An overdue conversation for financial services: Where are we really headed next?
If there was one theme that emerged during this pandemic, it would be one of acceleration. While much of our daily life feels like it has been in stasis these past nineteen months, it seems every area of financial services is experiencing some form of transformation. A decade of venture-fueled startups amassing an over abundant level of capital has been compounded by unexpected shifts in consumer behavior resulting in customer relationships pulled apart by the ever-present spectre of emerging technology. As the banking business model continues its metamorphosis, has our industry truly changed for the better? What might the future hold for us as we venture further down this path of dissecting and rebuilding the past?
The serendipitous nature of open finance
As the value propositions of financial services become more segregated, where are the biggest opportunities to serve the financial needs of more people? While the past year has seen phenomenal growth for embedded finance business models — from payments and lending to insurance and investing — can this be a way for banking to be more inclusive? It certainly could be part of the solution, as we see a future where consumers can obtain financial services whenever, wherever, and however they need them. Though the question remains as to who benefits the most from these transactions over the longer term.
One way we’ve seen credit access expand during the pandemic is through Buy Now, Pay Later (BNPL). While most of us are familiar with the Peloton example, where providers like Affirm provide time-driven financing for big purchases, big brands see a market opportunity as well (e.g. retail giant John Lewis launched a series of retail investment products with digital wealth manager Nutmeg). Companies like PayPal are extending their brands from payments to BNPL to consumer retail experiences and creating new financial superapps focused on meeting more customer needs either outright or through embedded finance partnerships.
The expanding role of infrastructure providers is enabling both potentially inclusive extensions of the business model and new opportunities for fintech startups, incumbent financial institutions, and the customers they serve. From banking as a service providers from Mambu, Railsbank, and Tink, to data aggregators from Plaid to MX, and for financial product platforms the likes of Marqeta and Circle and Radius, there are now hundreds of infrastructure partners to choose from. This has opened up both the opportunity for startups to grow and the risks associated with an increasingly fragmented market. While some neobanks like Monzo, N26 and Revolut are experiencing challenges launching into new territories, others like Varo, MoneyLion, Chime, and Nubank are seeing impressive expansion in their home markets.
Digital identity expands its wings
Another area where we are seeing the opportunity for broader inclusion is in identity. Your identity is an asset; it is the key to this growing financial kingdom. But it is also a privilege not available to everyone. “Identity is the largest unsolved problem on the Internet”, according to Rod Boothby, Santander’s Global Head of Identity and co-chair of the Open Digital Trust Initiative at the Institute of International Finance (IIF).an
According to the World Bank, there are still over 1 billion ‘invisible’ people with no proof of identity, depriving them of access to the basic services –– from education and healthcare to finance and physical mobility –– that many of us take for granted.
As the usage of digital immunization passports grows, and as more private and public entities require proof of immunization against COVID-19 while economies re-open, the importance of identity will become a critical component of our health, safety, mobility, and financial opportunities. This also becomes critically important to the industry as more people gain digital and physical identity for the first time. We are already seeing massive investments by banks to shore up KYC, AML, and digital onboarding tools, as well as significant venture activity into companies like Alloy focused on identity as a service. How we safeguard the data and privacy and ensure inclusion for all citizens will be an important focus for the future.
Some things may never change
As banking is being disrupted in new and interesting ways –– it feels like the cadence has only increased. While there was an initial slowdown of venture activity, fintech funding is now on fire. Prior to 2021, global funding had not reached over US$100 billion in a single quarter. But this year it has done that each quarter –– US$454 billion invested in 2021 –– and the year is far from over. And incumbents from Citi to JPMorgan Chase to Banco Santander are both investing and acquiring talent and startups at a record pace, as corporate venture teams see similar opportunities.
Despite the unremitting financial strength of the industry and concurrent success of venture-backed exits during the pandemic, however, we should be concerned about blind spots that persist. While a record amount of funding has poured into startups, the amount of funding going into female founded startups is at the lowest in the past 5 years, capturing only 2.2% of total funding. While opportunities for diversity and inclusion have been under the microscope the past several years, we have yet to see significant changes to the makeup of both boards and executive teams within banking and the fintech startups that comprise its external muse.
You can’t be what you can’t see –– and you can’t fully service what you have never truly known. Genuine financial inclusion will only occur when the services portion of the model includes all people from all walks of life from every part of our only home.
Come commune with us in London
Where do we go from here then? During the pandemic, many facets of the industry –– despite its obvious successes –– have become rather myopic. While most of us have followed the daily news of fintech startups, product updates, bank earnings, and c-suite reshuffling, we have barely had time to hear the stories behind these changes, to piece together the context of the content that leads to the genesis of new ideas. It is far past time for us to commune –– to personally connect with other humans, confront other viewpoints, and work to find that context. It’s the only way to build a better future, one that has not been yet written.
Join us for the next edition of FTT Embedded Finance & Super-Apps taking place in London on 13th May 2025 and live as part of the FTT Fintech Festival on 11th – 12th November 2024 at The Brewery, London.
By Theodora Lau and Bradley Leimer of Unconventional Ventures
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