- Matthew Alfieri is vice president on the investment team at Centana Growth Partners, a specialized growth-equity firm that invests solely in financial services, fintech and enterprise technology, and he currently serves as a board observer at Centana’s portfolio company Beacon.
- In this op-ed, Alfieri, one of Business Insider’s 2019 Rising Stars of Wall Street, lays out the biggest themes to watch for fintech in 2020.
- Click here for BI Prime stories.
Fintechs have done it again.
It’s clear that investors’ appetite for fintech grew in 2019. We continue to be blown away by the level of innovation in the financial services ecosystem, created by companies looking to enable incumbent financial institutions and other early-stage businesses looking to disrupt the status quo.
We also continue to see a proliferation in the number and types of firms providing financial products and services to consumers, from traditional banks to technology and ecommerce businesses. Amidst all the rising trends, here are the key ones we’re on the lookout for.
Banks roar back
Some fintechs have found success in nabbing small slices of the banking pie. While they have attempted to disrupt the financial services ecosystem at-large, their impact has been limited to date and incumbent financial institutions have refused to remain silent.
Banks and institutions bolstered investments by creating their own digital services and leveraged fintech startups in cooperative partnerships. In 2020, one thing is for certain - big banks have no intention of scaling down their efforts as the pressure for incumbents to maintain their competitive edge will only continue to intensify.
We're already starting to see this in action. Incumbents are continuing to roll out more attractive offerings in response to the fintech tsunami.
A few months ago, we predicted the "fee war," which only intensified throughout the year. What was the response from major institutions? A rollout of their own commission-free options, such as Charles Schwab's decision to eliminate trading fees. Now, with no-fee trading as the new norm, established firms are roaring back. On top of incumbents being able to compete effectively on price, overhyped challengers have experienced infrastructure issues resulting in outages and costly margin glitches.
Boomerang effect: Bundling, unbundling to rebundling
A decade ago, fintechs were attempting to take charge at legacy institutions. It was the era when disrupting banks meant unbundling banks, taking over parts of the value chain and making them more customer-friendly, cost-efficient and digital. However, products and services became too dispersed as consumers started expecting more than a single breakthrough product and competitors crowded the field.
While there appear to be emerging success stories within the challenger bank community, others are coming under pressure, as evidenced by their struggle to raise capital and sizable staff layoffs. Through the process of unbundling, fintechs realized they had several disadvantages, including: lack of brand recognition, smaller balance sheets/limited access to capital, uncertain regulatory schemes and difficulty in making customer economics work with a monoline financial services offering.
From this perspective, many have started to re-bundle. Offering a suite of financial services requires challengers to either partner with existing banks to leverage their balance sheet and regulatory status or be regulated and capitalized like traditional banks. Certain players like Varo Money realized this early on and opted to seek a National Bank Charter, while other challenger banks decided to partner with sponsor banks. Each have their advantages and disadvantages, but to build a long-term, sustainable banking franchise we believe well-capitalized, traditional banks stand a much greater chance.
The idea of rebundling banking is nothing new, but only recently has it started to gain real traction. The initial confusion and friction between regulators and fintechs have transitioned the financial services landscape into a building of partnerships. We're seeing several cooperation avenues for both fintechs and financial institutions as they work together to build an environment of financial services around a single institution.
Cloud: We're still talking about this?
There is no doubt the cloud is booming. By the numbers, the cloud market accounted for $175.8 billion in sales in 2018 and Microsoft's cloud revenue reached $11.6 billion in Q3 of 2019. Beyond the numbers, has the cloud proven its value as more than just a buzzword? It's hard to say. Recently, IBM and Bank of America announced their own public cloud system, designed specifically for banks, while Capital One suffered a cloud breach that brought persistent security concerns back in the limelight.
It seems as if financial services have dabbled in cloud solutions, and only dabbled. Nearly half (43%) of banks have no cloud strategy and have not begun to consider migrating their data to the cloud. There is a vast archive of literature on the benefits of investing in the cloud, but we have yet to see the impact of these. 2020 may be the year cloud adoption finally jets to the stars, and our portfolio company Beacon Platform is a key player in enabling financial institutions to successfully and securely transition capital markets workloads to the cloud.
Financial services: Gig economy edition
One third of U.S. workers are now part of the gig economy thanks to the likes of Uber, Postmates, and Lyft. The modern labor force as we know it has embraced change and all of the pros and cons that come with it. While these companies have lowered the barrier to workforce entry, they have yet to address the lack of HR services, retirement benefits, or occupational insurance that cushion the employment of full-time workers.
Only 16% of gig workers reported having a retirement savings plan in place, compared to 52% of full-time employees that have access to an employer-sponsored plan, according to recent research.
There is a huge opportunity for fintechs, such as GreenLight, and financial services to play a pivotal role in providing much-needed HR solutions for independent workers-setting the standard for what's 'normal' and establishing a new paradigm for employee well-being. As workforce structure and dynamics continue to evolve, fintechs will be central in building solutions to meet these new expectations, solidifying the growth and sustainability of the gig economy in the years to come.
AI, data & digital identity: SMS two-factor is dead
Advancements in technology and fraudulent attacks have not only increased in frequency but have become more sophisticated and nuanced as they permeate online. Innovative technology and sophisticated attacks have accelerated at the same pace, without one overcoming the other. Firms need better technology solutions to sufficiently avert digital identity management threats.
In 2020, we're expecting better uses of artificial intelligence, machine learning and data in advancing digital authentication and identity. We're already seeing the industry explore AI and ML-powered identity verification solutions to detect fraud and prevent money laundering, and this momentum will only continue.
Companies like Jumio offer biometric authentication solutions to reach KYC and AML compliance in customer onboarding. The two-factor authentication method that so many banks rely on, for instance, will likely become obsolete as financial incumbents and insurgents look to transition into surefire, data-backed, AI solutions.
Payments: Always more to come
2019 - what a year for payments. With the mergers of Fiserv and First Data; FIS and Worldpay; and Global Payments and TSYS, it may seem as if we're trending toward one sole payments provider. But this is far from the case. Instead, we're seeing value in vertical payments applications across different industries.
The booming cannabis industry, for instance, has been signaling the need for payments solutions from fintechs as both local and federal regulators add to the complexity of the cannabis supply chain. Within the insurance ecosystem, One Inc offers a single platform for processing premiums and claims payments. Payments innovation continues to be the common denominator across different industries and verticals, and 2020 will see a spike in demand for these embedded solutions in the financial services and adjacent industries.
Special Edition-The fintech myth to bust in 2020
Fintech, in many ways, became the go-to label that's been applied to any type of innovation in financial services.
While innovation is crucial, "fintech" companies aren't necessarily just "fintech"-they sit squarely in lending, payments or insurance, or they build enterprise software technology that sells and is of vital use to larger, incumbent institutions. In the end, these divisive lines will blur together and ultimately disappear: all financial services will become fintechs and all fintechs will become financial services.