By Matt Harris
August 8, 2018

I’ve been proven wrong once again.

For eight years running, I’ve predicted that fintech investment is going to plateau. Based on the start of 2018, it hasn’t yet. In fact, we saw more than $5.4 billion invested in fintech during the first quarter of the year, with no signs of slowing momentum. For perspective, fintech investment for all of 2014 was just under $4 billion, so that’s “5x” growth in four years. In 2001, per data from Venture Scanner, it was something like $300 million.

With that said, this whole “fintech” thing is kind of a charade. As I shared with attendees last month during our annual Fintech CEO Summit, co-hosted together with Nyca Partners, the CEOs in our portfolios don’t actually run “fintech businesses.” They run a payments business or a lending business, or they build investing technologies, or they sell to banks or insurance or real estate companies.

Regardless of what VCs tell limited partners, or how media cover the industry, these businesses don’t necessarily have much to do with each other (besides the obvious of moving money around). So while the investment numbers are up in aggregate, each sub-sector has a very different story. And it’s worth diving in more deeply to understand what’s really going on.

Payments: Been there, done that

Ten years ago, “fintech” equaled “payments” because Jack Dorsey made payments cool in Silicon Valley. That’s very different now. Payments is a distinct minority of new fintech startups, and early-stage funding has dipped over the past few years. In 2012, about 90 payment companies were founded by my count. In 2017, that number dropped down below 10. Commercial payment companies like Billtrust and AvidXchange are still having a bit of a moment (full disclosure: my team has invested in these firms), but if you follow the trends, you won’t see tons of payment startups this year or going forward.

Where did the energy go? Cryptocurrency. When I meet with cryptocurrency founders today, I can imagine those folks a few years ago being payments founders. It’s a lot of the same DNA, similar engineering talent, and even some of the same end markets.

Venture investment: $1.6 billion in 2016 (Source: CB Insights)
Startup energy: Slim to none, all late stage

Lending: More fin than tech

The lending sector is a tough business these days, with investment of just $4 billion in 2017 and dropping fast, especially in early stages. The transactional and commodity natures of lending always made it hard, and now the investment community re-rated those startups from technology companies to lending companies—Lending Club and OnDeck being the obvious examples. With GreenSky recently having a successful public debut and Funding Circle waiting in the wings, we’ll see if they can change investors’ minds.

Venture investment: $4.0 billion in 2017 (Source: CB Insights)
Startup energy: Declining fast, pending IPO boost

Wealth/Investing: Race to the bank

Wealth tech companies get a steady 10% of fintech investment year after year. There’s a durable view that they show real opportunity for disruption. One of the more interesting trends right now is that all the wealth and investment companies that have achieved scale—like SoFi, Acorns, and Wealthfront (another disclosure: my team has backed Acorns)—are doing the same thing: They’re adding a checking account. You could paint with a broad brush and say they are all trying to become banks. Not necessarily licensed banks, but rather, leveraging third parties and new technologies to try to become a consumer’s primary financial partner.

This is really fascinating to me and raises a key question for our industry, and our society: Will consumers bail on traditional banks? Will they go to their employer with a new direct deposit authorization form and say “send my money to Betterment, to Acorns, to SoFi”? This is truly a new phenomenon. If it works, there’s a whole new era of fintech coming, where the banks go from the “Empire Strikes Back” phase that they’re in right now—and they start to worry again. It doesn’t mean wealth tech is toast if it doesn’t work, but it’s striking that all these companies had the same ideas at the same time.

Venture investment: $1.2 billion in 2017 (Source: CB Insights)
Startup energy: Steady as she goes

Insurance: Fast growth leads to full stack

Insurance startups are really at a pivot right now. Companies like Oscar or ZhongAn have scaled from nothing to billions a year in funding, and in the process, they’ve decided to be full stack. Historically, insurance startups Insureon and Zenefits were simply brokers or managing general agents, but increasingly there’s a take that startups need to be(come) carriers. I certainly understand that instinct—if you don’t control the product, someone else controls the capital. So, I get it. But return on equity for carriers tends to be around 9%. It doesn’t make sense for a VC to invest in a carrier. Not at all.

Moving forward, the insurance tech players need to figure this out. It will be the difference between insurance getting really transformed or having a bunch of brokers with fancy apps. And that second future is not going to create a lot of equity value.

Venture investment: $1.4 billion in 2017 (Source: CB Insights)
Startup energy: Awkward teenage years

Real Estate: Disruption in full effect

Real estate and crypto are the two areas where we see the most growth. In real estate, five of the venture world’s 10 most recent unicorns—Compass, Opendoor, WeWork, Airbnb and UCommune—are real estate companies, whether you think of them that way or not. Opendoor, for instance, invented a true “prop” brokerage, where they don’t broker a sale for 6%, but instead buy the property, find another buyer and make money on the spread. Zillow now says they’re doing the same thing, and there have been a bunch of fast followers. This incredibly stodgy industry—which hasn’t changed in a hundred years—is getting re-made.

Venture investment: $1.2 billion in 2017 (Source: PitchBook)
Startup energy: First-movers moving fast

Cryptocurrency/Blockchain: Time to get serious

What can we say about crypto? Last year at our Fintech CEO Summit, we talked about how people were going to go to jail for initial coin offerings (ICOs). No one has gone to jail yet, but it’s tricky. ICO volume is still frothy, with a peak of $4.1 billion raised in March but otherwise running at roughly $1.5 billion a month. Plus, the noise out of government is getting louder and clearer that this is not some sort of safe harbor.

Beyond ICOs, we think about the crypto space in three parts: the crypto investing ecosystem, enterprise blockchain, and distributed applications.

For the first, a key question is: Will crypto be an asset class? Provisionally, I believe the answer is “yes.” The investing ecosystem is now maturing nicely, and several pioneers like Basis and Compound (last disclosure: both are portfolio companies), are filling in key elements of market structure, assuming people want to trade crypto at scale more in the future.

Regarding enterprise blockchain, is it actually a standalone business? The market is thriving if you count press releases, but not if you look for revenue outside of proof-of-concept. We provisionally said “no” to this question in the early days, but we have great entrepreneurs working on it—and I’m sure they’ll prove us wrong.

Finally, distributed applications are the big prize. It’s clearly early days, but this is where the talent is heading. Will the Airbnb, Uber, and Amazon Web Services of the future simply be open source protocols powered by tokens that change the way we store our files, book our houses, book our travel, and manage our transportation? I don’t know when, but I believe we’ll get there. Someday.

Venture investment: $716 million in 2017 (Source: CB Insights)
Startup energy: Wild, wild west (and east and north and south)

Bonus trend: Incumbents and insurgents unite?

When I started in fintech, the industry was primarily made up of vendors that sold to banks. Many of us who started investing set ourselves in opposition to that and said, No, fintech can be entrepreneurs who do a better job than the incumbents. Now, the big banks increasingly want to know about new vendors they should push through procurement, so they can partner and deploy their technology to become more like modern companies.

Those banks are also now acquiring the insurgents. I would not have predicted this last year, but JPMorgan Chase, Goldman Sachs, Capital One, and BBVA have processes that are under way right now. The banks have decided it is not taboo to buy fintech companies. That’s a meaningful and positive change for everyone with whom we work. We’ll see how lasting it is.

Matt Harris is a managing director at Bain Capital Ventures. He is consistently ranked as one of the top investors in fintech, having participated in the space since 2000.

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