But what are the current challenges now when you’re building the infrastructure that helps companies and individuals move money around? At this year’s Pulse event, we brought together a panel of fintech founders and investors to explore this question. During the discussion, they examined the environment they’re building in, identifying three areas that present risks and opportunities for the sector.
Disruption is one of the great cliches of the startup world: exciting new players using software to solve problems, banishing large but antiquated incumbents in the process.
In the financial sector, things are slightly different. The nature of interactions between banks and fintechs is more cooperative than competitive. Indeed, the B2B fintech sector – where fintechs provide services to established banks that continue to own the relationship with the end customer – is expected to reach $285bn in annual revenue by 2030.
Partnering with an incumbent in the early days also lends a startup credibility.
‘Building reputation is critical when you are processing sensitive information,’ said Baran Ozkan, Co-founder & CEO of fraud detection platform Flagright. ‘Clients will be very selective about who they work with in areas like sanctions compliance, because if anything goes wrong, the consequences for them can be severe. The way to offer these services as a startup is by leveraging incumbents and their brand.’
While it may be necessary to play nice with incumbents, their dominance can make for an imbalanced relationship. In other words, don’t become overly reliant on a single partner.
‘Often they will not be nearly as reliant on your business as you are on their infrastructure, so it’s important constantly to keep an eye on what critical aspects of your business are reliant on these partners,’ said Nick Brito, Managing Director at DST Global. ‘Where we’ve seen a lot of issues from these partnerships arise is when a big bank decides to shut down a business overnight, leaving fintechs at a loss because they can’t service their customers.’
All that said, there’s plenty of room for disruption.
‘There’s still a huge amount of opportunity for unbundling products and services, because the big banks aren’t very good at delivering modern product experiences,’ said Seth Phillips, founder and CEO of currency risk management company Bound. ‘What’s core to our business is making it really f——— easy to do something that used to be really f——— hard.’
Another challenge to fintech’s ability to expand into new markets is regulation, as governments try to strike a balance between protecting consumers and allowing companies to blossom.
But the right regulatory framework can fuel innovation and foster a more healthy early-stage ecosystem – just look at a16z’s recent expansion to London, citing the UK’s more open policy to crypto and Web3. Startups can use the right regulatory environment to their advantage, or build a business that helps others navigate the regulatory maze. ‘We love regulators,’ said Baran. ‘We wouldn’t have a business without them.’
However, expanding into new regions is often less important for financial companies because of the amount of revenue they’re able to generate from each user.
‘Fintech is such a vast market that you don’t need to expand globally to build a big business,’ said Nick. ‘For example, HSBC’s retail division alone makes 20 times more revenue per user than Facebook, which shows how you don’t have to have as large a user base to build a big business in financial services.’
‘It’s one thing to get regulatory approval and expand into another country, but it’s a whole other challenge to find product-market fit in that country. It’s quite often forgotten that, just because your product works in the UK, for example, it’s not guaranteed to work in Germany or France.’
At Moonfire, we’ve been thinking about AI for a long time. From the start, we envisioned a new kind of fund that uses AI from the ground up, integrating AI into how we work at every stage. And we’re deeply invested in its transformative power across our investment areas. Among fintechs, the technology is already widely used – 90% of the sector already employs the technology.
Flagright is a case in point, using it to detect and prevent fraudulent activity.
‘The operations side of the business does a lot of mundane tasks as part of their investigations,’ said Baran. ‘Now we’re using GPT for those tasks, such as summarising information, while humans still make the decisions. This allows you to scale volume without scaling headcount.’
However, Lasse warned startups not to fall into the trap of using AI for the sake of it.
‘We should rephrase the question to ask what customer problems you can solve with AI,’ he said. ‘If we can find an existing customer problem which can be solved using AI, great, but we try not to ask ourselves how we can use AI to find a problem. That’s why we haven’t rushed into asking what we can do with it.’
With so much going on in the sector, it’s an exciting time to be charting the future of fintech. There’s plenty of opportunity still to disrupt and innovate, and we look forward to partnering with those poised to redefine the landscape of money and finance.