By Tilman Ehrbeck, Flourish Ventures
The covid-19 pandemic has accelerated trends in consumer behavior that otherwise would have taken years.
For example, according to analyst data, the share of online retail sales in the US shot up over the March/April time frame from 16 percent to 27 percent after years of inching up slowly.
While some aspects of life will return to how they were before, other changes will be irreversible.
No one who has transitioned to easy, digital payments will want to go back to cash, and that has profound implications for the global fintech industry. The “no-touch” economy is arriving and will bring everyone worldwide into the digital future.
Over the past decade, digital technology platforms had already grown in prevalence, relevance, and importance in our lives and work. These platforms often are the natural owners of retail financial services that were traditionally provided by financial institutions.
Take ridesharing, as an example, to illustrate the potential for embedded finance, the idea of blending financial products into digital tools that people use on a daily basis. In the case of ridesharing, drivers already find work and get paid within the app, and as a result, there is an immediate transaction/payment relationship. Combine this with the data that the usage of the platform generates, and embedded finance opens up all kinds of opportunities for those platforms to serve as an origination point for auto finance and working capital or motor and liability insurance.
With people spending more time at home and trying to minimize unnecessary physical contact with others, the need and desire for a touchless economy is stronger than before, and a broader array of platforms across social media, e-commerce, logistics, and even gaming have become more prominent in our lives.
However, key functions of financial services will remain regulated. In response, the industry has begun restructuring so that digital platforms handle more of the front-end, and B2B fintech infrastructure serves as the connector in an increasingly open-architecture environment to provide the plumbing.
It seems like every other day, there is a big announcement about investments or acquisitions in the fintech-as-a-service space: Mastercard acquired data aggregator Finicity, matching Visa’s earlier acquisition of Plaid; Amazon teamed up with Goldman Sachs for merchant credit purposes, and Shopify partnered with Walmart trying to create a counterweight.
This list will only grow as new players try to participate in new and innovative ways.
Imagine what will happen the moment people can seamlessly make payments within WhatsApp, such as when an uncle in Brooklyn can send graduation money to his nieces in India, or a gig worker in Brazil can get paid instantly for their work. No wonder WhatsApp is planning to provide payment services in India and briefly launched payments in Brazil before the regulator intervened.
As the world accelerates toward the “no-touch” economy, embedded finance can promote greater financial inclusion and support economic recovery by providing people with more convenient, expanded access to financial services. Policymakers and regulators are carefully weighing the pros and cons of these developments as they try to balance the upside potential from tech-led inclusion with new concerns about financial stability, integrity, and competition policy. The retail financial innovations enabled by technology have proved slower to catch on in the US than in leading emerging markets, such as China, Brazil or India, but the pandemic has shown the power of a modern, digital, no-touch financial ecosystem.
New innovation emerges
As innovation in retail finance flourishes, the evolving, competitive landscape won’t be as simple as start-ups versus incumbents. The winners will be the companies that are in the right place at the right time with the right momentum.
That includes legacy players like PayPal, which had its best month ever in terms of new accounts in April, and challengers like neo-bank Chime, which offers a free current account with no hidden fees and advances their customers’ salary deposits rather than benefiting from a three-day free float as incumbent retail banks in the US do.
Under the umbrella of embedded finance, a larger number of fintech innovators will thrive. Companies like Plaid in the US are serving as data connectors, and companies like Galileo and Marqeta are offering card issuing and processing. Hummingbird provides regulatory compliance, while Zest in India provides point-of-sale, credit plug-in solutions, which in this economic crisis have become vital as the only form of unsecured consumer credit that can viably be extended. Open architecture and API-based financial infrastructure providers are driving the shift toward a broader ecosystem supporting the touchless economy.
Against the backdrop of digitization trends being accelerated by the pandemic and the macroeconomic challenge, expect the VC investment landscape to adjust.
In the US, we have already seen a barbell-type reaction. On the one hand, relatively more, early-stage, seed activity, where founders go after new opportunities building teams and products and raising funds all on Zoom.
Expect the more experienced founders to succeed, who can draw on a broader range of learnings from previous cycles.
And significant funding rounds in de-risked later-stage businesses seen to benefit from the accelerated changes, on the other hand.
Expect the more experienced founders to succeed, who can draw on a broader range of learnings from previous cycles. With a premium on founder experience and a return to more thesis-driven investing, investment firms with strong brand and network as well as sector-focused investors should have an advantage.
Geographically, the US market will likely be more resilient. In emerging markets, Asia will recover earlier than Latin America or Africa, partly reflecting relative success in containing the pandemic and thus stabilizing the economy.