2021 Retrospective

Before making any wild predictions for the new year, because obviously one has to make predictions about the fintech industry in 2022, one has to reckon with his past predictions. It is a healthy process that most people do not want to go through. Even though it is quite necessary. Firstly, because most predictions tend to be wrong. Which is fine, as long as you recognise it. No matter how smart you are. Or at least claim to be. Secondly, because it gives you an indication of how the industry has fared during the year. You end up doing the work of looking at what has gone wrong or right. And that is a pretty fun exercise.

Market Consolidation

What we said at the start of 2021:

That should not surprise anybody, the fintech industry is likely to see some consolidation. That will be one of the top trends for fintech in 2021. The financial services as a whole will see a wave of mergers & acquisitions. It has already started, for instance, PNC acquiring BBVA’s American subsidiary. Or Visa acquiring Plaid. Oh wait, this did not happen in the end. These things often happen in the corporate finance world. No big deal (literally). A bit of market consolidation was surely going to take place before the Covid-19 pandemic, it is even more likely now. That’s because the economic situation has deteriorated considerably, hitting the profitability of the industry entirely. And interest rates are likely to stay low for a while, which is not good news for banks and fintechs alike.

Not all the fintech industry will see consolidation, though, as some segments are more crowded and under pressure than others. Payments’ fintech are doing perfectly fine, for example. Neobanks are the obvious candidates, especially the retail-focused one. Most of them are unprofitable and just make money on interchange and FX fees. Which there was very little in 2020 due to low in-store purchase activity and travel restrictions. How long can they continue like that, fighting for the same customer and his $10 per year? Not long. Fintech lenders are also likely to face a reckoning, particularly if they have dodgy risk management practices in place. And so we will see a bit of consolidation there. It is a natural process for any industry to go through, it is only economically viable for a finite number of market players. It could also be cross-segment: for instance, neobank Starling is on the lookout for a lender.

5 Top Trends for Fintech in 2021, Fintech Review, 5th January 2021

There was a bit of M&A activity, but not as much as anticipated. That prediction was not as accurate as we would have liked. The fintech industry did not really consolidate in 2021. It seems that the music will continue for a little while, as venture capital investors are still willing to support their champions. No matter what. You know, unprofitable companies with no prospects of ever having a healthy business model. These kinds of businesses.

But that’s the game.

We have not seen big consolidation happening yet. More, like incumbents snapping promising startups. Which makes sense, to assure your survival, if you cannot beat your competitor… buy them.

Public Listings

What we said at the start of 2021:

Purposely not saying IPO here because we are surely going to see more public listing activity that is not IPO. Why? Well, it has been known for a while that there are a few things that are wrong with the traditional initial public offering process. Companies are complaining about the first-day pops, for instance, where they leave a lot of money on the table. Unless you make some change to the process, companies will choose alternatives. There are two quite good ones:

1) Direct listings, with or without pre-listing funding rounds, to make up for the fact that you are not raising new funding in the listing process;

2) and of course the Special Purpose Acquisition Companies, aka SPACs, that are going through a hype phase right now.

It is likely that a swath of later-stage, big fintechs will go public in 2021, especially as the new aforementioned processes are becoming more common place. Stripe, Checkout.com and others are likely candidates. Some will decide to do a good old IPO, like consumer finance fintech Affirm just did. Startups stay private for longer these days, but what it means is that they need bigger cheques at a later stage. There are not that many investors able to underwrite massive funding rounds à la Softbank, so going public is still going to naturally occur.

5 Top Trends for Fintech in 2021, Fintech Review, 5th January 2021

There were a few public listings. Robinhood went public at the end of July. The stock has performed incredibly well since then. Joking, obviously, as it is down almost 80% since its peak and 50% from IPO price. That’s great for the flag bearer of the “democratisation of finance“.

Coinbase did slightly better. If by better you mean hovering around IPO price, 9 months after going public.

Public listings have and will continue to happen because it creates liquidity and early investors will still want to cash out. SPACs on the other hand have fizzled out. It seems that the trendy way to do a public listing is not so trendy any more…

Crypto & Blockchain

What we said at the start of 2021:

Have you ever heard of Bitcoin?

Joke aside, there has been a massive influx of money into cryptocurrencies, with the market topping $1 trillion lately. Of which 70% is Bitcoin. It will continue to be one of the top trends for fintech in 2021. Besides the money, it got the attention of institutional investors – and regulators. Which is good news for the industry, obviously. For investors, that is thanks to the money printing frenzy and low interest rates. There are not so many assets that are not overvalued right now. Equities are through the roof and bonds’ rates are hitting rock bottom. In their quest for decent yields, they turn to cryptocurrencies. BlackRock and others are throwing their hats in the ring. It will be interesting to see if, in turns, Bitcoin becomes a well-functioning asset class. High concentration, fake volumes and dormant accounts are telling you that it is not.

We have yet to see massive changes brought by blockchain technology to the financial services industry. However, its potential is still huge across many verticals. Unfortunately, financial institutions that have been shelving innovation projects are unlikely to put a lot of blockchain PoCs into production. But some will. And big fintechs might be keener to adopt the technology. Infrastructure blockchain startups will continue to mature. Keep an eye on decentralized finance as well, a lot of promising things are being developed in that space.

5 Top Trends for Fintech in 2021, Fintech Review, 5th January 2021

Bitcoin and cryptos were still quite front and central in 2021. Why? Well, it seems that for many investors, it is fun to ride the crypto train. Although, it is not certain that it is as fun when it goes down a lot… Or maybe it is, who knows?

At some point, buying the dip just ends up trying to catch falling knives. It is not even as easy as it sounds.

For blockchain technology, we still see some use cases coming out eventually. But nothing breathtaking in 2021 though.

Private Funding

What we said at the start of 2021:

Venture capital money will continue to flow into fintech initiatives. Particularly if the other end of the tunnel, public listings, are more commonplace. Exits will motivate investors to continue to insert coins in the jukebox. As of late, we have seen more money being invested into later stage fintechs than early stage ones. A direct consequence of the current economic crisis but not only. Some segments are a bit saturated, so it makes sense that investors do not see clearly what market share you could realistically capture. Say, another retail-focused neobank launching in London. Really?

However, another effect of quantitative easing is that venture capital will continue to be an attractive place to put your money. Fintech being one of the favourite place to invest. That’s quite logical. Although some segments are saturated, financial services are still full of inefficiencies. We are far from the industry being 100% revolutionised by fintech!

5 Top Trends for Fintech in 2021, Fintech Review, 5th January 2021

That was quite accurate. It seems that you cannot be wrong, all the time. Woo-hoo. Venture capital money did flow big time into the fintech industry. Again. Another banner year. Which is not particularly surprising given how much cash there is in the system.

Is that a good use of investment money to pour so much cash into early stage fintech startups at crazy valuations? Yeah, sure. What were you going to do with that money anyway?

Automation & Restructuring

What we said at the start of 2021:

The current crisis has not hit hard financial service firms, yet. Because at the moment, a lot of their customers, especially small and medium-sized business ones, are basically zombies surviving on Government schemes. We will inevitably see a wave of business failures and redundancies, or at least customers not being able to pay back their loans. That’s not one of the great 2021 trends, but it is bound to happen. This will be problematic for fintech lenders and banks alike.

What it will mean is further cost-cutting and restructuring for incumbents. It will result in large scale digital transformation programmes. Higher front-end digitisation and back-end automation. Robotic Process Automation and AI projects should get their fair share of investments. Banks will accelerate branch closures. There was a massive push towards self-service through digital means, mobile apps and web, during 2020. Some say a 5 to 10-year leap. This will be one of the long-lasting effects of the pandemic and will continue long into 2021.

5 Top Trends for Fintech in 2021, Fintech Review, 5th January 2021

Well, there were no huge waves of business failures. It seems that it was too early. Or maybe it will not happen yet, because debt is still pretty cheap. It is not particularly normal. But it is a hard time being a rational economist these days given the wild experiment we are in.

Cost-cutting, restructuring and digital transformation was a big part of incumbents’ agenda in 2021 though. That’s because there is a lot of work to do. And that will still be high in the list of priorities for the years to come…