01/31/2024
Fintech
Fintech 2024: Innovation meets consolidation
AI will continue to drive the industry forward in new directions, while some high-flying startups may be in for a rough landing
For Fintech, 2024 will be a year of both consolidation and innovation. AI-driven solutions will continue to propel the sector forward, making significant advancements in fraud reduction and automated accounting solutions, while cross-border and real-time payment systems will continue to evolve. Crypto and blockchain will creep ever closer to mainstream use, and we’ll see an increase in bundled SaaS offerings. At the same time, we’ll also see a reduction in the overall number of entities; those battle hardened by the pandemic years will thrive, while others may be facing an unforeseen exit.
Our global Fintech team at Lightspeed came together to share thoughts on what’s in store for Fintech in 2024 – from infrastructure and enterprise application layers, to consumers and wealth. We think this year is going to be a pivotal year for Fintech investments and innovation, and we’re excited to see how the industry propels forward.
Consolidation: The number of Fintech players will shrink
After years of companies building apps and services for every segment of Fintech, we’ll see the market consolidate into a smaller number of full-featured products. Winners will adopt the best-in-class features and a trend of bundling will dominate, as only a handful of companies will be able to survive. Companies that would have gone out and raised a new round of financing during the last bull run will find no new attractive capital available to them. They will need to find an outcome – either by being absorbed into a competitor or large incumbent, or, sadly, by shutting down.
This will lead to gradual but persistent consolidation in both B2B and B2C Fintech companies. It will be an awkward and painful process, as the muscle for absorbing or merging companies was rarely used over the last market cycle. A smaller number of new winners will emerge, more efficient and scaled than the competitors they subsumed. Existing incumbents will also gain new products and capabilities, as teams, companies, and products will finally be available at reasonable prices. Fintech is healing; it took a long time to get here, but we’ll be stronger for it.
Fraud and Compliance: The rise of real-time fraud detection
In 2023, merchants incurred ~$48B in losses due to eCommerce fraud. This issue continues to grow in severity, with fraud costs increasing around 30% annually. Traditional rules-based systems are ill-equipped to adapt to new threats such as synthetic identity fraud and account takeovers. These challenges are exacerbated by the sheer volume of data that needs to be processed and the increasing pace of change.
However, advancements in AI are providing a foundational shift in the ability of financial firms to evaluate risk, identify complex fraud patterns, detect anomalies, and engage in proactive investigation and co-piloting response strategies. In fact, according to Alloy’s latest State of Fraud Report, 23% of financial institutions reported a decrease in fraud, compared to just 1% of respondents the year prior.
On the other hand, fraudsters are employing AI to deceive consumers and businesses, further underscoring the need for continuous innovation in anti-fraud measures. With the rise of real-time payments, the need for real-time fraud detection and prevention has become more critical than ever. Regulatory bodies are also paying closer attention to this issue. For example, in the UK, the Payment Systems Regulator (PSR) has made both the sending and receiving institutions liable for Authorized Push Payment (APP) fraud. The global nature of fraud in financial services is evident, and as we continue to see it evolve, the stakes in the ongoing game of whack-a-mole are only increasing across financial services.
AI Accounting / CFO Suite: Automated accounting takes another leap
Sam, Adrian, Justin, Shan, Anuvrat
In 2023 financial institutions took significant steps towards full accounting automation, using AI to drive improvements in data processing and categorization, capital deployment and management, month-end bookkeeping, and other basic fiduciary responsibilities.
But the disruptive potential of AI within the accounting industry and the broader CFO suite is nothing new. The CFO stack has exploded over the past three years, and generative AI tools such as ChatGPT have proven more than competent in their ability to stand in for human CPAs. So much so, that companies have begun to question the high cost of humans in their bookkeeping and audit workflow. If 2023 was all about shipping products to show that accounting can be automated, 2024 will be about execution and streamlining the workflows of the entire finance organization. However, both enterprises and mid-sized organizations will need to balance functionality and complexity, and finance leaders will seek products that consolidate and streamline their day to day, and in turn enable the Office of the CFO to become more strategic.
Cross-border payments: The innovation gap remains
Anuvrat, Mercedes, Justin, Shuvi
Despite the mainstream adoption of tech-enabled remittance products like Wise and Remitly, cross-border payments will remain costly and slow for many people and businesses in 2024. The average cost to send $200 is 6% globally, still far above the World Bank’s 2030 target of 3%. The largest remittance receivers in 2022 were India ($111B), Mexico ($61B), and China ($51B) (India replaced Mexico as the largest recipient in the last several years). Trade finance is still dominated by the US <> China ($576B), Mexico <> US ($459B), and Canada <> US ($447B) corridors. Despite these large volumes, the innovation gap is particularly large in trade finance for SMBs selling on the global stage. The aftermath of COVID-19 introduced new patterns in trade, shipping, and e-commerce, demanding innovative solutions. In 2024, our team will continue to monitor several solutions areas that could solve the global changes in demand: developments in crypto rails for global payments, expansion of Real-Time Payments and Pix International, and solutions addressing foreign exchange management and banking access in different countries.
RTP/FedNow: US real-time payment systems are still a long ways off
FedNow was announced ten years ago. It’s been seven years since the Clearing House launched real-time payments (RTP), and in 2023 the Federal Reserve finally got FedNow out the door. Yet we still have not seen material adoption for RTP.
The common Fintech narrative has been to mistakenly use Pix (Brazil) and the Unified Payments Interface (India) as the model for the adoption of faster payments in the United States. However this scenario is based on several fundamental (and mistaken) assumptions: 1) US financial firms would take a holistic approach and reinvent their entire financial systems around these new rails, versus merely creating a new settlement system; 2) crucial top-down government sponsorship in the form of policy initiatives, funding, and incentives to drive adoption (for example, Pix is mandatory for all financial institutions in Brazil); 3) a newer financial system concentrated amongst a small number of institutions; and 4) a majority of the consumer base being underbanked. The US has very few of these traits. Instead, we’re looking at minimal governmental support, a mature and fragmented banking system, and entrenched systems like ACH.
The primary friction for adoption in the US is the bank technology stack. Many banks are satisfied with the limitations that come with daily batch payments processing – that’s how their core systems and risk processes are mapped. In order to support payments around the clock, banks will likely need to amend “core components” of their stack, including processing and reconciliation systems, liquidity monitoring, and staffing. For adoption to become ubiquitous, real-time payments will need an industry-wide catalyst.
Bottom line: We are long-term optimistic on real-time payments in the US, but short-term realistic that it will take another five to ten years for RTP to gain meaningful traction in the US. That said, it has been promising to see FedNow participants grow from the original 35 at launch to 400 at the start of 2024.
Capital Markets and Climate: New capital markets will appear, driven by carbon tax credits
Federal and state local governments will continue to play an important role in financial services outside of “traditional” securities and banking regulation. Climate change will spur government’s involvement in creating new capital markets driven by securitized or transferable tax credits. This new system of assets will create a new financial market. Climate change will also continue to change the insurance market, driving additional risk to specialty markets. In the first 12 months of 2022, startups that sit at the intersection of climate, finance, and tech have raised nearly $3 billion globally — more than two times the total for all of 2021. This trend will only gain more momentum into 2024.
Blockchain: Inching ever closer to mainstream use
Bear market or bull, the technological foundation of blockchain tech and product-level adoption in crypto have advanced over the past year. With close to 1 billion cumulative transactions on-chain, the validity of blockchain as a method of value exchange has been firmly established. The fast development of Layer 2 blockchains such as Polygon and Arbitum, as well as alternative Layer 1s such as Solana, enabled a higher volume of transactions per second (TPS) while reducing gas fees, laying the groundwork for broad-based adoption. In 2023 Bitcoin also staged a strong comeback. Traditional institutions led the march with exchange-traded fund (ETF) markets, as well as new programmability features built on base protocol such as Ordinals, which allows NFTs to be created directly on the bitcoin blockchain.
As the crypto hype moderates over time, more people and organizations will develop and use blockchain technology. Crypto will become a settlement layer for new payment alternatives and money-movement solutions in an increasing number of real-life business and consumer use cases. As DeFi infrastructure matures, we’re likely to see a second wave of on-ramps/off-ramps for Fiat<>Crypto as the utilization of stablecoins grows. Last but not least, blockchain as a distributed database and universal computing power will play an important role in the world of AI, physical infrastructure, and network nodes. We believe crypto will move from a “hype-driven concept” to a real way to redefine money movement, and that the development of distributed databases will continue to evolve and advance into the new year.
Mortgage Tech Stack: Home owners will seek relief from high interest rates
The hope for lower interest rates will increase mortgage and property tech innovation and spur further development of mortgage software tech. This will include consumer-facing products as well as improved technology and workflow tools for mortgage companies. Whether the ‘revenge of refis’ comes to pass quickly or not, the nation’s pent-up frustration with high interest rates (30-year rates hit 8.45% in October 2023) has created strong anticipation for players in the refinancing space, spurring activity. Those rates won’t be coming down significantly any time soon. As a result, more people in the top brackets of income earners are choosing to rent. At the same time, both homeowners and renters alike will expect to l get more value out of their largest monthly expense. We’re excited to see how mortgage servicers, brokers, lenders, originators, and other Fintechs step up to serve the demand.
Vertical SaaS-Fintech: More bundled offerings to come
In response to the increasing challenges and costs associated with customer acquisition, SaaS companies are strategically broadening their reach within their existing customer base by adding Fintech-related products. Vertical SaaS platforms, with their sticky workflows and high usage times, are uniquely positioned to seamlessly introduce financial functions. For example, Toast’s first product was a restaurant point of sale (POS) system; today it’s expanded to managing inventory, payroll, scheduling, online ordering, raising capital, and more. Toast’s reported 50% attach rate on some of these products proves that bundling works.
We expect more players to expand their marketplaces and vertical-SaaS business to include payments, payroll, embedded lending, insurance, and more. We also believe AI will transform how embedded players are able to serve these verticals, offloading some of the customer support work for the specialized offerings. Workflow moats will be deepened with data moats, and finance functions will meld with every part of an organization.
Insurtech in India: The time is ripe for innovation in healthcare expense management
Health insurance in India remains an oft-debated topic among investors and founders alike. On the one hand, health insurance penetration has enormous headroom for growth (15% of individuals are covered by private insurance, with 50%+ out of pocket coverage, vs WHO guidance of 15% to 20%). On the other hand it remains a push-based product with a lot of inherent friction. We strongly believe the health reforms initiated by the National Health Authority might finally lead to a step change in stakeholder behaviors.
There are multiple levers of growth and, consequently, opportunities for new companies to create and capture value. For example: helping the long tail of hospitals digitize their data and expand insurer coverage, leveraging user-side data to create better products and more personalized premium pricing, and improved claims processing to open up new provider segments and improve the customer experience. Together with the secular trends around greater market awareness in T2/T3, rising healthcare costs, and a push towards cashless claims, the time is ripe for a new wave of companies to disrupt how healthcare expenses are managed in India.
2024 will be a year of transition in Fintech
While we will likely see a consolidation of Fintech companies in 2024, the long-term outlook remains positive. Startups that successfully navigated the uncertainties of the pandemic are now positioned for growth, and will be seeking additional investments to fuel their next phase of development. While down rounds may be a reality, this phase represents an opportunity for resilient Fintech survivors to showcase their adaptability, positioning themselves for the exciting prospects that lie ahead.
As Fintech evolves into a smaller, more efficient landscape, winners will emerge with enhanced products and capabilities, injecting even more efficiency and continual value creation into the financial services ecosystem. At Lightspeed, we remain excited about Fintech investment opportunities in 2024.
