Embedded finance and the rise of finfluencers: 4 fintech investors highlight the hottest trends to watch in 2021
- We asked fintech investors at Bain Capital Ventures, Citi Ventures, Index Ventures, and PayPal Ventures what they're looking out for in 2021.
- Every investor said that embedded finance startups, or those who provide the infrastructure that enables companies to rollout financial offerings, had a big year and will continue to be a focus in 2021.
- In 2021, investors are looking out for everything from the rise of finfluencers to changes in how loans are orginated.
- Visit Business Insider's homepage for more stories.
Ten years ago, fintech was all about unbundling financial services. Startups took aim at one piece of a bank, be it checking accounts, trading, or wealth management, and built a digital-forward, often cheaper, alternative.
Now, fintech is rebundling, with startups layering more offerings and services in hopes of boosting user loyalty and becoming a one-stop shop.
And embedded finance — the underlying infrastructure layer that enables these new offerings — is powering the trend. Fintechs that many call the "picks and shovels" of finance have been on the rise.
Embedded finance enables non-financial companies, like Uber, for example, to add financial products to their platforms. And by doing so, these platforms increase their value to consumers, offering them all the products they need in one place.
Uber offers banking services for its drivers, which means that drivers can get paid quicker and manage their income in one place. Uber Money is powered by banking-as-a-service provider Green Dot.
Insider asked four investors what they're looking out for in 2021. All mentioned embedded finance as a major trend in 2020 that's likely to continue into next year as fintechs, and those in other industries, look to expand the types of services they offer customers.
"I think we're in a great rebundling," Ashley Paston, an investor at Bain Capital Ventures, told Business Insider. "If you look in any fintech, they have expanded outside of their initial product to create more value for their end customer. The whole idea is to be everything to the end consumer."
Beyond embedded finance, investors are also expecting segments like insurtech and lending to take off in 2021, building on the blocks laid by infrastructure fintechs.
Here are the key trends that fintech investors are watching for in 2021.
Jay Ganatra, partner at PayPal Ventures
Ganatra, who is a partner at PayPal Ventures, the payments giant's venture-capital arm, said that 2020 was all about the behind-the-scenes tech in fintech.
"The biggest thing by far this year was infrastructure-as-a-service and banking-as-a-service," Ganatra said.
From point solutions like Mantl, which offers an API for digital account opening, to full-stack banking-as-a-service providers, fintechs powering embedded finance have had a big year.
And the proliferation of this infrastructure layer means that any company with consumer or merchant customers can embed financial services, like banking or lending, within their platforms.
"That entire market is really taking off for what we would consider to be the picks-and-shovels players for fintech," said Ganatra, referring to the strategy of investing in the underlying tech used to produce something as opposed to the final product.
Read more: Execs from Plaid and Yodlee explain how new data-sharing rules will dictate the future of how banks and fintechs work together
In 2021, Ganatra is watching to see how data availability impacts the financial services market.
Through data aggregators like Finicity, Plaid, and Yodlee, financial data has become more open and available. What remains to be seen is how finance will evolve given the broader access to this data.
"The connectivity was level one," Ganatra said. "Where it gets interesting is how that data connection gives you the ability to underwrite and provide new and different financial services once you have a better picture of the consumer or merchant."
Proponents of open banking often say that more data access will result in better and cheaper financial products for consumers.
But so far, innovations have been incremental, Ganatra said. Instead of drastically reducing the cost of lending and underwriting, what's more likely is changes in how loans are originated, he added.
Ganatra said there's more room to evolve the way lenders find borrowers. It's a departure from a theme many fintechs have pushed in recent years about the opportunity to democratize credit access and underwriting,
"More of the reduction will be driven by distribution then it will be from underwriting," said Ganatra of lending costs. "We're very good at underwriting already. I think there's less to gain there than there is to gain on the marketing side."
Ashley Paston, investor at Bain Capital Ventures
Paston, an investor at Bain Capital Ventures, also noted that embedded fintech was a clear winner in 2020, identifying it as the top trend of the year.
It's also one she expects to continue.
Software companies, already well-equipped with data on their users, are well positioned to roll out financial offering, too. And fintechs that enable that seamlessly have seen a massive boost this year.
"To me, this trend makes perfect sense. The software companies have data-rich relationships with their end consumers, and can therefore better underwrite their end merchants or consumers, but also spin up novel functionalities that other horizontal players may not be able to do," Paston said.
And for those software companies, adding financial services to their offerings can boost user retention and loyalty.
"Especially in the drive for ruthless prioritization throughout COVID, there is a clear ROI for embedding fintech because it helps you reduce churn, it's an up-sell opportunity, and you can better monetize off of payments, lending, investing, and insurance," she added.
Read more: These are the 38 fintechs that investors say are poised to be breakout B2B stars. Meet the startups they think will follow in the footsteps of Plaid and Stripe.
Another area Paston is watching is insurtech.
The space, which was long dominated by traditional players that have significant scale, has seen an uptick of young, agile companies looking to disrupt it. Softbank-backed Lemonade and car insurance startup Root both went public this year, raising $319 million and $664 million in their respective IPOs.
Meanwhile, Hippo, which focuses on homeowners insurance, raised a $150 million Series E in July, and auto-insurer Metromile plans to go public via an acquisition by a special purpose acquisition company.
"I think insurance is really in its prime right now," Paston said.
"I think there's a lot more focus brought to insuretech as a result on not just the B2C side, but also the B2B side. I think we're in the first innings of insurtech and insurance innovation, and there's a lot more to go there," she added.
Mark Goldberg, partner at Index Ventures
Goldberg, a partner at Index Ventures, is also bullish on the infrastructure layer of fintech.
"I think the cool thing for all entrepreneurs in fintech is that the toolkit is being built right now," Goldberg said. "That category of companies is attracting a lot of venture dollars because if you're the picks-and-shovels to an industry that's exploding, that's a good place to be."
But Goldberg is also keeping an eye on the kinds of innovations that follow as a result of seemingly any company being able to quickly roll out financial offerings.
"I'm much more excited about what the consequences of that are," Goldberg said. "If you have that toolkit, what can you do? That's the embedded finance thesis."
He's also expecting fintechs to embrace new channels of distribution to reach younger consumers.
Step, a digital bank for teens, launched in partnership with TikTok star Charli D'Amelio. Since its rollout in October, the fintech has over 500,000 sign-ups, and raised a $50 million Series B.
"The rise of the finfluencer is coming," Goldberg said. "You're not going to see JPMorgan on TikTok. It just doesn't feel native."
"I think you will see fintechs try and reach channels that the traditional incumbents can't go to," he added.
Read more: Teen-focused bank Step just raised a $50 million Series B that included TikTok megastar Charli D'Amelio. Its CEO explains why influencers are critical to the startup's marketing strategy.
The other area Goldberg is watching is social, collaborative finance, an opportunity he said no one has fully embraced. In software, products like Google Docs enable multi-user sharing and collaboration. But the same has yet to come to financial services.
"Collaboration has come to software. Collaboration has not yet come to fintech. I think that's the big consumer trend that's going to break through next year," Goldberg said.
There are first-generation products, like Splitwise, addressing the problem. But none have perfected the multi-player financial experience, Goldberg said.
"I think while they're addressing the problem, they're not really solving it comprehensively. That's the gap right now, between a tool that is trying to do that and what I think the perfect experience looks like," Goldberg said.
"That gap could close next year, and I'd like to make some investments around that," he added.
Jimmy Zhu, senior vice president of venture investing at Citi Ventures
Zhu, senior vice president of venture investing at Citi Ventures, also said that embedded finance and infrastructure players are well-positioned going into 2021.
"In 2021, I see the expansion and acceleration of the great foundational capabilities that were built in the last few years, into the next layer of headless finance or embedded finance," Zhu said.
"Embedded finance enables the best-in-class capabilities to be seamlessly embedded into the most relevant consumer use paths," he added.
Read more: Green Dot's bread-and-butter businesses have been undercut by VC-backed neobanks. It's turning to techy partnerships with the likes of Uber to restart growth.
Another area Zhu is watching is financial advisory and support services for consumers offered via their employers.
While employees expect healthcare from their employer, they don't tend to rely on them for financial care beyond a pension or a 401K, Zhu said.
Further complicating the matter is the proliferation of the gig economy, which has highlighted a gap in financial support products for consumers, he added.
"Consumers don't want to think about their finances; what they want is someone to help them navigate their finances and help them as they make important life decisions," Zhu said.
Especially given the amount of financial data that an employer has about an individual, there's an opportunity for employers to offer more than just a 401K plan.
"There is an exciting opportunity for startups to help expand the support structure through advisory services and solutions that could be a major benefit for employers to offer employees," Zhu said.
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