July 2024 newsletter: New global fintech report

Welcome to Q3: Prudence, Profit and Growth

The table is set but, as my dear friend and co-founder Frank Rotman brilliantly put it, "We don't know what's on the menu yet."

Last month, the QED team gathered in New York City to reflect on Q2 and discuss the opportunities that lie ahead for fintech. We paired this meeting with the launch of our second annual fintech report, co-authored with our friends at Boston Consulting Group.

The report, Global Fintech 2024: Prudence, Profit and Growth, sheds light on the key issues shaping fintech globally. The findings, paired with the team’s reflections of last quarter, gave me confidence that the industry is heading in the right direction and the market is beginning to stabilize.

Based on our research, we are projecting that the fintech market size will reach $1.5 trillion in revenue by 2030, up from $300 billion today. With an annual global profit pool of $3.2 trillion on a base of $14 trillion of total revenue, the financial services industry is ripe for innovation.

Fintechs are growing faster than incumbents, yet fintech is only about 3% of financial services revenue. Although incumbents have made progress over the past few years, they still significantly underperform fintechs. The average net promoter score for the US banking industry stands at 23 (out of 100)—compared with some US fintechs whose scores reach as high as 90.

However, before we pop the champagne, I’d be remiss not to talk about our new watchword: prudence. As a new fintech ecosystem emerges, players must remain incredibly prudent. Since 2021, fintech revenue valuation multiples have fallen from 20x to 4x on average, and funding is down by 70%—and almost 50% in the last year. Gone are the days of the “grow at all costs” mindset. We must continue to move toward profitable growth.

To thrive in this environment, founders are going to have to get strategic about their focus. Risk and compliance need to be seen as a competitive advantage, as learnt from the meltdowns of companies like FTX, Synapse and Evolve Bank & Trust. Even while companies continue to grow and innovate, they must engage regulators in the process, especially while they’re creating measures to ensure the responsible use of technologies like Artificial Intelligence.

Along with embracing risk and compliance, our ecosystem needs to begin to see more fintechs starting the journey to IPO or strategic sale. Retail banks need to become digital engagement platforms and governments must continue to support the creation of comprehensive and integrated digital public infrastructure. When this happens, we will begin to see fintech reach its true potential.

Over the last two years or so, we’ve gone through a period of austerity. We’ve made difficult decisions and learned a lot of lessons. Companies have reduced workforces, pulled back on marketing, shuttered science experiments, cut overheads and are now working to grow into valuations. I don’t know if I can confidently say that the tide is turning, but it certainly feels like it’s getting better.

The size of the prize is truly massive for those who win in the financial services industry. Now is the time to think about how to grow without recreating problems you’ve already faced.

- Nigel Morris, Managing Partner

Midas List
Nigel Morris and Frank Rotman

Join us in congratulating two titans of the tech ecosystem on being named on Forbes’ 2024 Midas List of the top investors across the globe.

'Father of Fintech' Nigel Morris is No. 50 — his fourth consecutive year on the Midas List — and co-founder and chief investment officer Frank Rotman is No. 77 for his seventh straight appearance in the rankings.

This honor would not be possible without the continued success of our world-class portfolio companies and the dedication, commitment and determination of the entire QED team.

QED and BCG's second annual global fintech report

‍Last month, we released our second annual global fintech report - Prudence, Profits and Growth - with our friends at Boston Consulting Group (BCG). This report follows our joint 2023 report, Reimagining the Future of Finance, which revealed that financial technology revenues are projected to grow sixfold from $245 billion to $1.5 trillion by 2030.We continue to expect fintech to reach a market size of $1.5 trillion in revenue by 2030—a growth of roughly five times from today. The global fintech market remains a hotbed of innovation and growth, despite a sobering few years in funding and valuation terms. And there is so much more room for growth. With the advent of game-changing technologies such as GenAI and with still billions of unbanked and underbanked individuals worldwide, fintech has vast potential.

However, the rules of the game are changing. Growth at all costs is no longer the watchword. The evolution of fintech has led to a moment in which prudence—the ability to avoid adding risk to the financial system—will be as important as the ability to generate profitable growth. The prize, and the rewards for customers, will be as significant as ever, but the path to success will be more difficult.

This report is based on interviews with more than 60 global fintech CEOs and investors and on our joint experience in the fintech industry. It describes current fintech industry trends and how these strands have combined to create a watershed moment for the sector, with four major themes shifting the grounds for success.

Themes Shaping the Fintech Sector

Embedded finance will be a $320 billion market by 2030.
Currently estimated to be $36.99 billion in 2024, the embedded finance industry will be a $320 billion market by 2030. The small and medium-size business (SMB) segment will account for about half ($150 billion); the consumer segment—already humming with activity and adoption in payments, lending, and insurance—will be worth $120 billion in revenue by 2030; and the enterprise segment will reach $50 billion in revenue. Established fintechs will continue to reap the lion’s share of the near-term benefits, while larger, more established banks will claim a growing share over time.

Connected commerce is poised for liftoff.
Connected commerce is emerging as a long-awaited killer app for banks, creating a new revenue stream, increasing customer loyalty, and enabling banks to offer a marketing channel for their SMB and enterprise customers. Using granular customer data, banks surface hypertailored ads to their customers; merchants then pay the bank based on either attributable sales or traffic. As core revenue streams continue to come under pressure, and as deposits risk becoming commoditized in a higher-yield environment, connected commerce hints at a future model for banks.

Open banking will have a modest impact on banking but a greater one on advertising.
We believe that open banking will continue to be relevant but is unlikely to change the basis of competition in consumer banking. In countries where open banking has had significant time to mature, no killer use case has emerged to drive customer switching. Of course, this is not to say that open banking will have no impact. But revenue pools in the connectivity layer will remain modest, with value accruing to the ultimate use-case providers that leverage open banking infrastructure. In advertising, access to transaction-level data will enable more timely and targeted personal offers.

GenAI will be a game-changer now for productivity, with product innovation to follow.
GenAI is already delivering tangible productivity gains in financial services. For GenAI in fintech, given that its digital-first cost structures are heavily weighted toward areas where the technology is delivering huge gains—coding, customer support, and digital marketing—the impact is likely to be even more pronounced in the near term. The use of GenAI in product innovation will lag its uses for productivity—but we expect it to follow.

Thank you to the entire BCG team for your partnership, including authors Deepak Goyal, Alexander Paddington, Andrew Janssens, Inderpreet Batra, Stefan Dab, Yashraj Erande, Rishi V., Yann SENANT, Sooahn Choi, Saurabh Tripathi and Aaron C.

Download and read the full report on our website.

Up for discussion
What the QED Investors team is talking about

The startup as a machine

‍The allure of the startup world is undeniable. The potential for explosive growth, the thrill of innovation and the chance to change the world fuel founders. However, the road from a bright idea to a sustainable business is riddled with complexities. Getting a startup to "work" isn't simply about doing one thing well. Most startups are extremely complex and require many interconnected parts to all function in concert.

When a startup is finally “working,” it can feel like an efficient machine with parts that fit together nicely and inputs and outputs that are well controlled. Unfortunately, the whole machine can’t be designed and assembled perfectly from Day 1. Founders invest in building and testing pieces of the machine over time and when a piece is kind-of-sort-of-working they shift their focus to other pieces of the machine that need more attention.

And every startup can be thought of as a machine being assembled that has three critical components: The front of the machine, the middle of the machine, and the back of the machine. By monitoring how well each part of the machine is working, founders can prioritize their efforts and allocate resources more effectively.

Read the full post on X (formerly Twitter).

- Frank Rotman, Co-founder and Chief Investment Officer, AKA @fintechjunkie

Evaluating the macro

Public equity markets continue to find new highs. That enthusiasm has trickled back into private markets as there continues to be a lot of money on the sidelines and IPOs in the pipe. And, while we are still awaiting some high-profile IPOs, it does seem the window is open and the market is receptive to new issuances.

While 'higher for longer' interest rates still seem to be very much in the cards, it is promising to see drops in rates in other geos, some early signs of inflation abating and allowing some space for even an “insurance cut” post-election. That won’t materially change the landscape and it seems most markets have largely adjusted to that reality.

In consumer finance, with excess savings fully depleted, we are mixed signals on the delinquency front. In most cases, there is reversion to the pre-covid mean - credit card DQs. But in some cases, it is more pronounced - subprime auto. Some underwriting models may have supported lower loss assumptions based on “unnaturally healthy” consumer balance sheets. Couple that with much higher rates, a squeeze on availability of credit, and higher prices on necessities, it’s likely to lead to overshooting past reversion to the mean.

Home prices may, for the first time in years, be on the tipping point of cracking. Inventory builds are the first indicator that the supply-demand imbalance may be tipping. We’ve already seen home prices fall in some markets (such as Austin), which were maybe most overextended. This would be a welcome relief to have a more smoothly functioning housing market again.

All-in-all, we seem to be in calm waters at this time. But, as you know, that can change on a dime.

- Chuckie Reddy, Partner, Head of Growth

UK election and the European Central Bank cuts rates

‍In a year of global elections, the UK results are now in. The Conservative Party suffered a dramatic defeat after 14 years in power, which was dominated by the Brexit vote and its aftermath, with five different prime ministers running the country during this period. The Conservatives lost 250 seats, a setback of historic proportions, and Labour now has a parliamentary majority of 172 seats, having won 411 out of the 650 total.

Key challenges now facing Labour will be to get economic growth back on track, boost business and public investment, all while managing a legacy of close to record high public debt and budget deficits and an external macro environment dominated by global tensions and increasing uncertainty.

On the bright side, the large parliamentary majority has given Labour a mandate to take bold moves and start from a clean slate to get the UK back on a path of growth and increasing optimism.

This all comes after we saw the European Central Bank (‘ECB’) cut its rates by twenty-five basis points on June 6th, taking the benchmark rate down to 3.75 percent.

This cut was perhaps fairly anticipated as we had stated in QED’s last newsletter but was nonetheless significant on several fronts.

First and foremost, this is the first time that the ECB has cut rates in close to five years. So, after half a decade of either flat or rising rates, policy conditions in the Eurozone are easing.

Secondly, and remarkably, this is also the first time that the ECB has moved to either cut or raise rates before the U.S. Fed. Historically the ECB was always more of a follower, and this marks a break from this trend as reported by Bloomberg and other market observers.

And finally, while the ECB may have acted before the Fed for the first time, it was by no means the first to do so among other central banks. The Bank of Canada had announced a rate cut the day before, and in the preceding weeks, central banks in Brazil, Mexico, Chile, Switzerland and Sweden had all reduced rates. There now seems to be a global wind of easing blowing through the world.

Read the full blog post on our website.

-Yusuf Özdalga, Partner, Head of UK & Europe

Ready, Set, Jet!
Where the QED Investors team traveled in Q2

San Francisco CEO Dinner

‍Co-founders Nigel Morris and Frank Rotman, Head of Growth Chuckie Reddy and Principal Victoria Zuo were joined by some of our wonderful San Francisco-based CEOs for dinner in May.

Fontes Summit

‍Also in May, we hosted QED's 2024 Fontes Summit in Mexico City.

The event kicked off with Partner, Head of International Investments Bill Cilluffo interviewing David Arana, founder and CEO of Konfío. The summit included workshops for our portfolio companies in the Fontes seed program, panels and breakout sessions on topics such as managing change, B2B sales and being vulnerable as a leader. There were great conversations during the networking hour and a wonderful friends and family event to end the evening.

Bangalore Fintech Community

‍In April, We enjoyed a wonderful night of networking and connecting with some of the brightest minds shaping the future of fintech in India. There's a vibrant fintech community in Bangalore and it was an honor to be a part of it for an evening.

April Web Summit in Rio

‍A snapshot of our time in Rio at Startup20 and the Web Summit Rio back in April.

Partner, Head of LatAm Mike Packer and Principal Camila Vieira Fernandes had a wonderful time hosting Startup20's kick-off event. Then, the team headed to the Web Summit Rio where Mike and Coru CEO Fernando Gonzalez (a Partner and Executive-In-Residence at QED) were invited to be panel speakers and enjoyed spending time with portfolio companies, investors and founders.Throughout the events, Mike, Cami and Fernando had engaging conversations around AI, payment solutions, diversity of leaders, opportunities in Brazil, B2B crypto solutions and more.

QED news

Katherine Tercek joined as the Head of Investor Relations where she will be responsible for QED’s fundraising strategy to fuel the franchise that has been built over the past 17 years. She will be responsible for managing all limited partner relationships – existing and in the future.

Nick Gasbarro joined as Nigel’s Chief of Staff. Most recently, Nick was the Deputy Chief of Staff to the CEO of Cognizant, a leading Fortune 200 technology and IT services company, where he was responsible for CEO client strategy, communications planning and executive committee agenda setting.

Nigel joined Ron Shevlin on his podcast 'What's Going On In Banking' to share his take on the current state of fintech, the impact of AI on financial institutions and the opportunities for fintech in emerging markets. They also discussed the underserved small business lending space, the integration of financial services with vertical SaaS providers, the growth of embedded finance and the future of blockchain and the metaverse in fintech.

Frank joined Nick Moran on The Full Ratchet podcast to share his lessons from building QED Investors and discuss the history of fintech, the efficiency of silicon-based learning machines, the role of decentralization in the future of finance, balancing investor and founder needs, VC's role in startup growth and the need for innovation in the industry.

QED Partner Amias Gerety spoke with Inc.com to discuss the types of AI startups QED is interested in investing in. In the interview, Amias shares insights that investors are looking to AI startups that offer solutions for businesses or provide a modern makeover for technologies that haven’t evolved in decades.
 

Nigel and QED's Head of Asia Sandeep Patil sat down with The Economic Times for an exclusive interview to discuss their excitement for fintech investing in India and why they believe the recent changes shape the ecosystem for the better in the long term.

As the VC ecosystem continues to evolve, Frank joined the Origins podcast to talk about his early days as the Chief Credit Risk Officer of Capital One, the fundamental flaw in the way founders and investors have been funding startups, the purpose associates serve and how those associates can better their skills, and how VCs can avoid being left in the exhaust of larger firms.

Select portfolio company news

Wagestream
Wagestream was named to Business Insider’s list of the 32 most exciting European fintech startups to watch in 2024. ​​Wagestream works with employers to let employees draw down a percentage of their income in the month for a flat fee to help cover costs.

Swap
Swap announced its $9 million Series A to launch its global eCommerce platform to facilitate cross-border shipments. The global platform will help DTC companies streamline their operations and improve customer lifetime value.

Kudos
Kudos announced its raise of $10 million to continue providing consumers an app and browser extension to provide personalized financial advice, which includes maximizing rewards and utilizing credit effectively. Since 2022, Kudos has grown from 1,000 beta testers to 200,000 registered users and increased annualized checkout gross merchandise volume to over $200 million.

Aplazo
Aplazo, which facilitates fractionated payments to offline and online merchants even when the buyer doesn't have a credit card, announced a $45 million Series B. In Mexico, where BNPL platform Aplazo operates, a large underbanked population makes BNPL more like a cash alternative.

Hello Alice
Hello Alice celebrated a legal victory after being sued for administering 10 $25,000 grants supporting Black-owned businesses, in partnership with Progressive Insurance.

Footprint
As it continues its mission to help financial firms onboard customers and verify their identities, Footprint announced its Series A, raising $13 million. They’ll use the funding to continue streamlining the identification process for businesses and consumers, which is a pain point felt across Wall Street thanks to regulations that require firms to know to whom they are providing services, such as KYC.

‍Payabli
Miami-based Payabli announced a $20 million Series A to further fuel innovation, particularly in Pay Out and Pay Ops product categories and better support software partners to easily integrate their technology and accelerate the activation of their total processing volume.

Moniepoint
Moniepoint was ranked by the Financial Times as Africa’s fastest-growing fintech. Moniepoint’s growth rates of 7,979% (absolute) and 332% (CAGR) ranked it ahead of hundreds of leading companies from diverse industries such as technology, telecoms, financial services and healthcare. Moniepoint has long been one of Africa’s largest business payments platforms, processing over $182 billion for customers in 2023.  

Treasury Prime
Two of QED’s portfolio companies, Treasury Prime and Footprint, have partnered to give banks and their fintech clients access to Footprint’s ‘Know Your Customer’ and ‘Know Your Business’ technology.