Insights & Trends

The future of Fintech: How founders need to build in the next five years

Insights & Trends

The future of Fintech: How founders need to build in the next five years

Words Olly Betts

May 27th 2021 / 8 min read

We’re all familiar with the idea that every company is a Fintech company. Thanks to the rise of embedded finance, even non-financial companies are starting to reap the rewards of fintech innovation, its ability to enrich user experiences and drive more value from customer relationships.

But what we’re only just starting to realise is how those experiences and relationships have changed. The big fintech success stories of the last ten years – the Monzos, Revoluts and Wises – gained traction by redesigning and optimising products that already existed. The banking front-end was broken: neobanks fixed it. In the next generation of fintech, it will be those founders that can see the future and solve tomorrow's problems that conquer the market.

That’s because it’s not just the financial landscape that’s changed over the last decade. The whole world has. In the last year especially, the context within which we live our lives has been dramatically transformed: from where we are, to how we define ourselves, the ways we interact and what’s important to us as consumers. Fintech needs to not only keep up with, but keep ahead of that change. In the next five years, the paradigm-shifting companies will be those that can ideate, build and embed hyper-tailored solutions for nascent user communities and their pain points.

Fintech is at an inflection point

If you’re not sure where the next wave of fintech is coming from, or what it’s going to look like, you’re not alone. The idea that we had reached ‘peak fintech’ was already being debated back in 2019, when there were about 1600 fintechs in the UK. Now there are 2160. And while growth in the sector remains incredibly strong – 16% annually, compared with 1.3% for SMEs – the level of market competition means some feel all the valuable end-user relationships have already been won.

That’s why the next wave of fintech innovators are focused on redefining who they build relationships with, and what they look like. The recent flurry of activity in Banking-as-a-service (BaaS) and Decentralised Finance (DeFi) are cases in point. Instead of targeting consumers with products offering improved UX at the frontend, they’re rebuilding the whole banking backend. By doing so, they’re exploiting a huge gap in the market, essentially becoming the OS for financial services. It’s a massive market opportunity: Infrastructure-as-a-service (IaaS) is expected to be worth $107bn globally by next year.

Others in the fintech ecosystem aren’t just enabled by this approach; they can also learn from it. The IaaS players that are now making waves have done three things well:

  • Identified a future problem: traditional banking infrastructure wasn’t agile enough to enable product-first fintech companies to innovate and scale. 

  • Provided a full stack solution to meet the needs of communities: fintechs needed not just good UX, but also transparency, flexibility and trust.

  • Reimagined distribution: financial products could be embedded inside non-financial products and services, and delivered at the point of need; such as on-demand car insurance when hiring a car, or flexible finance at the point of sale.

The next generation of ambitious fintech founders should follow their lead. Some – including those we work with at Founders Factory – already are. But what can the rest do to ensure they stay at the vanguard of fintech innovation?

Identify future problems

Obviously, it’s difficult to predict what ‘future problems’ are going to be – let alone build solutions for them. But there are a set of significant and shifting macro trends that fintech needs to start solving for.

Some of them are broadly financial problems. We have an ageing population, who need help to stretch their incomes across another ten years or more of life. And we have uneven distribution of wealth across generations, meaning the young need support to create wealth, and the old need routes for redistributing it. These problems are ripe for fintech innovation; solutions might include new ways of thinking about mortgages, investment and pensions. Others, like climate change, are less obviously in the fintech sphere. But if (as seems inevitable), the reduction of our carbon footprint ceases to be a luxury and starts to become a legal mandate, we will  require fintech solutions to calculate, reduce and offset emissions, for instance.

There’s already an emerging green fintech movement: banks like Tandem and Triodos who are listening to the 81% of people who say it’s the responsibility of companies to help improve the environment. But climate change is just one example: there are plenty of other global issues – from mobility, to mental wellbeing, to distributed workforces – that are creating a new set of financial problems to be fixed. 

They’re also creating new target groups, who’ll require verticalised solutions tailored to their specific contexts. While today, fintechs typically think about customer bases in terms of geography, in the future, they’re more likely to be borderless, anchored in like-mindedness instead. That shift is already happening: online communities are becoming the new global megacities. Gamers are a good example – they now make up over a third of the global population and have their own culture, community and identity. As these communities continue to evolve, they’ll need fintech products to match. Understanding deeply and responding to the needs of communities both professional and personal – gig workers, creators, LGBTQ+ groups and so on – will be critical to serve a newly-defined global market.

Provide a full-stack solution

Future problems and borderless communities need solutions that go deep. It’s a widely-held belief that the first fintech to develop a full-stack experience for the end-user will see massive success. That’s why companies like Revolut and Square are racing to develop ‘super apps’; the financial equivalent of Asia’s WeChat, which lets users access everything from social media to shopping and ride-sharing through one portal. But the value of fintech is that it’s an ecosystem: countless enabling technologies exist at each individual piece of the value chain. While building a single financial hub is one exciting (and lucrative) model, the alternative is to seamlessly integrate existing solutions into a single experience that serves specific communities end-to-end.

Take house-buyers. Currently, the house-buying process – from saving, to buying, to moving – is disjointed and piecemeal. A full-stack solution would put all those processes inside one platform. Acre is one such solution. The first truly digital end-to-end mortgage manager in the UK, it re-imagines mortgages to make getting one faster, less cumbersome, more certain, and ultimately cheaper. 

Emerging communities with less-clearly defined needs are harder to cater to, but represent a huge opportunity. Gig workers have been growing in numbers for years – a trend that accelerated again during the pandemic. And it’s not set to slow: the gig economy is predicted to grow by over 17% each year until 2023. But so far, gig workers have been left out by financial institutions, who see their income as too unstable to offer favourable rates on mortgages and loans. We’ve recently built Parity in our venture studio: a digital community for gig workers that enables them to find opportunities, evaluate platforms, compare financial products and save on insurance, all inside the same platform.

Similar solutions are emerging for other communities, including the creator economy. Current estimates suggest around 50 million people make an income as a creator. But they are underserved by traditional financial services, built on long-standing assumptions about what constitutes an asset.  Those assumptions are out of date. There’s no reason creators shouldn’t be able to use their social media followers as collateral against which they can borrow money, or buy insurance to protect their social media ‘equity’ against being cancelled. They just need future fintech solutions to enable it.

Reimagine distribution

If communities and their needs have changed, then the way we reach them needs to as well. Pre-fintech, financial services generally tried to do everything themselves, from building the infrastructure to serving and upselling the consumer. Now a confluence of factors, including GDPR and open data regulation, the ubiquity of APIs and the emergence of embedded finance, mean that’s changed. Monolithic solutions are rapidly becoming a thing of the past.

But that’s not to say that the existing infrastructure has outlived its use. Though fintech is often characterised as being in opposition to traditional banking, that oversimplifies the true nature of their relationship. In fact, most fintechs still rely on traditional banking partners for a range of compliance, practical and scalability reasons – and will do for at least the next several years.

The next wave of fintech innovators would do well to look at incumbents (and the wider ecosystem) as potential collaborators, not just competition. Instead of just borrowing functionality, they should look for ways to reimagine it and develop new routes to market. The embedded finance trend is one obvious example of this recontextualization in action: traditional banking services are finding new channels and customers through fintech and non-financial brands alike. But that’s just the beginning: the next five years will see us move beyond embedded finance to embedded everything.

Founders need to understand the problems of a community intimately enough to create a full-stack, tailored solution by integrating the best IaaS solutions – and then deliver it at the point of need. Again, it comes back to considering the new contexts we live in: insurance shouldn’t require lengthy phone conversations, but be available at the click of a button at the moment users want to rent a scooter, for instance. The solution isn’t necessarily brand new, but the way it’s delivered is.

Some fintechs are already taking this approach of rethinking existing solutions to fit future contexts. Created in our studio, Tembo is a new family lending platform that aims to close the vast generational wealth gap that exists in home-ownership. It allows older homeowners to secure a small, interest-only mortgage, the proceeds of which are then added to younger homebuyer’s deposits, helping them get on the ladder faster and for less. Bequest is creating a digital revolution in the insurance industry with the sole purpose of simplifying wills and life insurance for the millennial market. From managing digital inheritance to its holistic approach that considers the mental wellbeing of all those involved, free wills and a personalised policy decision in as little as 15 minutes (instead of the usual 6 weeks).

The next five years of fintech

As we enter the next phase of fintech, there’s still a huge opportunity up for grabs. It belongs to visionary founders who can predict and validate future problems, understand the nature and needs of new communities, and build deep, embedded products for them.

👋 I'm a FinTech founder, investor and advisor, and currently leading the FinTech / Insurtech sector at Founders Factory. With over 15 years in FinTech, I have successfully launched, scaled and exited multiple businesses creating B2B and B2C solutions used by millions of consumers worldwide. I’m on Twitter or LinkedIn if you want to say hi.

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