That’s how it goes… in Fintech 2021
Everybody knows that the pandemic was loaded and accelerated change in financial services. What everyone knew was going to happen, is happening a lot sooner…like right now. The entire industry has redoubled efforts towards digitization across the business stack moving beyond the point of sale to the critical middle office and back office infrastructure. Everyone knows that this will significantly accelerate the pace of secular innovation across financial services.
Everybody rolled with their fingers crossed, believing banks had won the wars and would rule over the fintech world, unperturbed and unchallenged by waves of innovation. The 2020 pandemic, as well as abnormal geopolitical events, smoothly hid that…
Everybody knows the bank wars are over. Banks have lost ground, most of them relative to their leading peers and also to new entrants, some in absolute terms, and they still do not know how or why. Open banking will lead to Open Finance and the embedding of all financial services in the digital world. APIs will irremediably break the data silos residing within every bank. Mature fintech companies and big tech firms are claiming payment rails, building new networks, winning over the SME ecosystem. To wit the strategic moves of Stripe, Amazon, Square. The crypto and blockchain world is birthing the protocol elements of the future of capital markets and asset management as well as cash management and very few banks are paranoid enough to genuinely participate, beyond maybe innovation theater. Be that as it may, the few banks that are successfully reinventing themselves (we see you Goldman Sachs) will be powerhouses for many years to come (with cash to burn they will build internally and acquire when it better suits their goals).
Everybody knows the fight is always fixed and the good guys of crypto v.1 lost. As if there was any doubt that cryptocurrencies and crypto assets would not end up being co-opted by the fiat world, leading to an explosive adoption curve in the making (see new centralizing agents like Coinbase or Binance vs truly libertarian independent individual participants).
Everybody knows the fight is always fixed. See how Ant Financial’s IPO got pulled. See how Facebook’s Libra has been reduced to a poor man’s USD digital coupon. See how Wirecard exposed the entire payments industry.
The poor stay poor, the rich get rich. Even in the crypto world, in DeFi. Hodl and prosper it seems.
That’s how it goes.
As everyone knows, looking back is easy. As for what we should pay attention to in 2021…
Not everybody knows that capital markets and asset management are leaking. So much so that the next evolution of digital assets – endogenous to a protocol, or tokenized and issued on a protocol, lightly or heavily embedded with lines of code ruling various corporate actions – will upend every workflow and every process, leading to drastically new market structures. The new capital markets and asset management industries will not resemble yesterday’s fiat worlds. They will borrow heavily from Omnifi (our term for all things crypto and blockchain). Watch these eco-systems for unprecedented change, albeit with an important caveat: as everyone knows, this sector has been especially slow to innovate given the confluence of capital, regulation and entrenched incumbents – but the signals of actual and impending change will be loud and real in 2021.
Not everybody knows the captain lied. Thus, not everybody expects ESG to provide a sea change in how assets are rated, indexed, categorized, ranked and – perhaps most interestingly for the financial sector infrastructure of tomorrow – how broader assets (not just traditional ESG) are governed and invested. We shall see an explosion of activity in this space. Everybody is expecting performative ESG moves. Everybody is wrong. Business will not carry on as usual. This is a rare example where the hype understates the reality. This is fundamentally a nascent market with some early pioneers, but the lanes of opportunity are uncrowded, and the potential is immense.
Not everybody got this broken feeling that the delivery of banking services is ailing. Everybody will be surprised by big moves at the application layer of open banking, or banking as a service. This is just the opening entree as more services will be co-opted. Many mature fintech startups in this space will become M&A targets. Many more fintech startups in this space will reach escape velocity. Banks will wake up licking their wounds.
Not everybody is talking to SMEs. They should though, as SME banking will heat up as an early beneficiary of open banking and the application of targeted and complete solutions for previously smaller and bespoke (and thus uneconomical) consumers of financial services.
Not everybody wants a box of crypto. Yet, there still will be willingness to experiment with self custody of long and short stem crypto and digital assets. The new custody infrastructure is being built. Much activity will ensue. We see the early beginnings of entirely new market structures around digital assets from asset management, both passive and active, to treasury and yield management, to indexing, to retail savings solutions, to white label custody solutions for institutions, to liquidity management and market making services, to crypto centric data analytics and feeds, to the entire industry adopting compliance and regtech solutions. A few more people know about the accelerating adoption of crypto as an asset class, at least when it comes to bitcoin, and this will continue in 2021.
And everybody knows that you love my data.
Everybody knows that you really do.
Everybody knows all service providers and incumbents have been unfaithful.
Ah, give or take a night or two, and…
Not everybody knows that with antitrust and data privacy and anti big tech sentiments being reinvigorating, new privacy solutions around ethical and compliant data analytics will be in favor. A fascinating mix of asset (data) growth, demand for analytical tools by business, and concerns regarding privacy and security by consumer and government will provide increasing opportunities in this space.
Not everybody knows that European fintech, discreet up to now, will see renewed investments and interest from many vc funds. Mark our words, from defi to self custody, across the ESG spectrum, with open banking morphing into open finance, with the beginnings of capital markets harmonization from primary issuance of digital assets to secondary trading platforms, to data analytics and governance platforms tailored to the financial services industry. And if you still doubt us on this last point, do realize that the freshly minted Brexit deal does not includes services in general and financial services in particular. Not everybody knows there will be further divergence between UK and EU financial markets structures, leading to a rebalancing of fintech activity to the EU, all else being constant (innovation follows market power and transactional activity, and both will, at the margin, rebalance towards the EU).
And there are so many new startups we just have to meet
Without a priori.
And everybody knows.
With special thanks to Leonard Cohen (for those who don’t know).
A short summary
- Banks lost, then fought back, but have now lost for good (zombies)
- Open Banking will lead to Open Finance aided by APIs obliterating old data and business silos
- SMEs have been ignored, again and again. Massive opportunity
- Co-option happened, as usual in competitive markets (see crypto, Libra, Chinese fintech)
- Much as banking was under attack beginning in 2014 (Neo and Challenger banking, remittances & transfers, PSD1/2, data privacy etc), culminating today towards the end of the banking industry as we know it, Capital Markets & Asset Management are at a similar juncture. CMAM is just beginning the break up and rebuild process.
- ESG will be re-invented and embedded as a core functionality across industry
- BaaS will explode across the globe enabling financial inclusion while destroying old institutions
- SME banking solutions accelerate (and benefit from Open Finance)
- FinData finally recognized as a priority asset with associated concerns of compliance, privacy, and security
- European (EU) innovation will accelerate, especially after the final Brexit deal