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January 3, 2022

QED Investors' 2022 fintech predictions

With a whirlwind 2021 in the rearview mirror and the dawn rising on a new year, QED's investment professionals preview the 12 months ahead.

From web3 and a decrease in valuations to ESG and rise in fintech IPOs, here's a look at what 2022 could offer.

The QED hypothesis is that there is a real need for banks to start partnering with, or buying, fintechs. Fintechs caught the wind of digital acceleration in 2021. Outside of a few exception cases, the banking segment largely did not. We’ve already seen the start of this in 2021 and we think it will be a key theme in 2022. The banks have got profits, brand, customer bases and proprietary data, but they don’t always have great tech, and subpar user experiences typically result in poor net promoter scores.

Traditionally, banks are risk-averse, and they have yet to build a track record by which to measure the synergies of a partnership. With some exceptions, the banks don't have a muscle to know how to buy these things well and manage fintechs well post-acquisition. This will be exposed more than ever over the coming 12 months.

Moreover, the window for a bank to buy a fintech is actually pretty narrow. In the early days, banks aren’t interested because the fintech is not industrial strength. But then by the time it has proven itself and developed product-market fit and is scaling, the valuation is too high and it will be dilutive to bank earnings. The window won’t shrink in 2022, but QED expects banks to move quicker than ever before, prompted by their boards if not their management teams. QED prefers to look at videos rather than photos, to get a holistic sense of how a company is performing, rather than a single snapshot in time.

It’s a real challenge, but since banks likely won’t be able to build out quickly enough the key functionality to remain competitive, they will not be left with many better options. Expect M&A activity to ramp up in 2022 as bank-friendly fintechs, or those in adjacent spaces, seize the momentum. Could 2022 be the year of the superfintech? Perhaps. But expect most banks to find reasons to stay on the sidelines.

- Nigel Morris, Managing Partner

There are a number of key themes we’re expecting to see in 2022, including talent globalization as the war on talent accelerates, non-crypto companies offering a suite of crypto products as adoption increases, and a refocus on profitability as private investors will once again focus on unit economics as a key measure of start-up health.

I predict the biggest areas of focus next year will center around climate fintech emerging as a breakout category, and “Act II” fintechs emerging across industries.

Over the past three years we saw a number of companies seed-funded to take on climate change –  carbon credits, solar and alt energy financing, ESG trading, alternate insurance for high risk areas – and now we’re in the early days of seeing real winners emerge. Blockchain, without the energy-sucking mining requirements, will play a bigger role in tracking carbon offsets and re-branding crypto as a planet-saving technology.  

Elsewhere, as companies feel more pressure to focus on unit economics and sustainable growth, we’ll see more non-fintech businesses begin to monetize off of payments and lending as core capabilities. Not every business is well positioned to be a fintech, however. Winning strategies will still have a core sticky product to drive user acquisition, access to differential data versus banks/others players to enable unfair advantages in pricing, and sit in a valuable payment flow where financial services are a natural extension of the core product, like we’re seeing with QED portfolio companies Nuvocargo and QuintoAndar.

- Lauren Morton, Partner

2022 will remain very hot for the fintech VC market, but it will be much choppier. The best companies will continue to be able to attract nearly limitless funding and sky-high valuations. However, we will start to see many companies start to have serious issues when their business traction can’t live up to lofty promises made in 2020 and 2021. We will see some high-profile failures and down rounds will become much more common for those companies who might still be growing, but not at exponential rates.

- Bill Cilluffo, Partner, Head of International Investments

2022 will be a “return to normal” year and Q2 2022 will be the “magic quarter” in the U.S. Omicron will hopefully have burned out by late January / early February. That will set the stage for employers to reset their return to office plans in earnest. COVID seroprevalence (vaccinated + previously infected) will have gone past the tipping point. Each subsequent variant will have lesser impact, mostly in the media. Inflation will also have started to abate with supply chains starting to normalize and wage inflation normalizing as workforce participation recovers. The Fed will raise rates in the quarter, but the capital markets will have already assumed that was coming and react with little fanfare. And fintech IPOs will resume in Q2 and be a major vertical amongst all IPOs throughout the rest of 2022.

Companies will be on the hunt to cut costs. After two years of meaningful top line revenue growth, it will be time to return to focus on the bottom line. Cloud adoption amongst large corporates will continue its torrid pace with modernization projects to continue to provide meaningful cost savings.  This cloud adoption rate is finally setting the stage for large corporates to implement fintech tools that have previously had long sales cycles.

Who needs 10-minute grocery delivery? The craze that has swept the globe will start to deflate. Delivering in 10-15 minutes will prove to be very difficult and costly to execute on. Customers would prefer to sacrifice limited choice for the horror of say 20- to 30-minute delivery. The equilibration toward 30 minutes will be underway from both sides… let’s see what the “incumbent” delivery providers will do in response.

Early NFT and Decentraland adopters will be overwhelmed by the influx of the Gamestop crowd but more importantly, teenagers. My nephews and niece (aged 13 and 17 and 15 respectively) will be addicted to their Avatars by year-end. And any gifts will be coins sent to their crypto wallets going forward (Amazon gift card – no thank you)!  There will be at least one story on CNBC about a 15-year-old making millions trading NFTs. Gary Gensler will have his ears up but do nothing more than make another great short film!

- Chuckie Reddy, Partner

Crypto represents massive green field opportunities. We will see companies that are only doing so-so layer in crypto (but not DeFi) products to capitalize on these opportunities. We’ll also see +2x the amount of VC capital flow into this space to fund new projects. Regulation is coming to crypto and generally speaking I view this as a good thing. In developing regions, anticipate this regulation will focus on the on and off ramps. In the U.S. and Europe, the conversation is leaning toward securities law. Of note, as the types of crypto products expand we will likely see products trip the Howey Test and be classified as securities. Broadly speaking, clarity will help drive investment and innovation in this space.

Web3 won’t eat the world in a year but it might feel like it. In the VC world this will be a rubicon – you’ve either crossed or you haven’t. It’s also almost definitely a .com style bubble; some amazing things will emerge but getting there is going to be messy. Waves of innovation do not ripple across industries equally. As we saw with Web1 and Web2, I'd expect blockchain-based innovation in music, media and entertainment to be swift and iterative.

Is Bitcoin going up or down in the next six months? Do you have a physical coin we can flip?

- Adams Conrad, Principal

Explosive challenges in the startup talent market with compensation for experienced tech talent will rapidly escalate as more VC money chases a more finite talent pool, equivalent to what happened this past year in digital ad investories. There will be lots of M&A activity as cash-rich and highly valued tech firms seek to meet high-growth expectations with inorganic moves and also as a way to solve for recruiting challenges.

Separately, there will be lots of growth in vertical SaaS/fintech as laggard industries historically hesitant to digitize increasingly jump on the bandwagon as digital natives continue to assume management roles in buying functions.

- Matt Risley, Partner

Digital payments have transformed ways of doing business across many sectors, including e-commerce, logistics and direct B2B transactions.

Despite being the largest asset class in the world, real estate transactions remain largely analogue and paper-based processes. We think 2022 will be the year that the real estate transaction becomes digitized. We’ve seen a rising tide of companies targeting various parts of the real estate transaction, from KYC/AML on buyers and sellers, to automating legal checks on the property, acquiring a mortgage and the payment itself. 2022 will be the year these components start to come together to power a more centralized, digital, efficient and secure real estate transaction.

- Alexandra Piedrahita, Principal

While developed countries will look to regulate crypto more on the one hand, we will also see Western central banks more openly committing to creating their own digital currencies. The U.K., Sweden, the ECB and many others are working on this frantically as COVID-19 accelerated the disappearance of cash, and central banks need a currency they can control directly.

As those of you familiar with the banking system know, central banks basically control the money supply indirectly via the banks that they regulate with all the monetary policy tools they have, while controlling it directly via the actual money they print. Even before COVID-19 struck, cash was increasingly disappearing from developed economies (especially in places like Sweden), and hence that one part of the money supply that central banks used to control directly was becoming less and less relevant as a policy transmission tool.

As a result, central bankers will want to have a digital currency they have total control over, and we can expect lots of new announcements around this in 2022. This will make lots of new monetary policy innovations possible – for example when stimulus is needed it will be much easier for central banks to create more money supply by simply transferring new digital currency into the accounts of all eligible citizens.

Interestingly, this will also make things like highly negative interest rates and very strong consumption incentives much more easier. One example that has been talked about is that central banks would be able to hand out a digital currency that “expires” if not spent within a certain timeframe, thus creating a very strong stimulus for demand.

For more insights from Yusuf, read his blog here.

- Yusuf Özdalga, Partner

Things have to slow down, right? Changes will come with less frequency in 2022 as the world gets used to COVID-19. I think we had a lot of pull forward in 2021 deals, so I expect the VC deal frenzy to slow a bit, despite there still being plenty of capital to deploy. With that abundance of cash, deceleration of growth in some fintech sectors will continue to drive M&A and consolidation.

Elsewhere, niche fintech platforms will start to emerge – across sectors and specific use cases, the deep verticalization of fintech continues where the “fintech wedge” is most powerful. This will be true across developed nations, but emerging markets will continue to get global attention – LatAm, Southeast Asia and Africa are all seeing explosions in the start-up ecosystems. The combination of talent, capital and huge opportunity isn’t going anywhere in 2022.

- Mike Packer, Partner