Fintech 100: The most promising fintech startups of 2023; The Verticalization of B2B Fintech; Vertical SaaS + Fintech;

In this edition:

1️⃣ Telegram starts to look like a super app, echoing WeChat

2️⃣ Revolut strikes share deal with SoftBank to remove barrier to UK licence

3️⃣ PayPal faces new antitrust lawsuit

4️⃣ Fintech 100: The most promising fintech startups of 2023

5️⃣ Vertical SaaS + Fintech

6️⃣ Embedded finance: what’s the opportunity for banks?

7️⃣ The Verticalization of B2B Fintech

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News

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Telegram starts to look like a super app, echoing WeChat

Telegram, the popular messaging app with 800 million monthly active users worldwide, is inching closer to adopting an ecosystem strategy that is reminiscent of WeChat’s super app approach. Certain aspects of the ecosystem will be decentralized with help from two heavyweights: Telegram’s crypto partner TON Foundation and WeChat’s owner Tencent.

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Revolut strikes share deal with SoftBank to remove barrier to UK licence

Revolut has agreed to simplify its ownership structure with its largest investor SoftBank, removing one obstacle faced by the UK’s most valuable fintech to win a vital and long-delayed banking licence in its home market.

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PayPal faces new antitrust lawsuit claiming it unfairly stifles competition with Stripe, Shopify and more

PayPal has been hit with a class action lawsuit by consumers represented by law firm Hagens Berman alleging that the fintech giant’s anti-steering rules stifle competition against lower-cost payment platforms such as Stripe and Shopify.

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Insights

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Fintech 100: The most promising fintech startups of 2023

Overall funding and valuation trends: The Fintech 100 includes a mix of companies at different stages of maturity, product development, and funding. The cohort has raised nearly $22B in equity funding across 381 deals since 2019 (as of 9/22/23). This year’s list includes 31 unicorns (private companies with a $1B+ valuation).

Early-stage innovation: Twenty companies in this year’s winning cohort are in early fundraising stages (seed/angel or Series A). Solutions from early innovators are being developed across categories, including B2B BNPL (Mondu and Two), account-to-account (A2A) payments (Banked and kevin.), and mobile wallets and remittances (DANA and LemFi).

Most represented categories: The cohort is broken down into 20 categories. “Spend management” and “insurance” are tied for the largest portion of this year’s winners (9 companies each).

The spend management category is led by later-stage market leaders Brex and Ramp, which both launched generative AI product features this year. The category also includes two new winners in non-US markets: Singapore-based Aspire and Mexico-based Clara.

Insurance is one of the biggest categories for the second straight year. Eight out of the 9 insurtechs are B2B, including two insurance distribution platforms: repeat winner bolttech and new winner Cover Genius.

Global reach: This year’s winners represent 24 different countries across the globe. Forty-three percent of the selected companies are headquartered in the US — down from 53% last year. The UK comes in second with 12 winners, followed by Singapore with 7.

Additionally, some emerging markets stand out with multiple winners this year. For example, India has 3 winners, while Indonesia and Egypt each have 2.

Novel applications: Two of this year’s winners are developing large language models purpose-built for financial services: conversational AI provider and returning winner Kasisto and financial document processing platform Cognaize.

Two winners in the wealth and asset management category, AlphaSense and SESAMm, have integrated generative AI into their market intelligence platforms for document summarization and extraction.

Finally, within core banking and infrastructure, embedded finance platforms — like repeat winner Unit and an early-stage new winner Synctera — are growing quickly in the United States.

Source CB Insights

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Vertical SaaS + Fintech

Vertical software businesses like Toast (54%) and Shopify (46%) each derive significant portions of revenue from payments and fintech.

This isn’t a new phenomenon. Software private equity firms commonly look to monetize payment volume through payment facilitation (payfac). PayPal invented the ‘merchant aggregation’ model over 20 years, which preceded the modern payfac model that many of these software platforms rely on today to monetize payment flows - that can mean an additional 2-5% take rate on $100M of GMV.

Looking forward, vertical software platforms will (and already do, in many cases) incorporate lending, invoice factoring, spend management, insurance, and payroll into their product suites. By adding in fintech offerings, selling vertical software to SMBs can become a profitable and sustainable business of its own. Fintech products provide additional revenue streams, as well as customer acquisition engines, retention catalysts, and more expansive value propositions for customers. In the process, this helps to reinforce the operating system role the vertical software platform seeks to serve for its customers.

Leveraging vertical software platforms with captive customer relationships and proprietary transactional, financial, and product-level datasets presents unique opportunities to create and distribute financial products to existing customers.

A few unique characteristics of vertical software that get us most excited about the fintech applications include:

Gauging Intent: platform, usage, and transaction-level data can inform customer intent for financial products to simplify the customer experience and engagement

Pre-Approvals: platform-level data provides better insight into customer quality and underwriting

CAC Advantage: demonstrably lower customer acquisition costs because you already own the customer relationship through software,  often a daunting challenge for standalone fintech

Revenue Diversification: subscription and transactional monetization allows for a diversified revenue mix

Customer Lock-in: building a one-stop shop for end customers where each incremental product reinforces the value of the platform, driving greater stickiness and net dollar retention

Source Upper90's

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Embedded finance: what’s the opportunity for banks?

Benefits for banks from non-traditional, digital distribution partnerships

• Access to new customer types e.g. Gen-Z and Millennial digital natives

• Lower cost of acquisition of new customers, higher conversion/onboarding rates

• New and more effective financial services engagement models, leading to better monetisation opportunities

• Better long-term stickiness and loyalty for contextual, convenient financial products and services accessed by customers at the point of need

• Opportunities for distinctive innovation beyond traditional banking app/portal offers, and beyond a race to the bottom in generic price comparison sites

Banks have strengths that non-financial digital brands lack

• Regulatory licences

• Brand recognition and customer trust

• Strong standards of verification of real customer identities

• High degree of reliability and robustness in service delivery and underlying infrastructure

Resources of non-financial digital brands that banks can tap into

• New-generation,digitally-nativecustomers

• Large pre-existing populations of users with common interests

• Engaged digital users keen on financial features which help them with a “job to be done”

• Data and contextual signals that are key to financial services relevance and personalisation in offers and finertuned eligibility criteria

Reverse embedded finance?

Some banks are exploring growth opportunities in non-finance verticals by building new digital applications of their own. This approach provides a high level of ownership and control for banks, but it puts them outside their normal business models, into competition with digitally-native domain specialists, Furthermore, this “build it ourselves” approach demands dedicated resources to maintain, market, and independently innovate the new end-customer-facing application: will banks continue to fund these experiments if they don’t live up to expectations - or take longer than expected to reach critical mass?

Most importantly of all, how many of these experimental sub-businesses can a bank hope to research, build, market, and maintain simultaneously? A handful at most. This compares poorly with the potential leverage of true embedded finance, where - with the right model and technology - a financial institution can provide for dozens or potentially hundreds of niche “embedder” applications… with those partner distributors taking the burden to build, maintain, market, and front-line service their various growing customer bases - instead of the bank trying to do everything alone.

Source Weavr.io

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The Verticalization of B2B Fintech

What does the verticalization of SaaS look like?

First, a SaaS product that solves a critical vertical-specific problem is needed. The best vertical SaaS companies build on deep customer knowledge, solve a quantifiable pain point, deliver quick time to value, and over time become a trusted “system of record” embedded in daily or weekly business processes for key employees of a specific type of business. They are also often built by insiders with a unique perspective on a vertical’s inefficiencies and opportunities for improvement. These SaaS platforms become deeply integrated into businesses and get access to invaluable insights and data of a company.

The best vertical SaaS company will continue to build its offering upon this deep customer knowledge and data moat, and increasingly that product suite includes fintech products. Upselling financial products via vertical SaaS platforms circumvents the high friction and CAC that typically accompany fintech sales. For example, how does money move? Who are their customers? What does inventory look like? What is the payback cycle? With this data, companies can make smarter decisions about their customers’ product needs. Today, most of these SaaS companies start by offering a payments solution and often stop at working capital or invoice financing products. However, the types of fintech products offered can scale beyond that. This can include additional financing to businesses and end customers, credit cards, insurance, etc. There is flexibility based on what the customer needs and what each product could do from a revenue perspective for the SaaS business.

Adding fintech enables vertical SaaS companies to lower prices

Financial products are high-frequency and sticky. This can have a big impact on revenue potential — sometimes up to 8x versus the price of the software alone. The future potential revenue from fintech add-ons can enable software companies to lower the price of a vertical SaaS product or even make it free.

Toast and Shopify are model success stories in this space, both beginning as SaaS companies and increasingly developing into fintech companies. Based on their success, some SaaS companies planning to monetize through fintech are starting to add key fintech-experienced hires early on, given how massive the fintech revenue potential can become.

Potential pitfalls

The SaaS-meets-fintech can be a great go-to-market strategy for fintech. But some potential pitfalls:

• It’s important to note gross margins for fintech products can be lower than SaaS, depending on the product. For example, Toast and Shopify respectively make 82% and 79% margins on their software subscription businesses but only 20% and 69% on their fintech solutions businesses.
• It’s tempting, but dangerous, to offer free SaaS to lower the barrier to adoption, assuming future revenue will come from fintech. We believe it’s important for customers to show the need for the product by their willingness to pay. Having subscription revenue also helps protect against market fluctuations, which can occur in the absence of annual contracts. For example — today, Toast and Shopify’s subscriptions respectively make up 17% and 29% of overall revenue, helping provide consistency in both their customer base and revenue streams and blend their overall gross margins.
• Despite the upside of fintech potential, not all industries are in need. The specific vertical must be big enough to support a venture scalable business. And the sector/vertical must have unique pain points, requiring specialized solutions. We also believe that when it comes to financing, having that specificity will become increasingly important to successful and attractive underwriting.

Source Cowboy Ventures