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Who will the winners be in the future of fintech?

Nik Milanovic
Contributor

Nik Milanovic is a fintech and financial inclusion enthusiast, with a decade of work across mobile payments, online lending, credit and microfinance.

So what happens when fintech ‘brings it all together’? In a world where people access their financial services through one universal hub, which companies are the best-positioned to win? When open data and protocols become the norm, what business models are set to capitalize on the resulting rush of innovation, and which will become the key back-end and front-end products underpinning finance in the 2020s?

It’s hard to make forward-looking predictions that weather a decade well when talking about the fortunes of individual companies. Still, even if these companies run into operating headwinds, the rationale for their success will be a theme we see play out over the next ten years.

Here are five companies positioned to win the 2020s in fintech:

1. Plaid

In 2014, I met Zach Perret and Carl Tremblay when they reached out to pitch Funding Circle on using Plaid to underwrite small and medium businesses with banking data. At the time, I couldn’t understand how a bank account API was a valuable business.

Plaid’s Series C round in 2018 came with a valuation of $2.65 billion, which caught a lot of people in fintech off-guard. The company, which had been modestly building financial services APIs since 2012, recently crossed the threshold of 10 billion transactions processed since inception.

For those unfamiliar with Plaid’s business model, it operates as the data exchange and API layer that ties financial products together. If you’ve ever paid someone on Venmo or opened a Coinbase account, chances are you linked your bank account through Plaid. It’s possible in 2020 to build a range of powerful financial products because fintechs can pull in robust data through aggregator services like Plaid, so a bet on the fintech industry is, in a sense, a derivative bet on Plaid.

Those 10 billion transactions, meanwhile, have helped Plaid understand the people on its’ clients fintech platforms. This gives it the data to build more value-added services on top of its transactions conduit, such as identity verification, underwriting, brokerage, digital wallets… the company has also grown at a breakneck pace, announcing recent expansions into the UK, France, Spain, and Ireland.

As banks, entrepreneurs, and everyone in-between build more tailored financial products on top of open data, those products will operate on top of secure, high-fidelity aggregators like Plaid.

The biggest unknown for aggregators like Plaid is whether any county debuts a universal, open-source financial services API that puts pricing pressure on a private version. However, this looks like a vanishingly remote possibility given high consumer standards for data security and Plaid’s value-added services.

2. Stripe

Predicting Stripe’s success is the equivalent of ‘buying high,’ but it is hard to argue against Stripe’s pole position over the next fintech decade. Stripe is a global payments processor that creates infrastructure for online financial transactions. What that means is: Stripe enables anyone to accept and make payments online. The payment protocol is so efficient that it’s won over the purchase processing business of companies like Target, Shopify, Salesforce, Lyft, and Oxfam.

Processing the world’s payments is a lucrative business, and one that benefits from the joint tailwinds of the growth of ecommerce and the growth of card networks like Visa and Mastercard. As long as more companies look to accept payment for services in some digital form, whether online or by phone, Stripe is well-positioned to be the intermediary.

The company’s success has allowed Stripe to branch into other services like Stripe Capital to lend directly to ecommerce companies based off their cashflow, or the Stripe Atlas turnkey tool for forming a new business entirely. Similar to Plaid, Stripe has a data network effects business, which means that as it collects more data by virtue of its transaction-processing business, it can leverage this core competency to launch more products associated with that data.

The biggest unknown for Stripe’s prospects is whether open-source payment processing technology gets developed in a way that puts price pressure on Stripe’s margins. Proponents of crypto as a medium of exchange predict that decentralized currencies could have such low costs that vendors are incentivized to switch to them to save on the fees of payment networks. However, in such an event Stripe could easily be a mercenary, and convert its processing business into a free product that underpins many other more lucrative services layered on-top (similar to the free trading transition brought about by Robinhood).

Which types of startups are most often profitable?

Julian Shapiro
Contributor

Julian Shapiro is the founder of BellCurve.com, a growth marketing agency that trains you to become a marketing professional. He also writes at Julian.com.
More posts by this contributor

I co-run an agency that teaches a hundred startups per year how to do growth marketing. This gives me a unique vantage point: I know which types of startups most often reach profitability.

That’s an important metric, because startups that don’t reach this milestone typically fail to raise additional funding — then die.

Here’s what we’ll learn:

  1. Companies are increasingly living and dying by ads. Because it’s the startup’s approach to customer acquisition — not its business model or market — that most determines its early-stage profitability.
  2. E-commerce companies lend themselves best to ads, and SMB SaaS the worst. Meanwhile, most startup founders in 2019 are starting SaaS companies. They’d benefit from the data we share in this post.
  3. In fact, our agency has found that every other type of business reaches profitability quicker than SMB SaaS, including mobile apps, Chrome extensions and enterprise SaaS.

Our sampling of startups isn’t as biased as startup valuation leaderboards, because we also see those that failed. That’s the key.

You can use our experience to de-risk your startup. That’s what this post explores: How to change your product roadmap to pursue a path more likely to reach profitability.

The startups that frequently reach profitability

Here’s the data my agency is referencing for this post:

  • We train 12+ venture-backed and bootstrapped startups every month. Half are Y Combinator graduates. This is how we study early-stage product-market fit trends.
  • We run ads full-time for between 20 and 30 mature companies per year. On average, each spends $2.5 million annually on paid acquisition. And, on average, each has 30 employees. Our clients include Tovala.com, PerfectKeto.com, SPYSCAPE.com, ImperfectProduce.com, Clearbit.com and Woodpath.com.
  • Our students and clients are roughly evenly distributed across D2C e-commerce, B2B, mobile apps and marketplaces.

When we try to control for founder skill and funds raised, the types of startups that first reach profitability do so in this order:

  1. E-commerce
  2. Chrome extensions
  3. Mobile apps
  4. Enterprise SaaS
  5. Small-to-medium business SaaS

On average, an e-commerce company is more likely to first reach profitability than an SMB SaaS company.

Before I explain why, let me explain how we’re differentiating startups: I use the word “type” instead of “business model” or “markets” because I’ve learned that business model and market are often not the best predictors of success. Instead, it’s your approach to customer acquisition. That’s what typically determines the likelihood of profitability.

Venmo is still growing like crazy

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Venmo’s rapid growth isn’t showing any signs of slowing down.

As mobile payments as a whole struggle to gain widespread traction, the amount of money exchanged on the Paypal-owned app doubled last quarter from the same period last year.

The app’s total transaction volume reached $6.8 billion in the last three months, according to Paypal’s earnings call Wednesday.

Paypal had an otherwise rosy quarter as well, reporting one of its best performances since splitting from Ebay two years ago. 

Venmo is also starting to answer some nagging questions analysts have had about its future — namely, how will it make money? Read more…

More about Paypal, Venmo, and Business

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Innovation under the hood will rev the engines of a fintech revolution

15508915702_f1edbff91f_k New consumer-facing financial applications are being built on top of old banking infrastructure, while other startups are going around financial infrastructure altogether. Together, they are unbundling the roles of banks and other financial incumbents. Read More

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