Enabling Infrastructure & The Opportunity to Power the Next Generation of Fintechs

👋🏼 everyone. Medha here. I’m a partner at Redpoint Ventures focused on fintech at the seed + Series A stage. At Redpoint, we’ve been fortunate to partner with many category-defining fintech companies including Stripe, Ramp, Nubank, Root Insurance and several soon-to-be announced companies starting at the earliest stages.

In addition to posting on Medium, I’m launching a newsletter called Make Cents where I’ll mostly be diving into the dollars and cents of fintech trends to unpack the what, why, and how. There are so many buzzwords in fintech today. Even as someone who spends my days in the category, I struggle to understand what many mean in practice. I’ll do my best to break some of these down and provide actionable takeaways.

In this post, I’ll focus on why I believe we will see increased innovation in fintech infrastructure. Before I get into it, let me set some important context. Financial services is the largest sector globally by market cap. 162 of the Fortune 500 are financial services businesses. As of 3/21, 56% of that market cap was owned by companies that have been around for longer than fifty years. Compare this to software where only 5% of market cap is owned by 50+-year-old businesses.

Source: Fintech Revolution

Most of these companies are running on technology infrastructure from the 60s and 70s leveraging COBOL and other monolithic systems. Many have grown through acquisition, which means that business units and technology do not communicate effectively with each other. Don’t get me wrong, these behemoths are formidable competitors — there is a reason they have continued to maintain their scale, but it also underlies a huge opportunity to disrupt and innovate in a massive category.

I’m not alone in my bullishness. Excitement and innovation in the market has continued to build rapidly. Fintechs globally attracted ~$5 billion in total venture funding in 2010. By 2020 that number was $45 billion, and tripled to $142B in 2021! If investment dollars are an indicator of innovation, there’s a lot going on!

Source: FT Partners

But despite the explosion of fintech companies and the billions of investment dollars flowing into the ecosystem, why is it still so hard to get a fintech company off the ground?

Founders have to jump through so many hoops and invest serious time and resources to get their product up and running. Given the complexity and regulation inherent in financial services, “move fast and break things” is not a viable option. And even after companies move mountains to go live, this challenge doesn’t disappear. Operating a fintech effectively, scalably, and compliantly continues to be a huge lift that takes significant product, engineering and ops resources.

I believe we are in the early innings of the next generation of enabling infrastructure that will continue to drive down the amount of time and people required to innovate in financial services. Just as the cost and time to launch new software products has evolved to the point where arguably you do not even need to write code to launch a company, so too will the hurdles to build a fintech continue to lessen. Don’t get me wrong — we are a far cry from being able to launch financial services with the click of a button (I’m not sure that will ever be possible — nor would we want it to be), but it’s definitely time that we get closer to that reality than where we are today!

Below I lay out my view the universe of enabling infrastructure and where we’ll see more companies build in the coming months and years.

What is enabling infrastructure? I define it as the picks and shovel building blocks that power a fintech company.

I break down enabling infrastructure into 10 categories. And as you will see, within each category there are many subcategories. In practice, these are not mutually exclusive or comprehensive but follow how potential buyers think about the competencies of enabling technologies. This categorization is always evolving so am always curious to hear how others view the world as well.

Categories of Fintech Infrastructure:

• Identity & risk — fraud, KYC, AML, compliance
• Lending & insurance — underwriting, servicing, loan management software
• Banking — banking as a service (BaaS)
• Data aggregation & normalization — bank accounts, accounting, data normalization
• Payments — processors, payment facilitators, payouts
• Card issuing — debit and credit cards, virtual cards
• Custody / clearing — brokerage
• Income verification — direct deposit switching, payroll data
• Crypto — enabling infrastructure for traditional FIs

It is important to point out that many of these categories themselves are not new — modern fintech companies are disrupting the traditional players with some combination of lower costs, better experiences and innovative distribution.

Across these categories, I believe there are three broad themes where we will see accelerated innovation.

1. Product Launch

First, there are many layers of partnerships, regulatory hurdles, and technical integrations that are often required to even launch a fintech product. This is no small feat. For example, a team needs to find, negotiate and integrate with a banking partner to launch a consumer fintech or with a credit card provider for a card offering. Initial innovation in banking as a service (BaaS) and with card issuing platforms has meaningfully driven down the cost and time to market for companies who want to provide cards or checking or savings accounts but there are dozens of other service offerings that are still extremely cumbersome (brokerage is just one example that comes up frequently.) I am excited about platforms that continue to evolve and democratize the ability to launch a fintech offering.

2. Operational Requirements & Workflows

Second, even after fintechs are live there are huge operational requirements to stay afloat and compliant — onboarding, customer service, regulatory compliance, and many other manual workflows that are abstracted to the user but often require a human in the loop. These teams and needs often scale linearly with growth, if not at a faster rate due to compounding complexity. Some examples include large teams to reconcile payments, verify consumer and business identity when opening accounts, and to onboard users onto more complex products. There are companies building tooling to automate certain workflows, or at least be more efficient with exception handling, and will continue to see more being started to support the growing fintech ecosystem.

3. Crypto Enablement

Crypto enablement is a theme I am watching closely. Today, the process of adding a crypto offering is very challenging both technically and from a regulatory perspective. 16% of Americans own cryptocurrency, with that number jumping to 31% among 18–29 year-olds. As the number of Americans interested in owning crypto continues to increase, there will need to be more infrastructure that enables traditional financial institutions and fintechs to offer crypto compliantly and more seamlessly to their end customers. As the lines continue to blur between traditional financial services and crypto, we will see more vendors like ZeroHash offering services to ease this integration.

As the universe of fintech companies continues to grow, I believe we will quickly see a next gen fintech infrastructure ecosystem emerge to enable the creation of more sophisticated financial products as well as to drive efficiency and margin in operations as these companies scale. While the entire infrastructure stack is ripe with opportunity, some areas of particular interest include insurance, identity and risk, data aggregation, and crypto enablement. More to come on these areas in future posts.

In an upcoming installment of Make Cents I’ll share a market map of the current enabling infrastructure landscape and dive into more detail about the subcategories. In the meantime, if you’re building in or around this space, definitely reach out. I’d love to hear from you!

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Originally posted on Make Cents