- A partner at Point72 Ventures, the VC arm of Steve Cohen’s hedge fund, expects the next wave of fintech disruption to happen in the less publicized back-end tech that powers big banks.
- Infrastructure giants like FIS and Fiserv have dominated the banking infrastructure space for decades, but fintechs are looking for ways to reimagine these core banking services.
- “They are all, as it currently stands, very good businesses with large customer bases who trust them, but the fact of the matter is they’ve fallen behind on technology,” Tripp Shriner, partner at Point72 Ventures, told Business Insider.
- Shriner isn’t alone in his prediction. Goldman’s investment banking head of fintech also says that the next trend to watch in fintech is players that focus on banks’ core, often dated, infrastructure.
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Depending on whom you ask, fintech is, at any point in time, unbundling or rebundling financial services.
An unbundling fintech might put a tech-forward twist on a particular product or service, like checking accounts or personal financial management. Rebundlers look to do more than single-point solutions, instead aiming to bring a tech-forward approach to a broader set of financial products.
These cycles of venture-backed fintech disruption aren’t new, with direct-to-consumer offerings such as Robinhood, Chime or Betterment.
And while consumer-facing fintechs are often well-funded with VC cash and unicorn valuations, not all investors are convinced.
In developed markets like the US, about 80% of households are “fully banked,” meaning they have bank accounts and access to credit from mainstream banks, according to the Federal Reserve. For direct-to-consumer fintechs, acquiring users that already have established financial services relationships can be challenging.
“We’ve had questions around what some of the businesses on the direct-to-consumer side look like long term, both from an economics perspective as well as from valuation perspective,” Tripp Shriner, a partner at Point72 Ventures, told Business Insider.
Instead, Shriner expects the next wave of unbulding and rebundling disruption to come for the not-so-glamorous back-end tech that powers financial services.
Read more: SoFi is buying a payments startup that powers Robinhood, Chime, and Monzo in a $1.2 billion deal that could upend the fintech ecosystem
Point72 Ventures, the VC arm of billionaire Steve Cohen’s hedge fund Point72 Asset Management, invests primarily on the enterprise side of fintech. Its portfolio companies like Extend, Mantl, and Roostify, are going after the less publicized, back-end side of financial services, taking on infrastructure giants like Broadridge, FIS, and Fiserv and building new solutions for the banks themselves.
“They are all, as it currently stands, very good businesses with large customer bases who trust them, but the fact of the matter is they’ve fallen behind on technology,” Shriner said.
Financial infrastructure giants are falling behind
Players like Broadridge, FIS, and Fiserv have been around for decades, behind the scenes of consumer-facing banks and asset managers. And they’ve achieved massive scale, largely through a series of acquisitions. From payments processing to back-office tech to compliance and tax reporting, these firms have products for virtually every aspect of financial services.
But, in part due to their incredible size, these established players cannot move as quickly as startups. Part of the reason they’ve been slow to evolve is complacency and bureaucracy, but it’s also about their technology infrastructure, Shriner said.
And at such a large scale, there are fewer incentives to invest in modernizing their platforms.
“They have good business models, they’re large businesses with fairly captive customer bases. So they haven’t had much need to innovate,” Shriner said.
Read more: There’s never been a better time for banks to buy fintechs, according to a Capital One cofounder. Here’s why both sides need each other more than ever.
But the scale of financial technology vendors like FIS and Fiserv doesn’t mean they’re immune to disruption. And there are plenty of fintechs vying for a piece of the financial infrastructure space.
And many have grown to be sizeable as well. Payments giant Stripe is valued at $36 billion, backed by big-names investors Andreessen Horowitz, GV (formerly Google Ventures), and Sequoia. Card-issuing platform Marqeta is valued at $4.3 billion, and data fintech Plaid was acquired by Visa for $5.3 billion earlier this year.
To be sure, the traditional players aren’t simply ignoring fintech. FIS, which bought WorldPay last year, just set up a venture fund in April to invest in fintechs. Fiserv runs a fintech accelerator program as well.
“In the near term, if I were the CEO of one of those businesses, I don’t know that I’d be particularly concerned given the scale that I have,” Shriner said.
“But over time, I do think it’s something that they’re going to have to figure out a way to react to, whether it’s introducing more innovation into their organizations, partnering with more of the startup technology businesses, or acquiring them,” he added.
Shriner’s not the only one who’s bullish on infrastructure fintech.
Goldman Sachs’ Jeff Gido, global head of the fintech for the firm’s investment banking division, discussed how the coronavirus pandemic has accelerated the acceptance of fintech in a recent podcast.
And the future of fintech is all about infrastructure, Gido said.
“Going forward, the concept of infrastructure really revolves around the fact that many of these financial institutions are running the core systems and core platforms on tech that may be 20 or 30 years old,” Gido said.
And fintechs that help those financial institutions change their core infrastructure are well-positioned, he added, enabling banks to remove some of their “legacy tech debt” and become more innovative.
“We really think that’s the next trend,” Gido said.
Fintechs are taking on incumbents one piece at a time
While taking on large companies such as FIS and Fiserv is an uphill battle, the potential benefits are undeniable. FIS reported $10.3 billion in revenue in 2019 — a company record. And Fiserv reported $14.5 billion in 2019, a 4% increase year-over-year.
“When you look at the revenue base and market capitalization of an FIS, I think the positive is that there’s a really good opportunity to build a very valuable business just by unbundling one piece of it,” said Shriner.
Online account opening, for example, is a crucial part of customer acquisition for consumer banks. And Mantl, a Point72 portfolio company, is one fintech that offers banks a solution to onboard new customers digitally.
Point72 led Mantl’s $8 million Series A in February, and participated in its $11 million Series A extension in June.
Mantl helps smaller community banks, which typically would require customers to enter a branch to open an account, compete with big retail banks like Chase and Wells Fargo, as well as digital banks like Chime. Acquiring customers is a huge cost-driver for banks, and can result in losses if prospective customers don’t sign up due to difficult account opening processes, Shriner said.
“Any sort of solution that helps incumbents match startups from a technology and innovation standpoint and has an actual impact on the economics for those institutions was very attractive for us,” he added.
Once trust is established, fintechs have an opportunity to disrupt more pieces of banking infrastructure
Fintech’s push to disrupt back-end tech providers is bolstered by banks’ increasing acceptance of them as partners.
“I think big banks, in particular, have seen enough success with their fintech partnerships and have seen enough evolution in their internal mindset where they’re more comfortable working with early-stage startups,” Shriner said.
“Because of the growth of cloud and the growth of APIs, it’s much easier for a bank to now work with those types of companies,” he added. “That has us really excited about the opportunities for those types of businesses.”
Read more: Visa’s fintech chief lays out how a new program to bring startups on board in just a few weeks will help tap a $185 trillion opportunity
And that trend has only accelerated amid the coronavirus pandemic, with banking and payments becoming more digital. On the financial infrastructure side, Shriner expects that this trend of increased partnership will continue, especially as fintechs build trust with institutional players.
“We guide our startups quite a bit on building referenceability and therefore trust in the marketplace,” said Shriner.