. “But the truth is that when you lever technology as much as possible and fully integrate with business processes, compliance becomes an operational cost you can improve with scale. For Fintech, the real question is what ways do regulations place an artificial ceiling on growth? In that respect, the top ones have to be access to the payment rails and bank charters. The unit economics for Fintechs are tricky if you have to go through a traditional bank for access to the ACH system, for instance – fixing this block would unlock a lot of potential.”
“The regulatory environment is still very uncertain…It’s evolving and exciting but still very challenging.”
AVA’s Lavery concurred, describing the difficulty crypto and blockchain companies still face even accepting credit cards. “The daily concern for a crypto company has traditionally been whether the regulators are going to shut us down,” he said. “The regulatory environment is still very uncertain, and so many entities have different opinions about what crypto is doing – the IRS, the Treasury Department, the CFTC, state regulators, etc. It’s evolving and exciting but still very challenging” for companies to operate in the space.
COVID-19: Accelerant or Headwind?
The panel was unanimous in saying the COVID-19 pandemic served to accelerate many trends already in place…
The panel was unanimous in saying the COVID-19 pandemic served to accelerate many trends already in place, such as contactless payments, online trading, and virtual tools for everything from business insurance to vehicle purchases. Despite entering the second quarter of last year fearing and preparing for the worst, many on the panel 2020 ended up seeing tremendous opportunities for them and their companies. “A lot of these trends are here to stay,” observed Core’s Utrecht. “Once people do something once or twice online, they’re more comfortable doing it again.” The pandemic has served as a giant forcing function for a wide swath of fintech applications, in some cases squeezing years of adoption into nine months.
Top Fintech Trends for 2021
The panel also discussed the RobinHood/GameStop saga at length, noting how the so-called democratization of Wall Street is really a Fintech phenomenon, or at least powered by one. Ultimately, the conversation returned to regulation, though – for instance, whether it is the government’s job to regulate what stocks adults can buy and how much, and the concerns about transparency that always accompany broad retail investor involvement in securities trading. Importantly, some on the panel thought RobinHood’s travails illustrated a regulatory environment actually operating correctly; it was capital requirements for clearing and settlement that ultimately forced RobinHood’s suspension of trading in several stocks, not any conspiracy to favor hedge funds over individual investors.
Other key 2021 trends identified by the panel:
- Interest in the sector will continue to grow, with several high-profile exits this year and subsectors like infrastructure and FP&A popular.
- Increased focus on the middle market and lower/moderate-income consumer applications, as events such as Jan 6th demonstrate the widening income gap in the United States.
- As innovation in the financial sector increases and avenues of liquidity are opened, volatility will increase.
- Stablecoins will continue to gain prominence in crypto circles. Using stablecoins will unlock new advances in custody, audit, and asset movement while also exploring how trustless banking systems can exist without third parties.
- Valuations in the sector will remain elevated, partially as a hedge against a weaker dollar, as VC capital seeks continued exposure to the sector.
The Fintech Roundtable illustrated what many of us in the sector already know – the sector continues to be a hotbed of start-up innovation, VC interest, and regulatory challenges. Together, they all but ensure a vibrant ecosystem for the foreseeable future. However, practical challenges exist for companies looking to successfully navigate the Fintech landscape, from fundraising to operations and finance. We can help – Burkland’s Fintech practice brings experienced fractional CFOs, bookkeepers, and tax professionals together to help startups in the space scale with confidence.