B Growth Network: Four Themes Shaping the Future of Fintech

October 26, 2022

An Interview with Sami Ahmad, General Partner at B Capital

Investment in the FinTech space has exploded over the last decade. FinTech accounted for less than 5 percent of total venture capital invested in 2010; in 2021, that percentage grew to more than 20 percent.

What is driving this explosive investment growth? For one, the number of new FinTech startups has expanded enormously; it has nearly tripled in the last two years alone. Disruption is happening at every corner of financial services, including new and exciting verticals like embedded finance and decentralized finance. At the same time, the population of consumers and businesses using and in need of these enhanced financial services is increasing rapidly, both in developed and emerging markets.

In short: FinTech is a very exciting investment frontier right now, particularly at B Capital. We spoke with B Capital General Partner Sami Ahmad to learn more about the key FinTech trends the firm is watching.

(The below transcript has been lightly edited for brevity and clarity.)

Q: What is Fintech, and why is it so exciting right now?

Sami: FinTech is the use of technology to enable new financial services or disrupt existing ones. Traditionally, financial services have been defined as payments, banking, lending, and insurance. Those are undoubtedly significant financial services pillars, but we think of the category much more broadly. Every dollar that moves worldwide – the entirety of GDP – has a financial element. Therefore, when we think about FinTech, it has the power to transform nearly every aspect of the global economy.

FinTech is particularly exciting right now because, traditionally, it has been an under-invested asset class relative to the opportunity set. When you consider that financial services comprise 15-20% of GDP in developed markets, FinTech investment has been disproportionately small up until recently. Meanwhile, the number of people using these financial services has grown significantly, thanks to widespread internet adoption and proliferation of mobile devices. So, I think this sector has enormous growth potential, and we are still in the very early innings of the revolution.

Q: What are some of the most exciting areas of FinTech right now?

Sami: There are four core themes that we believe are driving the future of FinTech:

The first theme is digitization. As consumers gravitate towards digital channels, traditional financial services are being deconstructed and reconstructed into a digital experience. Banks and legacy financial institutions are spending tens of billions of dollars trying to digitize their core operations to serve their customers better. They’re partnering directly with “enabler’ FinTechs to integrate technology into their existing systems. At the same time, many of these digital financial services are being created outside the four walls of traditional financial institutions. New FinTech entrants, such as challenger banks, are emerging constantly, looking to unseat incumbents with an asset-light, technology-first approach.

Democratization is another big theme we’re excited about. On the consumer side, billions of unbanked and underbanked people are entering the digital economy for the first time. They can now transact, send money, pay bills, and access financial services directly from their phone. In developing markets, for example, 1.7 billion people are expected to enter the middle class over the next decade and will need increased access to financial services. On the business side, there are 200-400 million micro and small businesses that have also been underserved and now can access working capital, payment solutions, and other financial services to support their business growth.

 Embedded finance and vertical software have become increasingly important FinTech trends in the last few years. Financial products are no longer distinct functions; instead, they are integrated within consumer and business workflows. Think about how many retail and online businesses support embedded payments solutions through platforms such as Stripe and Apple Pay, or companies that offer insurance products at checkout through a single click. FinTech and software are becoming codependent across vast segments of the market.

Lastly, decentralized finance (“DeFi”) has been very disruptive in the last few years, especially given all the attention around cryptocurrencies. Leveraging blockchain technology, DeFi can disintermediate financial services and drive the transition away from financial hubs and sovereign currencies to distributed ledgers, tokens, and smart contracts. We are still in the very early stages of DeFI. Still, the diversity of potential use cases and the widespread adoption of digital assets and cryptocurrencies makes it a very transformative opportunity set.

Q: It seems like the FinTech ecosystem is vast. How do you decide where to invest?

Sami: The companies that become category winners in FinTech are the ones that can maintain a distribution, execution, or capital/regulatory advantage. Having all three is ideal, but it’s also extremely rare. However, companies do need at least one or two of those advantages to grow and scale successfully.

The founder is arguably most important predictor of startup success. In venture capital, you win or lose with the founder and management team you back. We look for visionary founders who have the ability to make good short and medium -term decisions that will compound over a long period. At the same time, in a highly regulated and competitive space like financial services, founders and the leadership teams need to have the ability to adapt. An advantage can erode quickly, and leadership team need to be able to change course accordingly. 

Learn more about how B Capital supports early-stage founders with the resources and guidance they need to grow and scale: https://www.bcapgroup.com/platform-overview/

This information is provided for reference only and you should not rely upon this information to form the definitive basis for any decision, contract, commitment or action. Much of the relevant information is derived directly from various sources which B Capital believes to be reliable, but without independent verification. Certain statements reflected herein reflect the subjective opinions and views of B Capital personnel. Such statements cannot be independently verified and are subject to change.