In 2021, Fintech companies commanded an unprecedented amount of investors’ mind and wallet share. Companies raised a collective $134 billion, representing an impressive 177% year over year growth. Fintech was the leading sector for venture investment in 2021.
Zooming out to the social and economic environment of 2021, this is perhaps not surprising. Consumers were transported along a winding, unpredictable financial journey as the economy kept delivering surprises, an unprecedented number of employees quit their jobs, and some spending and savings habits adopted in the earlier days of the pandemic stuck. Individual investors were putting 5x more money in crypto than stocks, and consumers took out the highest volume of mortgages ever recorded. We also saw cross-border payments grow at 2x the rate of domestic eCommerce, as people and companies expanded internationally. There is an opportunity for companies to emerge to steward and elevate individuals in their financial lives.
We are eager to discover and invest in the next class of fintechs seeking to address the new problems and opportunities that have emerged. Below are 5 predictions we are particularly excited to spend more time on throughout 2022.
(1) The “Great Resignation” will create a new class of solopreneurs that need “OS systems” to manage their businesses
Through November, an average of 3.9M workers per month quit their jobs in 2021, meaning 2021 will hold the highest monthly average for any year on record. Many of these individuals likely left to do soul searching to find their personal and professional calling. While some may embark on a completely new career path, we believe a large share of these individuals will continue practicing their trade, but in more flexible and empowering environments.
What this would imply is a growing class of “solopreneurs” – professionals who are simply delivering traditional services untethered from the incumbent organizations that used to determine their destiny. As professionals like financial advisors, real estate agents, insurance agents and brokers, technicians, healthcare and wellness providers, and other service workers look to maintain and grow their own client base, we believe there is a large opportunity for “OS systems” for this class of workers. These systems will enable client engagement, compliance, accounting, scheduling, service delivery, and more out of the box.
(2) Fintechs will rapidly adopt new systems to deploy and manage products for an increasingly complex and global user base
Over the last 2-5 years, new software has made it much easier to launch and run a fintech. BaaS providers have made it less complicated to leverage the infrastructure of existing banks rather than build your own, APIs to manage KYC (like that of TSV portfolio company Socure) have simplified customer onboarding, and payment rails like Stripe have made it easier to process payment transactions.
Fast forward to the last 1-2 years, a wave of new industry paradigms have emerged that we believe will require fintechs to adopt new tooling. Most obviously, we expect the consumer demand for, and regulatory scrutiny of, crypto to put pressure on fintechs to integrate new features and manage increasingly complex compliance requirements. Emerging markets, specifically LATAM and Africa, are starting to develop more robust financially active communities. We expect this to create new challenges in multi-currency checkout and international user onboarding for global fintechs to be able to maintain palatable fraud rates and unit economics. Lastly, there is an evolving narrative around what types of monetization strategies are “kosher”. Most notably, overdraft fees have quickly fallen out of favor and earned wage access has become commoditized. We expect that, in addition to forcing fintech to search for new monetization opportunities, this narrative will force them to adopt tools that deliver operational efficiencies as margins get compressed.
(3) Demand for financial health management tooling for the bottom 99% will soar
We believe the perfect storm of financial health risks and opportunity has formed in the last 2-3 years. Volatility of the economy and job market throughout the pandemic have re-emphasized the importance of savings and personal finance for individuals. These individuals have also been part of the rise of the retail investor, and watched crypto markets unveil new paths to wealth creation. At the same time, the 4x increase in credit extended through BNPL and credit cards with alternative credit models (e.g. Petal, Tomo) has arguably extended credit at a pace that will prove to be too rapid for a large number of these individuals who are already struggling to repay.
We are eager to invest in financial products that are helping individuals more responsibly learn, earn, and manage their money. This includes managing income, savings, and debts that are higher than ever before. 2022 may be the year where we start to upgrade the credit score with new data, as is already being discussed with BNPL data. It may also be the year we see alternative assets rise as forms of collateral.
(4) Demand for investments in alternative assets, beyond crypto, skyrockets
The hype of investing in crypto and NFTs has sparked an intellectual renaissance among younger generations. They have been motivated by the new freedom to seek to generate wealth without assistance or permission from government and education level. Technology like OpenSea and Coinbase have lowered the barrier for individuals to get started investing quickly.
We believe this intellectual renaissance will not be contained within Web3, but flow outwards into other alternative assets like real estate, art, traditional collectibles, and private investment funds. We expect that these investments will take the shape of both individual and collective ownership and will create an opportunity for software enabling facilitation, education, and management of these new investing strategies that will flourish in 2022 and beyond.
(5) The long tail of traditional financial institutions will continue to seek software to compete with new entrants
We continue to be big believers in the future of credit unions (CUs) and community banks (CBs) who still deliver tremendous value in a world increasingly overwhelmed by neobanks fighting for the spotlight. The rise of neobanks focused on specific populations (e.g. Daylight, First Boulevard) are arguably taking the same approach that CUs and CBs have taken for 100+ years – focusing on building unique products for their target population. While later-stage neobanks like Chime, Current, and Nubank have improved account opening, early access to earned wages, and native budgeting experiences, many of the higher value financial transactions like getting a mortgage or other loans have not been reclaimed from incumbent institutions.
We think many consumers will continue to prefer to access these higher value products from traditional, often local, institutions. We are excited to invest in tooling that seeks to enable the creation, distribution, and customer support for these banking products among traditional financial institutions. The need for middleware to unlock more efficient launches of digital experiences also continues to be an interesting area we are watching.
If you are thinking about or actively building in any of these areas, we would love to hear from you! Feel free to reach out to kyra@twosigmaventures.