Here’s what’s hot—and not—in fintech right now

Fintech is the hottest investment area for venture capitalists – $1 out of every $5 in funding went to fintech startups in 2021.

But with a recession possibly around the corner, investors are writing fewer — and smaller — checks. And they are becoming much more selective about the kind of companies they want to support.

According to CB Insights, global venture capital investment in fintech firms fell 18% in the first quarter of 2022.

That has led to something of a rotation out of certain pockets of fintech that were hyped by venture capitalists last year, such as crypto and “buy now, pay later,” and into less sexy areas focused on generating stable revenue streams, such as digitization of payment processing for businesses.

So what’s hot in fintech right now? And what isn’t? I went to the Money 20/20 Europe event in Amsterdam in June to talk to some of the region’s top startup investors, entrepreneurs and analysts. Here’s what they had to say.

Investors remain obsessed with the idea of ​​making and accepting payments less burdensome for businesses and consumers. Stripe may face a few questions regarding its eye-popping $95 billion valuation. But that hasn’t stopped VCs from looking for the next winners in the digital payments space.

“I think we will see a next generation of fintechs emerge,” said Ricardo Schafer, partner at German venture capital firm Target Global. “It’s a lot easier to build things.”

Niche industry buzzwords such as “open banking”, “banking-as-a-service” and “embedded finance” are now in vogue, with a number of new fintech firms hoping to eat away at the volumes of established players.

Open banking makes it easier for firms that are not licensed lenders to develop financial services by connecting directly to people’s bank accounts. Something that has caught the attention of investors is the use of this technology to facilitate payments. It’s a particularly hot area right now, with several startups hoping to disrupt credit cards that charge hefty fees from merchants.

Companies like Visa, MasterCard Even apple closely follows the trend. Visa bought Sweden’s Tink for more than $2 billion, while Apple acquired Credit Kudos, a company that relies on consumers’ bank information to help underwrite loans, to drive its expansion into “buy now, pay later” loans.

“Open banking in general has gone from being a big buzz word to being seamlessly integrated into processes that nobody really cares about anymore, like bill payments or top-ups,” said Daniel Kjellen, CEO of Tink.

Kjellen said that Tink is now so popular in the domestic market in Sweden that it is used by about 60% of the adult population each month. “This is a serious number,” he says.

Embedded finance is about integrating financial service products into companies that have nothing to do with finance. imagine Disney offer their own bank accounts that you can use online or at the theme parks. But all the work that goes into making that happen will be handled by third-party companies whose names you may never meet.

Banking-as-a-service is part of this trend. It allows companies outside the traditional financial world to piggyback on a regulated institution to offer their own payment cards, loans and digital wallets.

“You can either start building the technology yourself and start applying for licenses yourself, which is going to take years and probably tens of millions in funding, or you can find a partner,” said Iana Dimitrova, CEO of OpenPayd.

Do you have an idea for a new crypto exchange that you just want to pitch? Or do you think you might be part of the next Klarna? You may have a tougher time raising money.

“The tokenization and the coin side of things we want to stay away from right now,” said Farhan Lalji, CEO of fintech-focused venture fund Anthemis Group.

However, the infrastructure that supports crypto — whether it’s software that analyzes data on the blockchain or keeps digital assets safe from hacks — is a trend he believes will stand the test of time.

“Infrastructure is not dependent on a particular currency going up or down,” he said.

Investors see more potential in companies that make it easier for people to access digital assets without all the knowledge of someone who trades cryptocurrencies and non-fungible tokens every day – part of a wider trend called “Web3”.

As for crypto, “the areas that interest us most today are areas for which we have an analogous experience in classical industries,” said Rana Yared, a partner at venture capital firm Balderton.

In the case of BNPL, there has been something of a shift in the business models VCs gravitate towards. While the likes of Klarna and Confirm have seen their valuations plummet, BNPL startups that focus on settling transactions between businesses are getting a lot of attention.

“Growth in B2C [business-to-consumer] BNPL is slowing … and regulatory concerns could limit growth,” said Philip Benton, fintech analyst at market research firm Omdia.

Business-to-business BNPL, on the other hand, is “starting from a very low base” and therefore has “huge” potential, he added.