Long reads

6 Fintech & Insurtech Predictions from a Pan-European VC

Michele Foradori

Michele Foradori

Investment Director, BlackFin Tech

It is a recurring appointment for us at BlackFin Tech to sit down, at the end of every year, to discuss and reflect on new trends shaping the future of financial services.

Here is what our team sees storming in 2021:

1. New frontiers for payments

A new innovation breeze will hit the payment industry. Two key themes will shape the discussion for the next few years: account to account (A2A) payments and B2B payments. The first entails all payment methods that, in alternative to cards, allow a cheaper, faster, and safer movement of money from one account to another. The second, instead, is about payment platforms offering new payment experiences for “B” customers.> In the A2A space, we have already seen a few attempts to bring a new payment experience to life. From GoCardless’ SDD approach to Token or Yapily PSD2-enabled PISP, the payment industry is at a crucial turning point where debit cards could soon become obsolete and instant A2A payments standing as “the new black”. 2021 will unveil the true potential of these new payment experiences (either via new standards, like SEPA Instant, or via technology), and the payment ecosystem will shake again.> Another great opportunity within the payment industry is B2B, starting from marketplaces to move then into treasury management. The industry is worth more than €100 trillion and yet dominated by paper-based processes.

The rapid spread of cloud-based accounting platforms and productivity software, coupled with innovation brought by PSD2, has made it possible for fintechs to innovate at multiple layers within the CFO perimeter, payment probably being the chunkiest opportunity in terms of TAM. Companies like LibéoLikvido and Billhop have already seized this opportunity and newcomers will not take long to join the game. On the other side, the nascent B2B marketplaces (e.g. ManoMano, Mirakl) create huge opportunities for new payment facilitators and independent software vendors (with embedded finance tools) to enrich the payment experience of any business (imagine the potential of BNPL but for B customers 😲).

2. B2B Saas momentum among Banks and Insurers

The need for different strategies around innovation and digital banking was apparent in banking well before the pandemic hit. This is becoming the most urging of the point for banks and insurers’ (“B&I”) agendas. On the one hand, B&I had to adapt quickly to “working from home” and had to speed up the digital adoption to work from remote. On the other, they have witnessed a sound increase of utilisation of their own web and app instances as well as of fintech and insurtech competitors.As shown by EY study, huge divestment plans will characterise 2021 where up to 43% of the divestment proceeds could be re-invested to upgrade their digital technology capabilities.This is a unique opportunity for independent software vendors, especially cloud-first / API-first ones, to gain momentum and increase their market penetration, expanding as well on their product depth.At the same time, B&I have a real chance to shift from a defensive to offensive approach, avoiding the risk of disintermediation that Alex Rampell, from Andreessen Horowitz, sees already happening in the coming years. A very offensive approach could lead as well to a vivacious 2021 M&A activity (mirroring 2020) in a moment when tech companies seem to be highly valued by the market.

What do we see as super appealing?

  • for Banks: new core banking platforms (ThoughtMachine, Modularbank, Mambu), AML software (Salv, Lucinity), fraud detection (RavelinFeedzai), tech partnerships to convert incoming leads to customers (Pretto, Younited Credit
  • for Insurers: back-end solutions (Instanda, Tech11, FrissShift Technology), nurture partners’ distribution network (Penni.io), achieve more efficiency in risk/pricing (HyperXponential, Akur8)

3. The come back of European (Fin)Tech IPOs

Recent rumours of Transferwise going public in 2021 on the LSE might signal a long-time-wished comeback for European IPOs. Following the US 2020 IPOs success stories, many EU tech giants, among which there are numerous fintechs, could take advantage of the increased appetite for tech stocks and choose the “listing way”.

There’s always been intense debate over the relevance of the public market : the lack of international or tech-savvy investors in Europe, the burden on the business’s management team and company agility. Even more so since the private market has unprecedented levels of dry powder, but in the end, the current sound demand for European tech stocks, coupled with a possible decrease in large €500m+ M&A deals (given the surge in tech valuations), could guide founders and investors’ choice to point at IPOs for both liquidity and financing — getting listed still remains the only chance to grow big and independent.

The big question remains when and where to go public? The LSE seems to be the natural choice for most European-rooted tech companies, it appears that the UK Government is already lobbying to attract best-in-class players towards the London exchange; it could even consider allowing a dual-class share structure to appeal to founder-led companies and compete with Euronext Amsterdam

What’s new in 2020 is also how you get listed — you can stick to the traditional way or embrace the Spotify way through a direct listing. To add to this, after watching from the sidelines as a boom in the listing of special purpose acquisition companies (SPACs) reshaped U.S. capital markets, Europe jump on the bandwagon and play catch up next year (see for example Niel’s 2MX Organic).

What are the most interesting fintech candidates out there? An article from Sifted drops a few names: TransferWiseWorldRemit, Trustly, Checkout.com, and Interactive Investors. Potential candidates could also be KlarnaOakNorth, SumUp, Rapyd, Raisin. Revolut is definitely in our minds (and phones), but we believe this could happen later in 2022/2023, even if we are quite sure the demand from retail investors is already there.

4. Moooore lending

Last year we called for an increasing offering of new lending products like BNPL or revenue-based financing. We believe 2021 could see an acceleration of these players but, above all, an increase of attention towards more “traditional” (but digital) lending models. Considering the worldwide economic fabric has been deteriorating since the virus outbreak, this sounds like a bold statement; however, some good theses support this view.First, the ECB and governmental helicopter money strategy have extended further banks’ capability to lend (with the big caveat of respecting Basel accords). Considering the struggle to do this via traditional branches (due to Covid and following a general wind down trend), Banks will likely team up with software providers (like Younited Credit, Ezbob) to ramp up their digital lending capabilities.

Secondly, neo and digital-first banks see more and more deposits accumulating; this represents both a missed opportunity and a cost, where overnight central deposits yield negative (which is the case). Likely, deposits will soon be lent out. Starling Bank seems to head down that road.Thirdly, improved access to data, together with specialised scoring providers (eg Wiserfunding for SMEs or Koyo Loans for consumers), opens up new opportunities for lenders to decrease their rejection rate without jeopardising their lending book performance.

5. The new faces of wealth management

Wealth management has been one of the areas in fintech that has never really shined, apart from a few isolated cases like robo-advising and stock trading. Despite the vast potential it holds, the European wealth management sector is highly fragmented, and it is hard to build a one-fits-all solution (similarly to Vise or DriveWealth in the US).Nevertheless, 2021 could be a very interesting year for new wealth management-related propositions. In particular, we are thinking of alternative asset classes and the expansion of ESG service providers.The dotted line is, once again, Covid and the effect it is having on the global monetary policies and individuals’ behaviour. As for H2 2020, 2021 will see an increasing demand for alternative portfolios and asset allocation in search of extra yield.

  • Alternative asset classes:We believe 2021 to be the year crypto-related technology (custody above others), fueled by the recent spike in BTC and ETH prices and driven by the entry of institutional market participants, with larger balance sheets (very different from the past retail-driven frenzy). Clear signals come from GS, BlackRock, Fidelity, Generali, Standard Chartered.A bunch of alternative asset classes (art, cars, reward points, etc) could also become investable and attract retail investors hungry for above-market performance. The US is already seeing a positive trend with companies like Bakkt and Rally (see a great post from John Street Capital). 2021 could see few European plays emerging in this space, like WiseAlpha(for fractional bond investing), Capdesk (a secondary market for private shares), TreasurySpring (offering Fixed-Term Funds to institutional investors).
  • ESG: A “fight the climate change” action is being demanded to asset managers and financial players for a few years, spurred by the overwhelming evidence that climate is changing for the worst. Simultaneously, the money flooding into ‘ESG’ funds (Europe has recently surpassed the $1 trillion mark — an all-time high) has also highlighted the business opportunity for institutions that can respond.

    Weighing the ESG components has not historically been a critical input within the “get me more alpha” investment strategies. Things are now changing, driven by a growing demand for ESG-friendly assets and a higher regulatory demand/scrutiny. For us these are clear signals that there is a highway for companies like Matter, Util and Netpurpose (to name some), to support wealth and asset managers with new frameworks, data or compliance tools.

    6. Spicing up SMEs tools

    We have spent quite a lot of time and efforts on SMEs for the past 2 years. We can already count 3 investments dedicated to this segment: Agicap, Likvido and Memo. This does not mean we shy away from it. We think there is still so much more to come. In fact, SMEs have been often disregarded by financial institutions, insurers as well as software and service providers. The past decade has shown an increasing interest in catering SMEs’ needs, starting from productivity and, more recently, embracing finance and insurance. In the past 3–4 years, we saw fintechs scratching the surface of SMEs’ financial needs, with “light touch” products and barely triple digits monthly ARPA. From 2021 onward, we will definitely witness to fintechs/insurtechs building stronger economic moats, developing more and more integrated products and journeys, fencing their relationship with SME customers.

    Here are a few interesting areas where we believe product depth will play a key role:

  • payroll platforms > opening a new breed of financial relevant data (see here a nice post from a16z); merging in one solution remote and non-remote staff needs, build orchestration engines that enable multiple country deployments.>
  • tax automation and compliance software > move from freelancer to SMEs’ automation, support multi-country business logics.>
  • account payables & receivables tools > support multiple payment options, beef up product to answer to larger SMEs (ie 200+ employees), add embedded finance features to stack multiple revenue streams.

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