Financial technology is the hottest area of investment for
venture capitalists — $1 out of every $5 of funding flowed into fintech
startups in 2021.
But with a recession possibly around the corner, investors
are writing fewer — and smaller — checks. And they’re getting much more
selective about the kind of companies they want to back.
According to CB Insights, global venture investment in
fintech firms sank 18% in the first quarter of 2022.
That’s led to something of a rotation out of certain pockets
of fintech that were hyped by venture capitalists last year, such as crypto and
“buy now, pay later,” and into less sexy areas focused on generating stable
streams of income, like digitizing payment processing for businesses.
So what’s hot in fintech right now? And what’s not? I went
to the Money 20/20 Europe event in Amsterdam in June to speak to some of the
region’s top startup investors, entrepreneurs and analysts. Here’s what they
had to say.
Investors are still obsessed with the idea of making and
accepting payments less onerous for businesses and consumers. Stripe may be
facing a few questions over its eyewatering $95 billion valuation. But that
hasn’t stopped VCs from looking for the next winners in the digital payments
“I think we’ll see a next generation of fintechs emerge,”
said Ricardo Schafer, partner at German venture capital firm Target Global.
“It’s a lot easier to build stuff.”
Niche industry buzzwords like “open banking,”
“banking-as-a-service” and “embedded finance” are now in vogue, with a slew of
new fintech firms hoping to eat away at the volumes of incumbent players.
Open banking makes it easier for firms that aren’t licensed
lenders to develop financial services by linking directly to people’s bank
accounts. Something that’s caught the eye of investors is the use of this
technology for facilitating payments. It’s an especially hot area right now,
with several startups hoping to disrupt credit cards which charge merchants
Companies like Visa, Mastercard and even Apple are paying
close attention to the trend. Visa acquired Sweden’s Tink for more than $2
billion, while Apple snapped up Credit Kudos, a company that relies on consumers’
banking information to help with underwriting loans, to drive its expansion
into “buy now, pay later” loans.
“Open banking in general has gone from a big buzz word to
being seamlessly integrated in processes that nobody really cares about anymore,
like bill payments or top-ups,” said Daniel Kjellen, CEO of Tink.
Kjellen said Tink is now so popular in its home market of
Sweden that it’s being used by about 60% of the adult population each month.
“This is a serious number,” he says.
Embedded finance is all about integrating financial services
products into companies that have nothing to do with finance. Imagine Disney
offering its own bank accounts which you could use online or at its theme
parks. But all the work that goes into making that happen would be handled by
third-party firms whose names you might never encounter.
Banking-as-a-service is a part of this trend. It lets
companies outside of the traditional world of finance piggyback on a regulated
institution to offer their own payment cards, loans and digital wallets.
“You can either start building the tech yourself and start
applying for licenses yourself, which is going to take years and probably tens
of millions in funding, or you can find a partner,” said Iana Dimitrova, CEO of
Got an idea for a new crypto exchange you’re just dying to
pitch? Or think you might be onto the next Klarna? You might have a tougher
time raising funds.
“The tokenization and the coin side of things we want to
stay away from right now,” said Farhan Lalji, managing director at
fintech-focused venture fund Anthemis Capital.
However, the infrastructure supporting crypto — whether it’s
software analyzing data on the blockchain or keeping digital assets safe from
hacks — is a trend he thinks will stand the test of time.
“Infrastructure doesn’t depend on one particular currency
going up or down,” he said.
Investors see more potential in companies making it easier
for people to access digital assets without all the knowhow of someone who
trades cryptocurrencies and nonfungible tokens every day — part of a broader
trend called “Web3.”
When it comes to crypto, “the areas that most interest us
today are areas that we have an analogue experience to in classic industries,”
said Rana Yared, a partner at venture capital firm Balderton.
As for BNPL, there’s been something of a shift in the
business models VCs are gravitating toward. While the likes of Klarna and
Affirm have seen their valuations plummet, BNPL startups focused on settling
transactions between businesses are gaining a lot of traction.
“Growth in B2C [business-to-consumer] BNPL is slowing … and
regulatory concerns could curtail growth,” said Philip Benton, fintech analyst
at market research firm Omdia.
Business-to-business BNPL, on the other hand, is “starting
from a very low base” and therefore has “huge” potential, he added.
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