Right before the pandemic closed global business in March, Flourish managing partner Tilman Ehrbeck was set to deliver a keynote presentation on the global trends shaping fintech business models at the India Fintech Festival in Mumbai.
Now several months later, Tilman revisited that presentation he never delivered. He took a red marker to it and examined which trends have changed and which ones have accelerated. He shared his findings in a live session on August 13, which you can now watch on YouTube.
In addition to the video, we’ve included a recap of his session below.
In the past month, Flourish has made two new investments in embedded finance, which will be announced soon. Many of these high-growth startups begin as digital platforms with embedded payments and then create new directions using cash flow data to extend credit or insurance to consumers and SMEs. “Finance transfers value across space, time, and probabilistic states,” says Tilman. “In many ways, platforms today are better positioned than traditional players to deliver financial services. In the COVID-19 era, embedded finance is highly relevant and digital platforms have only become more important in our lives.”
Fintech Platforms Proliferate
“Right now, platforms are roaring,” said Tilman. “Facebook, Google, and Apple are leading a stock market rally in America.” As rising costs, regulation, and competition squeeze platforms in their native markets, platforms are moving into finance. So far, in the no-touch economy, digital platforms have been the clear winners – and they will almost certainly emerge as major players in retail finance.
The Rise of Fintech-as-a-Service (FaaS)
The B2C relationship is still ripe for disruption, and fintech startups could also be winners on the retail front end. Many of the most successful fintechs, however, are B2B players. One example is the fintech-as-a-service innovator Plaid, which helps companies build fintech solutions so that consumers can connect their financial data to apps and services. By the end of 2019, Plaid linked more than 200 fintech offerings, and was acquired by Visa earlier this year.
“COVID-19 has accelerated FaaS. Fraud detection, compliance, and eKYC are all activities the big tech platforms won’t want to do themselves,” said Tilman. “They will want to outsource those aspects of the regulated banking stack, and we’re very excited about these B2B fintech services.” He believes that a new industry structure is technically possible with three different players coming together: 1) providing the front-end customer relationship (likely tech platforms), 2) the data and market infrastructure (likely B2B fintech), and 3) the regulated balance sheet (licensed banks, likely incumbents).
Policymakers Are Embracing the Digital Ecosystem
For policymakers everywhere, “the crisis has shown the power of the digital ecosystem,” said Tilman. “In the first month of the pandemic shutdown, Switzerland was able to digitally approve relief loan applications in 30 minutes, and India quickly distributed aid using digital rails.” The pandemic also highlights that policymakers the need to promote innovation and financial inclusion, as they continue to protect consumers and financial system stability.
Trust as a Differentiator
“Ultimately, in this crisis, it is consumers and SMEs that need the most support,” said Tilman. “In the no-touch economy, the 30% of working-age adults who remain excluded from financial services risk being left behind. It is more critical than ever to bring people into the digital future.”
Flourish’s hope is that consumers and SMEs will be among the winners in this evolving market, and we’ll continue to promote our Fair Finance Principles as a guide to ensure that this happens. For fintech companies, “the notion of trust is even more important now,” Tilman added, “people will not forget how you showed up in a moment of crisis and how you helped them deal with uncertainty.”