(This is part 2 of this topic. Part 1 can be found here)
So, have we found the contenders for “Most Valuable Fintech Company in 2020” ? That was the challenging task for our discussion group at Websummit a few weeks ago, and we spent an hour to try to come up with an answer.
Our group was a very diverse bunch of entrepreneurs (eToro, Biocatch, Lydia, Kantox, Nok Nok Labs, Karmic Labs, Property Partners, GateHub, Streamdata), more established Fintechs such as Paypal, VCs (Mosaic Ventures, PJ Tech Catalysts), and traditional finance companies such as Visa or Wells Fargo. In total, 20 people who are part of the Fintech world, but coming from different angles.
My first takeaway from that session is that forecasting 5 years in the future is very difficult! Although we were all very involved in Fintech, there were no obvious consensus on whether the next Fintech powerhouse would be Company X or Y, or even what the most promising sub-sector of Fintech was!
We started from my previous post, and wondered whether the most valuable Fintech companies in 2020 could be extrapolated from today’s list of Fintech powerhouses. For example, would they be in the lending or payment space? Or would they be spin-offs of larger technology groups such as Paypal or Ant Financial?
– A first difference was that 2/3 of the participants thought that Blockchain would be a huge theme in 2020. This is very different from today’s situation, where Blockchain attracts a lot of attention, but only 3 of the largest 80 Fintech companies are in that space.
– In addition to spin-offs of Internet companies such as Google or Facebook, people thought that bank consortiums or spin-offs coming from banks could be big. An example mentioned was the merger between ClearXchange (p2p payment network owned by a group of banks) and Early Warning (fraud detection also owned by a bank consortium)
– The insurance sector was seen as a growth area compared to today (only 5 out of top 80 Fintech today), where assets under management represent $3.5tn and revenues $45bn and therefore a huge potential market.
– Several entrepreneurs mentioned the need for Identity and KYC (Know Your Customer) in a Fintech world. This seems to be the shovels of the Fintech gold rush, and companies that help that painful on-boarding process seem to have a bright future…
– All asset classes that are currently difficult to trade because of wide bid-offers could be transformed by Fintech. An example was the property market for instance, with the ability to buy shares of properties.
– Other interesting comments: capital markets will see more Fintech activity, Apple or mobile operators could be big. Consulting companies will have a lot of work from traditional finance to adapt to a tech world.
We then had a very passionate discussion about verticalization vs. aggregation. As previously mentioned, the biggest difference between Fintech and traditional finance is the focus of Fintech companies on one single sector (e.g. payment, lending, investing, etc.). Whereas the traditional finance groups offer a whole range of products and services to their clients.
– Some people very strongly thought that Fintech companies will continue to be focused on verticals and grow until they totally dominate their space. The first argument was that consumers want the best provider, and a Fintech company good at credit scoring might not be good at investment strategies. Another rationale was that we were moving into a world of APIs and therefore there was no need to have a single provider for all products: the consumer could pick and choose the best providers in each sector, and these services could automatically exchange data if needed.
– On the other hand, other entrepreneurs thought that the disaggregation of financial services was just the first stage for Fintech companies to compete on specific sectors. The second stage would be a re-aggregation of financial services around the strongest companies. The main argument for this camp was that customer acquisition was very expensive. Once a Fintech powerhouse (say in SME lending) already has the relationship with (and has a lot of data about) the client, the incremental effort to offer new products such as FX transfers should be very small, and therefore the profitability much higher than a new entrant in that space.
– And there was absolutely no consensus on that point! Half of the people thought that the most valuable Fintech companies will be focused on verticals, the other half thought that the disaggregation cycle would turn back into an aggregation cycle, and the biggest Fintech companies would offer a suite of products.
I tried very hard to get someone (anyone!) to give me the name of a company that could be amongst the most valuable Fintech in 2020, or even a specific sub-sector. Apart from social trading (but which was suggested by Yoni Assia, so to be taken with a pinch of salt!), there wasn’t any name that came up.
If we had to summarise the findings from an hour-discussion between 20 Fintechers, that would be the following:
– There is no consensus on what the most valuable Fintech companies will be in 2020. Nor the sub-sector. Except that Blockchain will be big*.
– The Fintech powerhouses could either be new companies, but also spin-offs of Internet groups or even from banks.
– Interesting sectors: insurance, identity, KYC, p2p lending, capital markets.
– Strategy of Fintech startups would either to continue to focus on their niche markets, or to diversify and offer more services (in other words, no consensus!)
To add my own views, I’ll take a risk** and mention names of companies which could be contenders for the most valuable Fintech companies in 2020. There are many more that could be part of this list, but I wanted to to choose companies that had very different reasons to be included.
– Klarna: a great example of the disruption process. Klarna started by offering something that seemed very mundane (payment for e-commerce), which was actually linked to short-term credit, then offered deposits, then is getting stronger and stronger in credit scoring, etc. In other words, it’s becoming a proper financial group, but having started from something very niche.
– Kabbage: represents the trend towards data-led lending. It is one of the pioneers of data lending, and uses automated data feeds to calculate credit risk in real time. The main risk for Kabbage would be for traditional players to offer similar services (such as Goldman Sachs‘ initiative)
– Credit Karma: they thrive in one of my favourite areas of Fintech, credit scoring. But most interestingly, they have a business model that allows them to generate revenues today, which is often a challenge for innovative companies in credit scoring.
– SoFi: my favourite p2p lender. It’s difficult to choose between all the p2p lenders, but SoFi for me is very different because of their management who manage to combine traditional finance and technology. Which is the reason why they don’t have to reinvent the wheel, and went directly to securitization, rating, etc.
Overall, it was a fascinating discussion. If you also have strong views on who could be the most valuable Fintech companies in 2020, don’t hesitate to send me a tweet.
(Click here to read Part 1 about the most valuable Fintech companies today)
* not necessarily my view though… But clearly the view of the participants.
** I now pray that none of these companies go down in flames for whatever reason!