Chris Dean, CEO and co-founder of Treasury Prime, a leading banking as a service (BaaS) provider.
Remember pets.com? The late ’90s pet supplies e-commerce site became shorthand for a lesson of the dot-com bubble: What sounds cool doesn’t always make money.
But the idea behind pets.com wasn’t the problem. The idea found traction as e-commerce matured. Launched a decade-plus after pets.com, Chewy is basically the same concept — just a lucrative version of it.
The real wisdom here is you can’t predict everything. There are great ideas that fail because consumers aren’t ready or because of bad execution. Fast-growing markets such as fintech have ample room for both progress and missteps.
The fintech and banking as a service (BaaS) markets have boomed during the pandemic. Covid-19 precautions, as well as the desire for faster access to government aid, have driven consumers to seek digital-first financial services. Venture capitalists (VCs) have kept pace with demand. Q1 2021 was, at the time, the largest funding quarter for fintech ever with $22.8 billion raised. Through Q3, fintechs had raised a record $96.5 billion, and global fintech funding for all of 2021 hit $131.5 billion.
So what does the fintech crystal ball hold for 2022 — and beyond? What can the industry reasonably predict, and what does it still not know? Here are my thoughts, based on 25 years in the tech and finance industries and my experience as the CEO of Treasury Prime, a BaaS company.
1. Capital will continue to flow.
The record startup fundraising rounds of 2021 weren’t a blip — they were the tip of an iceberg. VCs raised record amounts from their limited partners in 2020 and 2021 and will likely be deploying that money for years to come. That means even if the larger economy lags and individual consumers have less money to deposit into fintech-branded bank accounts, the investment should still be there to drive fintech growth.
Fintechs have proven a solid bet for investors. While investments in fintech skyrocketed in 2021, exits also saw a boost. More than 700 fintechs exited as of October, a 25% increase from the previous year. VCs earned more than $134 billion in aggregate value from fintech exits in Q2 alone, per PitchBook.
2. Embedded finance will gain traction.
Banking on your phone is easier than traveling to the nearest bank branch. What’s easier than mobile banking? Accessing financial tools wherever you need them — including within nonfinancial apps.
The embedded finance market is forecast to be worth over $138 billion by 2026, and possibly trillions by 2030, according to analysts. What makes embedded finance so successful (aside from convenience for users) is companies that embed financial tools are starting with user bases that already need them.
3. Fintech will pull ahead in the U.S. and then face more scrutiny.
The United States has more than 10,000 depository institutions, many of them community banks. That makes for a highly fragmented financial system and has created hurdles to innovation. When there are so many banks, each with its own aging technology, it’s harder to build a streamlined digital experience for all depositors.
That’s changing. Consumers are more comfortable than ever with mobile banking, and investors are both flush with funding and highly interested in fintech startups. This combination of trends means there are more fintech options than ever. More activity means more visibility — including from regulators.
“We need to remove the disparity between the rights and obligations of banks and the rights and obligations of synthetic banking providers by holding SBPs to banking standards,” Michael J. Hsu, acting U.S. comptroller of the currency, said during a summit of industry group American Fintech Council in November.
In other words, he’s saying fintech should be more regulated. Fintechs and embedded banking companies need to prepare for this by building up their compliance offerings.
4. Banks will dip their toes into BaaS.
Banking as a service, the back-end wizardry of the fintech industry, has traditionally been the realm of tech companies. But with fintech booming, I foresee banks wanting to expand from the role of bank partner to also serve as BaaS provider. Expect to see at least one major bank dip its toe into building its own banking application programming interfaces. HSBC is already taking this step as of October, which could be a harbinger of a trend.
But can banks succeed as builders of BaaS platforms? I doubt it. They are highly regulated institutions with often decades-old technical infrastructure. The giants of finance are not known for experimentation or innovation.
5. Banks and fintechs will need each other more than ever.
Banks are still the foundation of the U.S. financial system. They hold an oligopoly on charters, allowing them to dictate the terms of their contracts with fintech companies. Banks have the power to end their partnerships with fintechs if they deem a relationship to be too risky or unprofitable. They also hold the deposits needed to continue influencing regulators. None of that is changing anytime soon.
Larger fintech companies are coming into their own, but with limits. They provide a lot of value to their bank partners by facilitating new account openings, and so they have leverage in their contracts. Still, they will need to negotiate heavily with banks to get what they want out of the relationship. They also have to be wary not to misrepresent themselves as banks, as regulators increasingly call for stricter oversight of fintechs. The role BaaS companies play by providing technology linking fintechs to multiple banks and compliance providers will only grow in 2022, in my opinion.
Ultimately, banks, fintechs and BaaS companies are most efficient when they work with each other to minimize risk, stay compliant and provide the modern financial products consumers want.
All these trends are likely to push forward. At the same time, fintech will surely turn new corners. Always leave room for the unexpected.