By Daniel Lanyon on Monday 27 June 2022
More than a decade into the digital disruption to financial services and banking, what actually does financial technology - better known as ‘fintech’ - mean? One CEO says its definition is quickly changing.
Few would disagree that the fintech trend has been a long one so far. Depending on your definition and experience its birth varies. The beginning of the 2008 financial crisis - which conceded with the launch of the iPhone app store - has always seemed a strong contender for this journalist.
All trends do, however, end. But does this ring true for fintech nearly 15 years later in 2022?
“Fintech is dead,” he tells AltFi.
Verdon, who formerly founded another fintech Currencycloud which was acquired by Visa for £700m last year - no doubt is aware that venture capital funding for fintech smashed all records in 2021 with $125bn raised by firms in the year. The figure was nearly three times as much as in the whole of 2020.
There is now something approaching 500 global fintech unicorns - private companies valued at over $1bn at their last sale of equity - in the market.
So what does Verdon mean? Surely fintech is riding high despite choppier waters?
Companies like Monzo, Starling Bank and Revolut who at least in the UK can lay claim to being successful fintech startups now have millions of customers and growing revenues while also employing thousands of people.
“The Monzos and Revoluts were really the first wave. What they did is they said, okay, how do we take something that people understand and how do we make a really great experience out of it. And what they had to do was they had to go and find the market and acquire customers. But all of those consumers already have a relationship with another brand,” Verdon said.
“What we think is going to happen is that [well-known consumer brands] will also access these markets using companies like us to access those consumers because there's already a relationship between them,” he said.
Verdon argues that fintech has become ubiquitous and therefore has lost some meaning.
“Nobody - no consumer at least - wakes up and says, I want to buy some fintech,” he said.
“Fintech is the new finance industry as opposed to the old finance. This is the new world, the new way the finance industry is structured and operates,” he added.
This new reality, he adds, means that older direct-to-consumer offerings such as those already mentioned are being challenged by different operating models as well as different commercial models and are moving from transactional to subscription-based.
We are in a transition phase that happens to be called fintech.
“We think fintech’s dead.”
The point then is not so much that consumers are not going to back to the pre-smartphone analogue era of cheques, and branch-based banking from a few large incumbents.
The new normal is that finance can be offered by disruptors and incumbents competed against quite easily. It is just that this has become the normal manner of things.
For Verdon - and Railsr - this means selling financial services through existing firms such as sports brands and well-known retailers.
This approach is often labelled as ‘embedded finance’ itself an increasingly popular term. Its meaning like fintech can be nebulous broadly describes where the front end and the back end of finance are decoupled to such an extent that any company can offer a loan, payment, insurance or bank account seamlessly.
Non-financial companies seem to be on board.
A survey recently from Vodeno found that 74 per cent of European retailers are already offering embedded finance solutions to customers while 56 per cent are planning to roll out more embedded finance solutions in 2022.
“The new finance market is all about enabling other markets like sports and retail, not just a fintech type markets,” Verdon said.
Consumers appear to want embedded finance too. A survey from Tuum found that nearly half of UK consumers are interested in insurance, loans and BNPL being offered at checkout and Banks are alive to the opportunity with a large majority - 84 per cent seeing embedded finance services for third parties like retailers as an important new revenue stream.
Nearly a third - 31 per cent - of those banks who don’t already offer embedded finance services plan to in the next six months.
Finance, he adds, needs to be relevant to the consumer at the point they need it. This means instead of going to financial services through a bank or an app in a transactional away, “ it comes to you”.
"Pre Uber, you had to interact. Now you just have to close the door and it all happens."
“What makes the likes of Monzo and Revolut successful is this incredible experience you get, and all the things they can bring you that change your day-to-day life. You've already got that relationship with other brands, why wouldn't you extend that relationship? Why wouldn't they want to extend that relationship?”
“The point brands are getting over is a frequency of access to that consumer, rather than just when you buy from them, you buy with them.”
Back (end) to the future
Verdon believes - perhaps unsurprisingly that more and more non-financial firms will follow suit meaning that the ‘back end’ of finance will continue to be where most of the innovation happens in fintech, or whatever we call it.
This will see the industry restructure where capital sits on the balance sheets of banks, and the distribution of capital and the origination of lending assets will sit in the digital finance - let’s call it fintech - world.
“That will be run by people like ourselves. The problem is most of the old finance world has lead pipes. We have lovely new plastic pipes. Rome was almost destroyed by having lead pipes. It killed people with lead poisoning. The problem is if you're changing your pipes, it's quite a dangerous thing because there's water flowing through them the whole time,” he said.
“That is where the real change is: We have clean pipes all the way to the central bank, all the way to the payment schemes. We don't have toxic fluid with lead-infested water only coming out. That's why we have the advantage going forward,” he added
This new infrastructure, he says, has fewer issues operationally and rapid rollouts of product sets. The customer needs one API and one commercial agreement as well as one point of contact for technical support.
“It's not batch processing, which most banks still are doing. That's what takes us forward: platforms like ourselves as being the total product sets. You don't have to deal with silos. It's super fast to go live,” he said.
“It's all about the rails now, flexible rails,” he added.