For our last edition of the year, the a16z fintech team weighs in on the big ideas they think fintech will take on in 2021. Check out our big ideas from last year here.
The reason PPP has fallen short and many stimulus checks went unsent this year is that, when it comes to money, there is no direct connection between consumers and government. Instead, banks serve as intermediaries. Very few people directly own U.S. government bonds, for example; they earn interest from the banks that own them. Consumers don’t borrow money from or deposit money with the Fed; their banks often do when handling “excess reserves.” Sending a wire means interfacing with “Fedwire,” but only banks can access that, not consumers. If you have a “conforming mortgage” you effectively got your mortgage through the government — except it went through many intermediaries first.
In 2021, I believe we’ll see the beginnings of the disintermediation of the banking system. Though private banks can and do perform a valuable function in every economy (and I believe “postal banking,” a.k.a DMV banking, is a terrible idea!), when they merely serve as a “front end” to the central bank, they insert more bureaucracy and fail to accomplish monetary policy goals. Fintech represents the most powerful tool that governments have to make monetary services available directly to their own citizens, benefiting consumers equally in the process.
Today almost 5 billion humans have mobile phones, 80 percent of them smartphones with internet access. Amazon has rendered much of retail obsolete; this process is quickly happening to banks, as well. The bank branch is an anachronism. Eventually, every consumer will access their savings, loans, and investments via a mobile app. This reshuffling of the deck is quickly being adopted by consumers — quicker still amid stay-at-home orders. But it should be appreciated even more so by governments, who can use such technology to eliminate unnecessary complexity and cut through bureaucracy.
If the borrower or recipient of money is the government, it makes no sense to filter it through legacy financial institutions first. Fintech has the power to advance monetary goals for consumers more efficiently and effectively.
It’s been a year since I first wrote that every company would be a fintech company. Consumer and B2B companies saw the opportunity to add fintech — including payments, lending, and bank accounts — to better retain customers and to drive more margin. We wrote about the opportunities in vertical SaaS to multiply revenue per customer. This trend will continue for years to come, and financial services will increasingly become the primary business model. These successes are likely to prompt some companies to ask, What more? Now that I’m providing my customers with financial services, what else can I offer? The answer: Insurance. One in 10 Fortune 500 companies is an insurance company, but all of those companies were started back before World War II.
Not only is our current insurance system outdated, but from a consumer’s point of view, it’s also highly inconvenient: I purchase my asset (house, car, lease on an office), but then I have to go somewhere else to buy insurance. For new insurance companies, customer acquisition cost is high, in large part because these companies have to try to nab consumers at the exact moment in time when they are thinking about buying insurance. It would be natural and highly advantageous to be able to embed insurance at the point of purchase. “Insurtechs” would be able to better acquire customers (“would you like some insurance with that?”) and better select risk by potentially leveraging the data of the host platform. For companies, offering insurance is yet another way to provide value to their customers and to drive more revenue.
This year, we saw the first insurtechs go public. In 2021, we will see insurtechs built in a way that makes them more easily embeddable (fast to bind, able to leverage the platform’s data for underwriting), more infrastructure companies that enable insurtechs to spin up faster, and more platforms looking for insurance partners.
There are two critical components to a startup’s success — a distribution insight and a product insight. Though we most often talk about product insights, the distribution insights are arguably harder to come by and even more critical to the success of a company. For example, Credit Karma is known for its free credit score (product insight) but less known for its innovative TV acquisition efforts (distribution insight). Similarly, Robinhood is known for zero-fee mobile trading (product insight), and less known for its incredibly viral referral program (distribution insight).
Over the past two years, the main lever for driving distribution in consumer fintech has been leveraging economic incentives — higher-yield deposits, lower-priced loans, even straight up giving customers cash. In 2021, we expect the pendulum will swing back toward product-led growth. Specifically, we anticipate the emergence of new fintech products that are “social+”: those that have more utility when you use them with others, creating a functional (and often emotional) incentive for users to help drive distribution. There are a number of exciting companies that are catalyzing this change already — Stir, Braid, Commonstock, Public, and Yotta among them. Not only do multiplayer products have built-in growth levers, they make activity around money — investing, financial planning, even saving — more engaging. Fun, even! There are a number of catalysts here: the need for differentiation, the need for distribution, and shifting attitudes around what consumers share about money. It’s a medium of exchange, after all.
The past few years of fintech have seen an evolution from improved access (loans online!) to better economics (and they are cheaper!). I see the next inflection point as improved products and the emergence of networks.
This year, a new crop of investors became active. Platforms like Robinhood have made investing more accessible by offering a more inviting mobile interface alongside product innovations like fractional shares. In addition, commission-free trading has lowered the capital required to participate. With COVID restrictions, many people have also had more time to invest. Trading in securities, however, is just the tip of the iceberg — there are many more asset classes. In 2020, we saw increased interest in options investing, which also can enable investors to take smaller positions.
There are more commonly traded financial products, like bonds, commodities, and foreign exchange (many of which are still traded over-the-counter on a decentralized basis, rather than on an exchange), as well as real asset classes like real estate, collectibles (art, classic cars, etc.), even small businesses. More tech-enabled marketplaces have emerged recently to centralize and facilitate the trading of these asset classes for retail investors. To lower the barrier to entry, many have begun to offer fractionalized ownership, as well. Education is in many cases still a limiting factor. These asset classes have typically been more difficult to enter, given the complexity surrounding the mechanics of the asset. Assets with complex underpinnings can also lead uninformed or novice investors to miscalculate risk.
In 2021 and beyond, we’ll see more of these alternative asset classes become available and accessible to the mainstream investor. Tech platforms will develop innovative ways not only to educate new investors through content and community-based learning, but also to encourage engagement with other owners and the product itself — imagine if you could share a property or painting you’ve invested in. As a result, we’ll see more investors with smaller checkbooks start investing in new asset classes.
Though 2020 has been tragic in so many ways, the year was also a tipping point for the fintech community. In the wake of some of the first major fintech exits, we saw a wave of new entrepreneurs, as well as explosive growth.
Though the ascendency of fintech is often discussed at a macro level, I had the pleasure of experiencing it at a micro level. Earlier this month, I tweeted an offer to help connect fintech entrepreneurs who are looking for a cofounder — more than 180 people reached out in less than 48 hours. This is not just about the increasing quantity of fintech companies, it’s also about the quality of the people building in this space.
As I’ve written before, fintech was still a nascent industry in the aughts and 2010s. Today, many fintech entrepreneurs not only have an understanding of technology and finance, but their early teams are equally impressive and knowledgeable. Many fintech founders we meet have already done one, two, or three tours of duty at successful fintech companies and have been able to recruit from a deep bench of industry talent.
In 2021, we’ll continue to be reminded — and blown away by — how large the fintech community has become.
Beyond making a product that consumers love and want to adopt, getting it into the hands of thousands and millions is how Silicon Valley mints its winners and losers. Distribution is the cornerstone that differentiates whether startups succeed or fail. In fintech, we’re excited to back founders that have found new ways to reach their target customers — these teams innovate on their go-to-market strategy as much as they do on product.
In the past, financial institutions acquired customers through physical bank branches, commercials, and direct-mail ads. (Think Samuel L. Jackson’s “what’s in your wallet?” tagline, or the reams of credit card offers clogging your mailbox.) Eventually, banks transitioned to online channels, led by fintechs that understood the power of the internet. LendingClub, one of the original fintech companies, started out as a Facebook application.
That brings us to today. Though many fintech companies still rely heavily on Facebook, Google, and Instagram to acquire customers, those channels have become increasingly expensive and oversaturated. That saturation has also contributed to a decline in consumer trust—a key component in the adoption of financial services.
I believe the next wave of fintech companies will pioneer distribution avenues—and take a page from the past — in ways that are both cost-effective and inherently trustworthy. In some cases, offline is the new online: fintechs are leveraging existing communities and affinity groups to acquire new customers. Other fintech companies are going back to physical locations, as we’ve seen with SoFi Stadium and the Chime x Mavericks partnership, for example. And increasingly, fintech startups are leveraging referrals from friends and influencers/creators to market financial services and products. We look forward to exploring new, better ways that fintechs can differentiate themselves.
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