A month ago, my investment banking group hosted Rosenblatt’s 12th annual FinTech summit, bringing together 400 investors and senior industry executives from the US, UK, Europe, India, Hong Kong, and Singapore. There were three panel discussions on cutting-edge FinTech topics with the CEOs of 15 leading FinTechs. Here are salient points discussed during each of the panel discussions.
Embedded Finance: The Next Phase of FinTech Evolution
On this panel, the CEOs of five leading FinTechs – ComplyAdvantage, Payfone, StoneCastle, Synapse, and Wisetack – described how their technology is enabling financial services to get more easily “embedded” into vertical industry solutions (like Payments in ride-sharing), and increasingly offered by non-financial services companies. Major highlights from this panel discussion are:
• As payments, lending, and insurance are no longer offered as a standalone financial service but integrated into service offerings, profit pools will shift, value chains will restructure, and the competitive nature of financial services will get altered as incumbent institutions get relegated to becoming utilities.
• ‘In the future, we will bank with the brands we love, not the banks we love’. Non-financial companies will take the lead from eCommerce and big-tech firms (Amazon AMZN , Google, Tencent, Alibaba BABA ) and distribute financial services directly to both consumers and businesses. Traditional financial institutions will continue to partner with these firms and offer them requisite licenses.
• Investors have an incredible opportunity to invest in FinTechs (like the five panelists) that are providing the infrastructure to embed financial services. This is a highly lucrative investment opportunity for investors as evidenced by Plaid and Galileo’s acquisitions at high valuations in Q1/Q2 2020. Or consider the mega funding rounds completed in the last few months for a range of companies in this space, including Cross River Bank, Currency Cloud, Finix Payments, Marqeta, MX, Payfone, and SynapseFI.
Capital Markets Reimagined: Bringing Trust, Transparency, and Liquidity to Alternative Assets
This discussion was led by the CEOs of 5 FinTechs – Alto, Capitolis, Clearlist, T-REX, and YieldStreet – who provide technology that removes the structural impediments for retail and institutional firms to invest in alternative assets like infrastructure, real estate, and private securities. Enhancing trust, transparency, and liquidity for such assets will democratize access to them, revitalize active investing, and could address critical challenges like the retirement crisis. Key highlights from the panel are:
• There have been significant regulatory, technological, and structural advancements in the last few years that are making it easier for retail investors to include alternative assets in their portfolios, depending on their risk appetite and investment horizon.
• Traditional financial institutions and service providers are encumbered by legacy technology and conflicts of interest that inhibit their ability to drive more efficiency in alternative assets like private securities. But new-age FinTechs (like Clearlist and T-REX) are enhancing transparency for such assets leading to more price discovery and eventually, greater liquidity.
• Three specific requirements to bring new assets into the investing fold are greater disclosure from issuers of Alt-assets, more investor education, and greater transparency around pricing, performance, and fees for these assets.
Emerging Risks: InsurTechs Respond to New Challenges
The world was caught flat-footed in dealing with COVID-19, with enormous long-term implications for the insurance industry including, demand for new products to address emerging risks, more clarity of which risks are covered in policies, and a complete overhaul of the insurance process to address emerging risks. This panel showcased five InsurTechs – Arceo, Bold Penguin, Deep Labs, RiskGenius, and Thimble – whose CEOs discussed what needs to be done to address emerging risks like climate change, geopolitical instability, the fall-out of AI/ML, or how to insure gig workers. Key takeaways from the panel were:
• COVID-19 has been a massive shock for the insurance industry combining huge health and safety claims, followed by a lockdown causing unprecedented business disruption, and knock-on effects like significantly higher cyber-attacks as people worked from less secure, remote locations. The enormous claims and litigation due to this event’s complex nature will haunt the industry for the next 5-7 years.
• Traditional insurance policies and the legacy technology of insurance carriers can’t adequately address the more complex and multi-dimensional risks that the world faces. But innovative cybersecurity technology from firms like Arceo and Deep Labs, fresh approaches from InsurTechs like Bold Penguinand RiskGenius, and flexible, on-demand policies offered by innovators like Thimble, can address emerging risks.
• There are new bills currently being considered in the US, UK, and European parliaments that provide government guarantees to fulfill the remaining claims for pandemics like COVID-19 after the insurance industry pays the first 5-10%. Such backstops could encourage insurance carriers to begin writing policies for emerging risks like pandemics, whose claims have been tough for actuaries to model resulting in carriers just not covering them.
COVID-19 has dealt a tough blow to the economy and to the financial services industry. But it is heartening to see the continued resolve of investors, entrepreneurs and market participants in the FinTech business, to power through this crisis and emerge even stronger to serve the changing needs of consumers and businesses.