The death of FinTechs — and of FinTech funding — has been greatly exaggerated.
Yes, venture capital funding in the space is slowing. And depending on where you look, it’s waning in general.
By way of example: CB Insights has estimated that global FinTech funding amounted to $75.2 billion in 2022. That’s down 46% compared with 2021, but up 52% when posited against 2020. Things have been volatile.
But the $925 million just raised by QED Investors gives the nod that, as Amias Gerety, partner at the FinTech-focused VC firm told Karen Webster, there’s a real opportunity in finding and backing the pragmatic disruptors of finance — the ones focused on profits and customers and finding defensible niche markets alongside the pursuit of growth.
“There’s all this talk about ‘is this the end of FinTechs?” he noted, “But we think we’re still at the beginning … and counseling these firms to be pragmatic and not to be dogmatic.”
For context, QED said last week that the two funds recently closed consist of an early stage fund worth $650 million and a $275 million early growth-stage fund. This brings the total funds under management by QED, to date, to more than $4 billion.
Finding Opportunity at the Edge
Through 16 years since its 2007 founding, Gerety said he and his partners have seen companies grow up, graduate into public markets, and exit — but all of them had to leave hundreds of ideas on the table because they had to focus on being excellent at the few things that would drive their desired outcome. These discarded would-be products and services now become another firm’s roadmap to success.
“There’s always opportunity at the edge,” he said. There’s plenty of room for FinTechs to find firm footing — and VC backing — with different structures and products that seek to define new and more efficient ways to deliver financial services.
That’s especially true given that even some FinTechs — digital disruptors of the recent past — have become incumbents themselves. Whether publicly listed or not, they have achieved scale, millions of customers, and billions of dollars in revenues. Gerety posits that they’re now busy protecting their own moats and can be reluctant to plow millions of dollars into early-stage companies. He also observes that it takes longer for incumbents to make decisions, in many ways, like the incumbents they sought to displace.
“Their tech was modern at one time — but they are not as cutting edge as some of the NextGen FinTechs that are looking at problems differently with different tech to accelerate their paths to market,” Gerety explained.
That leaves the door open for VC firms — QED among them, Gerety said — to put their money to work.
Forward-looking neobanks are seeking ways to become financial hubs for their customers in a bid to move from narrow interchange models towards a full suite of offerings — and thus a stronger economic foundation. The greenfield opportunity is there, he said, as there has yet to be the super app here in the states that brings a range of account-level functions and financial services into a digital continuum.
“We think great businesses are built on good businesses — you can’t lose money on the interchange model, but hopefully you’ll have the momentum and the discipline to use that as a ‘wedge’ to grow with your customers.”
Going Where Banks Won’t
The neobanks and the FinTechs can find success in their go-to-market approaches with incumbent banks (they’re not going away, said Gerety of the incumbents that have been around for decades and even hundreds of years), as those banks have the imprint in different geographies and markets to smooth the path for digital players.
In return, he said, “the FinTechs go where the banks don’t — and they fill spaces the banks do not.”
There’s particular value in finding niches that have thus far not been targeted by the marquee and traditional FIs (where $50,000 consumer loans, for example, have not been all that appealing). Gerety offered up the example of the 24-year-old individual living paycheck to paycheck, where the lifetime value of the customer grows (and becomes lucrative) as they find financial stability moving through the various stages of their life. QED holdings such as Albert have found success in combining financial advice and automated savings into one point of access.
Asked by Webster where the $925 million might flow in backing early-stage companies, Gerety noted that AI stands out as an avenue with potential. In the world of finance, fraud is a constant threat, and staying ahead of the game requires constant innovation. According to Gerety, “the fraudsters are constantly innovating, which means that there’s always an opportunity for innovative fraud [fighting] companies.”
No matter the focus, he said, “disruption is about customer delight.” And to that end, startups are most successful when they take small steps toward a grand vision.
“Its’s the customer that is going to determine your success,” he told Webster, “not a principle, theory or business model — and that’s what creates opportunity to invest, early, in the great FinTechs of 10 years from now.”