Hi Fintech Friends,
This is the debut of a new feature for paid subscribers, called Signals.
The goal of This Week in Fintech is to provide a concise and comprehensive weekly summary of fintech news. I first started it as an internal newsletter to keep my team up-to-date. My goal now is to provide an overview of everything happening in fintech in a once-weekly format that you can digest in 5 minutes over a cup of coffee.
But you need to zoom out to see the forest for the trees. News is more powerful when contextualized in aggregate. To borrow a phrase, to understand how the world is changing, you need to “follow the trend lines, not the headlines.” Signals aims to do that.
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Best,
Nik
Q1 in Review
(1) What concepts are getting funded?
The first of this Q1 series is focused on venture funding. Which fintech concepts are investors backing and why? What does this tell us about the space?
It probably will not come as a surprise to most that neobanks and payments startups took the lion’s share of Q1 venture capital in fintech. Of $6.8 billion raised, $2.4 billion went to payments companies and $1.3 billion to neobanks.
That said, an increasingly frequent trend in fintech is the prevalence of mega-rounds to category and market winners (and hopeful winners), which top-weighted funding in these categories. You can see this in the distribution of the 130 fintech equity raises that took place in Q1:
Of the 130 raises, 15 were greater than $100 million. Of neobanks, Revolut raised $500 million, Xinja A$433, and Qonto $115. Of payments fintechs, Grab raised $856 million, Toast $400, AvidXChange $250, Tradeshift $240, and Flywire $120.
In-part, these numbers are due to category consolidation: Grab is a Singaporean super-app that counts ride-hailing and food delivery among its services, while Toast is a restaurant POS and AvidXchange is a business payment network. However, their primary fintech value proposition in all cases is centered on enabling payments. Without payment functionality, these companies would lose a key financial service, and users would be forced to leverage a different payment network.
This highlights a tectonic shift taking place in financial technology: many traditional payment systems are under attack or going through rapid change. India released its UPI. The Clearing House expects 90% market adoption in the US of Real Time Payments by year-end, and the Federal Reserve is making overtures about its comparable FedNow service. Incumbents have taken notice: Visa pre-emptively acquired Plaid rather than let it build an account-to-account payment service, while Mastercard is striking partnerships to leverage blockchain for cross-border payments. Why is this such an attractive business for venture? A few reasons:
Payments businesses are lucrative. Their value is driven by user ease: from a restaurant POS system to an Indonesian peer-to-peer payments app, if platforms make it simple to make a payment, they will grow rapidly. And their rapid growth permits them to extract rents - which, even if miniscule, quickly add up. Visa interchange hovers between 1-3% on US credit cards, and yet the company has an astounding 80% gross margin.
Payments networks have struggled to achieve interoperability. Regional networks evolved asynchronously, and even international conversion standards like SWIFT have challengers such as China’s CIPS or the cryptocurrency project Ripple. The prevalent form of payment - card, QR, cash, mobile wallet - prevalent in one region may not be accepted in another.
Payments networks have network effects. Many types of payments networks have two-sided market dynamics: if adoption is high on both sides, it creates more value for each. Look at mobile payments in the US: as more consumers enable mobile payments, more merchants find it worthwhile to use a mobile-friendly POS, and the reverse relationship holds as well. The network effects create more winner-take-all dynamics (because it is unlikely that consumers or businesses want to juggle multiple forms of payment), which makes backing winners an attractive business for investors: hence the mega-rounds.
With regards to neobanks, I am more skeptical about the sustainable dynamics of these businesses. 15 separate neobanks fundraised in Q1 (epiFi, Qonto, Volt, Stori, Starling Bank, Revolut, B-Social, Tonik, EasyEuro, NorthOne, Tandem, Penta, One, Xinja, Lanistar).
On top of that, Q1 saw the rise of vertical-specific neobanks like Rizq for Sharia-compliant investing, Insha for charitable donations, Pinch for gamers, and Longevity for elderly consumers. I am not confident that these demographics need (or, indeed, want) their own curated banks. It is unclear whether the bespoke services these banks offer create any competitive moats. And, try as they may to sell an ethos of social consciousness, I am not sold on the idea that people personally identify with their bank brands.
Unlike Europe, where neobanks like Monzo, N26, and Revolut identified a significant gap in the market when it came to cross-border payments, account opening, and financial management, users in markets like the US or China have a variety of services (Chase Mobile, Alipay) that provide a good-enough banking experience. This, combined with more stringent consumer banking regulations in the US, waters down a lot of the neobank value proposition that propelled early entrants to rapid growth. We’ll discuss more in the KPIs section of the quarterly update.
Other than payment and neobank companies:
Different types of lenders (purchase financing, student, business) continue to proliferate and draw capital, with 20 rounds raised in Q1.
Cross-border money transfer services are increasingly carving out more niches and new remittance corridors. (Lightnet, Azimo, TerraPay, and Airwallex)
Open banking API services (comparable to Plaid) have drawn more attention. (Tink, Teller, Youtility, Linxo, OpenLegacy, and Zabo)
And the siren song of business and personal financial management apps continues to draw capital.
Two interesting emerging areas of venture investing, that I think will see more activity in the coming year, are (1) fintechs focused specifically on the interpretation and sanitization of financial data and (2) the new wave of core banking services providers. We’ll dig more into that in future sections.
