Overview
We’ve seen an explosion of all things “FinTech” over the past decade and we think this will only continue in the decade ahead. In 2010 FinTech companies raised $450.0mn across 118 transactions from VC’s representing ~4.2% of the overall transaction volume. In 2018 that number reached $40.4 billion across 1,503 transactions representing ~10.4% of transaction volume. The advent of ancillary technologies on mobile, the use of machine learning, and artificial intelligence, opened up the path for companies that weren’t feasible 10+ years ago and will lead to companies we cannot fathom today 10 years from now.
Bain’s Matt Harris recently wrote two pieces for Forbes calling FinTech “The Fourth Platform” after Internet (Connectivity), Cloud (Intelligence), and Mobile (Ubiquity). Matt notes that the first generation of FinTech enabled us to offer old school financial services in a digital way. The next generation of FinTech is one where FinTech moves from a business model into a platform in it of itself, wherein financial functions like payments, lending and insurance join connectivity, intelligence and ubiquity as layers of the stack upon which new companies can be built.
We think this vision comes to fruition and the first part of the next decade is the golden age of FinTech with the creation of $100bn+ companies analogous to the early 2010’s spurning the leading consumer internet companies. Given the fact that financial services account for ~15% of Global GDP there’s a significantly larger market opportunity at play.
Key Predictions: Below are some key predictions for the decade ahead. Some of these are on the cusp on commercialization and widespread adoption and will be part of our daily fabric sooner rather than later. Others will take more time to develop and of course as ancillary technologies continue to evolve at an unprecedented pace there will be service offerings we couldn’t begin to envision today. We look across a number of key verticals including:
· Autonomous Finance
· Alternative Assets
· Bitcoin
· Digital Wallets
· Distributed Ledger Technology
· Emerging Market FinTech
· Financialization of Everything
· Financial Advisory
· Payments
· Underwriting Disruption
Autonomous Finance
As artificial intelligence and machine learning begin to permeate every industry, the use in personal finances has the ability to be one of those that most significantly impacts our day to day lives, similar to the impact felt from the introduction of the iPhone and social media. We live in a world where planes fly themselves, self-driving cars are beginning to be commercialized, yet we still don’t have the concept self-driving money?
Today the financial service industry consists of a multitude of different verticals, the vast majority of which are regulated & operated in silohed infrastructure. The financial service industry was never built from the perspective of a consumer, it was developed over time piece by piece due to array of different regulation and product roll outs. As Matt Harris alluded to, FinTech 1.0 was the digitization of legacy financial services. FinTech 1.0 allowed consumers to leverage technology to more effectively engage in their finances. There was an explosion in PFM tools due to the evolution of legacy players like MINT and Yodlee, and new entrants like Plaid and Quovo (now together), we saw companies like Wealthfront & Betterment in asset management, Acorns, Stash, and Robinhood in stock trading, SoFi in student lending, Square & Chime in banking, etc… With the increased adoption of API’s, we’ve started to see a trend of “rebundling” occur where each of these companies is horizontally expanding their product suite, however as they look to add new products they run into regulatory roadblocks. This isn’t unique to B2C companies, but incumbent financial service firms run into their own issues as they look to meet the changing needs of their customer base.
We’ll see a generation of middleware companies emerge to enable this horizontal expansion. These companies will be able to provide access to multiple account types via a single integration on the front-end, as they will be connected to multiple regulated entities on the back-end. They will offer bundled services for firms like Plaid & Dwolla, offload regulatory & compliance functionality such as KYC/AML to vendor specific domain experts, allow for multiple income streams, and have a master contract for all the B2B clients.
This technology stack has largely been built and is one of the key enablers of Autonomous Finance. Soon consumers will be able to answer basic financial goal and risk tolerance questions, to fully automate their personal finances. A paycheck will be deposited in a central hub bank account and will first be used to pay down high interest rate debt, while capital allocated towards historical spending patterns and recurring bills, will be segregated. Users will pre-define different savings goals, and money will be optimally allocated into the highest yielding savings accounts, short-term investment portfolio, and long term investment portfolio based upon said goals (e.g., student loan repayment, buying a home, saving for a wedding, kid’s college, vacation, retirement, etc..).
There are a few companies that have started the path towards autonomous finance, with firms such as Wealthfront viewing this as an extension of their original robo-advisory offering. The focus to date however, has largely been predicated on the asset side of the personal balance sheet. Unfortunately a well cited Federal Reserve survey noted that ~40% of Americans would struggle to find $400 in an emergency scenario. This means we need to be focused on optimal allocation on the liability side of the personal balance sheet. In a world of “easy” money, as capital is commoditized, lenders should be competing over consumer dollars, and as a result, end users should be able to instantaneously switch between credit providers for the optimal interest rate for their needs (e.g., lower monthly payment vs. lower total payment).
These companies will know consumer spending, saving, and investment trends better than their users. As the data sets become more robust they’ll be able to offer suggestions to alter behavior, and address well known behavioral finance biases upfront. These types of companies coupled with enhanced focus on financial literacy and adaptive learning programs should be a net positive for consumers while significantly altering the financial advisor landscape.
The problem with legacy PFM tools is they required too much manual intervention. They were mere aggregators that offered consumers a snapshot into their entire portfolio, however they didn’t suggest action, and most importantly they didn’t take action. This next generation of PFM tools will be “self-driving money” which should lead to healthier personal financial decisions for everyone and expand beyond budgeting with both optimized asset allocation and liability management.
Alternative Assets
We are in the early innings of watching a shift in asset allocation towards a higher allotment for alternative assets, from a wide array of end-investors. David Swensen & Dean Takahashi are crediting with popularizing the Yale or “Endowment” Model, which was highlighted in Swensen’s book Pioneering Portfolio Management. This strategy over-allocates to alternative asset classes such as private equity, venture capital, and real estate arguing that long-term investors are compensated for this risk premium. At present Yale targets a ~40–50% allocation to these types of assets and other endowments, pensions, and sovereigns have taken a similar approach. This type of portfolio allocation has historically only been accessible for these institutional investors and the ultra, ultra, high net worth given the minimum investment needed to have a diversified alternative portfolio.
Over the past decade we saw companies such as Artivest, CAIS, and iCapital look to “democratize” access to alternatives largely in the form of fund vehicles. They started creating master feeder funds, reducing minimums from $1.0mn-$5.0mn down to $100,000-$500,000 and have since perfected the parallel fund vehicle. While democratization is a stretch, they were able to offer HNWI access to products that were previously inaccessible. This minimum investment threshold has been a significant hurdle in optimal asset allocation. In the US there is ~$10-$12.0 trillion of investable assets held at RIA”s predominantly through two main channels 1) Wirehouse Banks ($7.0 trillion) & 2) Regional RIA’s / Broker-Dealers ($3-$5.0 trillion). While the average institutional investor might have a ~30–40% allocation to alternatives, the average individual at an RIA, clients at a Wirehouse bank on average have ~ 8–10% allocation to alternative assets, while those at a Regional RIA have a ~1–2% allocation. There isn’t a difference is sophistication amongst financial advisors, or net worth of end-clients, however there is a big gap in “access” and infrastructure. These aforementioned firms have targeted that gap and countless other firms will follow given the multi-trillion market opportunity.
Fund managers have taken notice and according to a Prequin study on The Future of Alternatives, the Alternative Asset industry is expected to approach $14.0 trillion in managed assets by 2023. The drivers behind this macro trend have been alternatives’ track record and enduring ability to deliver superior risk-adjusted returns, investors’ need for alpha, the decline in the number of listed stocks, growing opportunities in private debt, and the massive market opportunity in emerging markets.
We are in the early innings of seeing niche FinTech startups cater towards this trend with firms such as Cadre for commercial real estate, YieldStreet for maritime / aviation, Rally for collectibles, Axial for SMB lending, Royalties Exchange for royalties, and Masterworks for Art. As we look at the rebundling thesis that has occurred across FinTech with companies expanding their product offering to include some combination of hybrid checking savings accounts, fractionalized equity exposure, crypto exposure, wealth management, and lending we think the next vertical for inclusion will be alternative assets. Just as large asset management complexes such as Vanguard, BlackRock, StateStreet, Fidelity, Franklin Templeton, and Invesco have offered a wide variety of ETF products they’ll look to bundle alternative assets which will be included in robo portfolios.
This demand for alternative assets will call for a variety of different infrastructure to be built including most importantly an exchange for alternative assets. There are a number of companies vying to go down that path with some focused on private company shares such as EquityZen, Forge, and SharesPost, others have indicated it’s in their roadmap such as Cadre, or Carta with CartaX, and some have taken an asset class agnostic approach such as Templum.
Charles Schwab recently announced the launch of their Schwab Alternative Investment Marketplace Platform, following suit of Fidelity, and TD is in the works (although with the pending Schwab merger TBD). These service providers have noted the trend towards an increasing allocation to alternatives and want to capture that as financial advisors are compensated on Assets Under Advisory, and custodians Assets Under Custody. Connectivity to the custodians will be critical as a gate keeper to the key distribution channels.
Alternative Assets is one of the areas within financial services that’s still dominated by pen and paper. Subscription documents are cumbersome, these processes continue to be operationally inefficient, manually intensive and often times duplicative. We’ve seen a number of companies working to automate this process and given the fact that these investors are either accredited or qualified purchasers this come be the first area we see portable financial identities leveraged.
As this infrastructure continues to get built the barriers between those looking for capital and those with capital continue to shrink allowing for the creation of a capital markets web. Towards the end of the next decade we’d be surprised if there wasn’t a venue where companies were being underwritten by funds leveraging machine learning or individuals allocating as part of an alternatives sleeve, next to emerging managers connecting to capital allocators structured in such a way that all these instruments are tradeable.
The move towards alternatives will allow for the creation of a number of companies across the value chain to modernize these processes at each step along the process.
Bitcoin
Has there been a potentially more impactful yet controversial FinTech innovation over the last decade than Bitcoin? Written off for dead once a year since, relegated by most of Wall Street and Venture Capital as a “Ponzi Scheme” it continues to exist and is the best performing asset of the past ten years; and it’s not even close. The Bitcoin genesis block was mined January 3rd 2009, the first transaction occurred January 12th, we had the first exchange rate published October 5th, and the famous Pizza transaction took place May 22nd 2010 valuing BTC at $0.0025 per 1 coin. While we still have a month to go in the decade at peak we saw Bitcoin appreciate ~799,999% and it will finish the decade roughly ~+299,999%. Bitcoin is here to stay. If we look back in 2010 who would’ve predicted that by the end of the decade $17.0 trillion or ~70% of sovereign credit was negative yielding? Or that we’d see $1.2 trillion of negative yielding corporate debt? That quantitative easing would still be occurring globally? That central bank balance sheets would’ve expanded by $12 trillion+ this decade? We like to say that Quantitative Easing turned your checking account into cash, your savings account into your checking account, the bond market into your savings account, the equity market into the bond market, the venture market into the equity market, and the crypto market into the venture market.
If we look over history some researchers will point to an average life expectancy of fiat currency of 27 years, while others will note an average lifetime of 40 years with a median lifespan of 25 years. Either way Bitcoin has crossed the 10-year market while the Euro has now been around for ~18 years. Given the diverging geopolitical frictions in the Euro-zone we’d expect to see Bitcoin outlive the Euro and many other fiat based currencies, most likely in this coming decade.
While technologists like to point to the fact that the first entrant into a market often dies from obsolesces (Friendster / MySpace, AltatVista / Yahoo, etc..) the same isn’t true for money. No other cryptocurrency can emulate the properties that make BTC unique. It received $0 venture funding, it had a “fair launch,” a pseudonymous founder that has stepped aside, there was equal opportunity for individuals, sovereigns, institutions to obtain access, yet few did. With the macro backdrop alluded to above coupled with currency wars as China & Russia try to replace the USD as the global reserve currency, there’s an argument to be had for a sovereign-less universal pricing currency that has the properties of money, but is not tied to the ebbs and flows of politicians pushing for re-election. The digital gold narrative has taken hold and for good reason, if we look at Gold’s market cap of ~$8.0 trillion today, ~$3.0-$3.2 trillion is not tied to industrial or precious metal use case which implicitly results in a “money” / “a store of value” properties. There’s an argument to be had about how much the jewelry component, especially in places such as India accrue to SoV as well. We’ve seen the financialization of Gold over the past two decades with the introduction of the first Gold ETF in 2003 and would expect to see the same for BTC. At an ~$8.0 trillion market cap using the fully diluted 21.0mn BTC that will ever be mined results in a price of $380,952/BTC.
Another way to think about BTC is “un-confiscatable wealth.” Offshore banking is a strong proxy for this market demand and it is estimated that $13-$20 trillion is held in offshore accounts. Using these numbers is how you can approach ~$1.0mn/BTC, although this market won’t gain much market share unless and until we see a sovereign nation attempt to confiscate wealth held in BTC and fail.
We think BTC will surpass $100,000/BTC by the end of the decade. Not quite the return we saw this trailing decade but this will still be one of the top performing assets of the next 10 years; and the best part is everyone has access to it today.
Digital Wallet Cambrian Explosion
As alluded to in the prediction pertaining autonomous finance we are still in the earlier innings of Digital Wallets, however they are starting to serve as the gateway to the broader financial system ranging from everything including payments, to asset management, insurance, banking, PFM tools, lending, and tax reporting.
This trend is much more prominent in Asia, with the omnipresence of AliPay & WeChat which have seen a 12-fold increase in mobile payments in the 3 years ended in 2018 up to $24.0 trillion. As you walk around most parts of Asia you’ll get a quizzical stare if you begin to pull out a credit card, forget about cash, by the end of the decade the same will hold true globally. These wallets aren’t merely replacements for plastic cards. If you look at the homepage of WeChat over half the screen space is dedicate to eCommerce, travel, gaming, gifting, while slightly less than half the screen is left for the balance of financial services ranging from bill pay, to wealth management, and P2P transfer. The West is lagging behind in this regard but the early signs of FinTech re-bundling suggest there are a number of key players looking to fill that whitespace (we’d personally like to see a TWTR / SQ merger and let Jack lead the pro-forma company).
This past decade we saw many retailers roll out their own native “digital wallet” with Starbucks having the number one most used digital wallet for nearly the entirety of that time. In our opinion the hardware participants (e.g., AAPL, Google, Samsung) have significant advantages over software companies given the seamless user experience of simply holding your phone to an NFC terminal. In their last earnings call Apple noted users completed 3.0bn Apple pay transactions during their fiscal fourth quarter which resulted in greater transaction volume than PayPal, with 4x the growth. In August of this year, Apple rolled out the natively digital Apple Card alongside GS which will lead to copycat partnerships and increased penetration (e.g., Google / Citi).
Without the cost of physical bank branches and the lower customer acquisition costs some of these FinTech wallets have customer bases that rival the largest financial institutions with firms such as Venmo, Square, Robinhood, Coinbase, and Acorns would all be Top 20 financial institutions in terms of customer accounts. This means these companies will be the battleground for financial innovation.
In 1975 the SEC allowed for negotiated commission rates which led to the birth of firms such as Charles Schwab and TD Ameritrade. The brokerage account of the 2020’s will be the digital wallet with even enhanced functionality and smarter feedback loops. This is one of the truly global phenomena. Just as parts of Asia skipped the Fiber Optic era, there is a growing trend of mobile money from all corners of the world including most importantly China, India, and Africa (more on that below). The ability to link biometrics & financial identity to physical devices creates a slew of opportunities and risks that will also require startups to address.
Distributed Ledger Technology
While the Bitcoin White Paper was published only 11 years ago spurning the innovation of blockchain, it feels as if distributed ledger technology has already gone through more boom and bust cycles (from a capital allocation perspective) than any other enabling technology in recent history. In the early-to-mid 2010’s there was the “Blockchain not Bitcoin” movement held by Wall Street leading to the war chests of capital raised by the enterprise blockchain providers in mid-2015. That hype cycle was largely that; hype. There was this vantage point that DLT was a panacea that solved the world’s problems. Since that time we’ve seen little progress materialize from the early consortium that coalesced around companies such as Chain, Digital Asset Holdings, Ethereum’s Quorum, HyperLedger, or R3. What the market has started to realize is DLT is very good at certain tasks such as cross organizational reconciliation without a centralized risk point.
The thesis wasn’t off but the execution was. There’s a significant amount of “rent-seeking” within traditional financial services today. Depending upon the asset class there is some combination of trustee, custodian, transfer agent, fund admin, that’s not accretive to investors, funds, or asset originators but is a “cost of doing business.” Now this is partially driven from regulatory purposes (which unfortunately won’t change in the next decade) but if these incumbents have the tools to conduct these functions in a more efficient way their pricing power is mitigated. Firms like BNY, StateStreet, and Broadridge are considered to be systemically important institutions within the financial sector. Their primary “value-add” is rent-seeking in nature. If they can perform these functions leveraging new technologies in a more efficient construct, there are significant cost savings to be had.
You’re beginning to see green shoots of traction in areas that are manually intensive, operationally inefficient, and require redundant databases held amongst disparate parties such as syndicated loans (where faxing is still part of settlement process), FX, ABS, private placements, and securitization. We’re in the early innings of seeing institutional adoption with Vanguard piloting a program to improve efficiencies & reduce risk in FX hedging, with their technology provider Symbiont. Analogous to the capital markets “web” idea alluded to above, there’s no reason corporates, asset managers, and funds transacting on the same network couldn’t have enough liquidity to cross FX flow, with bulge bracket banks serving as liquidity providers of last result on that network.
One of the most exciting areas of DLT in financial services is the ability to disrupt securitization. While we’ve seen several efforts to address the securitization market, we have yet to see a complete offering of origination, sales & financing, servicing, and securitization done completely on chain. If you don’t have each of those components it falls flat and loses the benefits. Originators today are forced to aggregate assets to the tune of ~$150mn+ prior to securitization. Through the use of DLT and the reduction in custody, servicing, QC/audit costs there should be no minimum to which loans can be securitized, enhancing balance sheet flexibility for originators while allowing investors to create custom loan pools, with real time data visibility. The first ecosystem focused on securitization with the proper originators, servicers, sell side & buy side participants will be a significant barrier to entry for those to follow and could set market standards simply by being first.
Outside of these manually intensive markets we believe there will also be more prominent use cases in the concept of a financial passport / sovereign identity (it won’t be global but it should be enough to be interoperable amongst regulated FI’s within a single country).
We’re incredibly skeptical of anything “DeFi” related given the regulatory arbitrage resulting in a lack of true liquidity, however the concept of P2P lending and the capital markets web alluded to above could be built via a consortium of regulated entities.
Emerging Market FinTech
Africa looks destined to be the next China / India as it pertains to FinTech growth & adoption. Sub-Saharan Africa is home to the world’s largest free trade area, youngest labor force, and the 1.2 billion-person market and is only going in one direction. It’s hard to believe that Kenya kicked off the digital payment ecosystem back in 2005 with a beta version of M-Pesa and the public launch in 2007. According to the World Bank ~66% of adults in Sub-Saharan Africa are “unbanked” yet there are over 600 million Africans who currently use mobile phones. 21% of adults in the region having a mobile money account. This correlates with GSMA supply-side data on mobile money, which shows that Sub-Saharan Africa plays host to almost half of all mobile money registered accounts i.e. 396 million — of which 37% are active on a 90-day basis.
A Brookings Institute study found that the world’s 10 fastest growing cities, between 2018 and 2035, will all be in Africa. Nigeria alone is expected to add 189 million urban dwellers between 2018 & 2050. This urbanization trend is critical as those are the ones leading the push towards financial services. In Africa FinTech isn’t disrupting incumbents but instead leveraging learnings gleaned elsewhere to build a financial service industry from the ground up. There’s significant whitespace for product innovation across digital wallets, mobile money, bill pay, payment processing, lending, insurtech, brokerage functionality, and wealth management.
Some of the top FinTech companies of the next decade will be built in these emerging markets to solve local pain points. Just like in China & India where initially we saw emulation of the West, coupled with new innovations that didn’t have to deal with legacy infrastructure we expect to see the same thing in Africa. Would anticipate you see a proliferation of micro funds on the ground in Africa serve as partners to larger funds in the US as well given the domain expertise required.
Financialization of Everything
As we enter the next decade and look to the concept of FinTech as a platform in it of itself this will include the financialization of “everything.” The youngest cohorts of Millennials & all of Gen Z has grown up in this environment where everything from Sneakers, to eSports virtual skins, to Trading Cards can be bought and sold in some exchange construct. Some areas that we’re excited about include:
· Alternative Assets- We continue to come back to this theme but everything ranging from artwork, to collectibles, to private company shares to real estate to sneakers, will have a venue in which they can trade for both complete ownership and equity investing purposes.
· HELOCs- QE Infinity has resulted in homeowners’ equity reaching record-setting levels. As Boomers & the Silent Generation lack the traditional financial wherewithal to support increased longevity home equity lines of credit continue to be one of the assets that will see enhanced financialization.
· HSA- Health Savings Accounts or HSAs now offer users a number of the same benefits that 401(K)s do as you can roll them over year-to-year, with the added benefit of no tax penalty for actually using them for HC expenses, and the ability to invest those assets. According to Denvenir, by the middle of 2019 there were 26.0mn open HSA accounts with $61.7bn in total assets. A drop in the bucket vs retirement accounts but growing 20% YoY. People are just starting to invest their HSA accounts & that same study found that Investment account holders have an average $15,982 total balance (for both deposit and investment accounts), more than six times larger than a non-investment holder’s average account balance. More than a fifth (22%) of all HSA assets are in investments. This is huge white space opportunity.
· Income Sharing Agreements- We are still in the early innings of ISA and we think they are here to stay in some way shape or form not just for coding boot camps, but higher education more broadly, and hopefully trade schools as well. While the first ISA provider began operations in the US in 2009, we saw limited traction in the trailing decade. We think with the ability to securitize loans more frequently at lower notional amounts, the ISA industry will continue to develop and grow (and may even count towards ESG mandates). The ability to transact in these will result in more capital being allocated towards the sector.
· Reward Points- Reward Points are one of the largest currencies in the world (AmEx would be the #3 or #4 largest global currency any given day). We have yet to see the maturation of that market but there are several companies focused on that including NYSE / SBUX / MSFT portfolio company Bakkt. We’ve seen companies like Bumped look to offer reward points in the form of fractionalized equities.
· Sports- One of the areas we’re most excited about is the financialization of sports. Professional sport leagues have fought this trend for sometime but as the value of franchises continues to increase there’s fewer and fewer buyers able to own a team. Each of the big 3 leagues in the US has started down this path with MLB changing ownership thresholds allowing a “fund” to own up to 14.9% of multiple sports teams, the NBA has circulated a memo to owners looking to create a private liquidity vehicle for LP interests in teams, and the NFL is allowing owners to borrow up to $1.0bn for teams now. We’ve seen firms like Silver Lake actively invest in teams like MSG & Man City. We’d expect to see financialization of teams, memorabilia, athletes, etc.. The biggest market will be the proper financialization of sports gambling which will happen in both a B2B and B2C conduit given the repeal of PAPSA.
As a general rule of thumb we think there are really only three constructs of marketplaces that make sense in any given environment:
· Supply of One- Auction is the best format to optimize for price
· No Meaningful Supply Constraint- The Seller Lifting Model is ideal (e.g., Amazon)
· Supply Constraint- Stock Marketplace is the most efficient model
What does this mean? Depending upon the product offering we expect to see asset class agnostic centralized “exchanges” or vertically specific leading venues for each of the aforementioned areas that tie other services to the offering besides merely the transactional capabilities.
Financial Advisory
The role of financial advisors is constantly changing, and given the tools afforded to FA’s today and in the first part of this next decade we would expect to see a significant change in what the focus is from a product and portfolio allocation standpoint. Some key themes for FA’s include:
· Alternative Assets- As mentioned earlier we expect alternative assets to become an increasingly greater part of all portfolios. This will require an education process for both FA’s and their end-investors, which is currently a white space opportunity for adaptive learning tools.
· Blurring of Public / Private- Just like PE firms such as Vista Equity, Apollo, and Fortress have public equity verticals, we’ll see the same ring true for Venture funds as evidenced by A16z transition to an RIA. Companies that are still in the compounding growth phase such as ZM or earlier this decade SHOP, meet late stage VC thresholds better than they do most public equity investors (especially pre-index inclusion).
· Customization- Tooling should help FA’s serve more clients in a more customized fashion. There is no one size fits all as it comes to financial planning, yet despite risk tolerance and objective questions, alongside behavioral finance questionnaires, there has been little tooling developed that allow FA’s to customize their solutions based on these inputs and learned behavior / preferences. For younger generations impact and ESG continue to be of importance. We think you’ll see the “unbundling” of ETF constructs in totality allowing for S&P 500 less certain companies, or customized solutions tailored towards ESG.
· Financial Services for the Silent Generation + Boomers — While everyone is talking about the generational wealth transition (which is undoubtedly a significant macro trend) few people have been focused on financial service tools for Baby Boomers (55–73) & the Silent Generation (74–91) which need to have a different look and feel than those catered towards Millennials & Gen Z. Key functionality needs to consider bill oversight, budgeting, will preparation, estate transfers, longevity insurance, the ability to monetize assets such as home equity. This needs to be both web and app based with the ability to share with children, main care persons, and of course FA’s. Boomers will need help providing solutions around distributions and how to manage those
· Generational Wealth Transition- Over the next 30 years we’re primed to see the largest wealth transfer in human history with an estimated $30.0 trillion estimated to exchange hands form baby boomers to Generation Xers & Millennials. InvestmentNews completed a study that showed 66% of children fire their parents’ financial adviser after they receive an inheritance. This demographic has grown up largely digital native & wealth management continues to be one of the last tech-literate sectors resulting in an opportunity for existing FA’s to try to develop relationships earlier on, and more importantly a new generation of FA’s to cater towards those millennial and Gen Xers with enhanced tooling when they become the recipients of this wealth transition.
· Return of Fundamentals- It’s the return of the L/S fund manager or stock picker…kind’ve. We think the concept of 2/20 L/S equity management probably continues to decrease in size as fewer and fewer managers can compete with passive and quant funds. That said concentrated portfolios (antithetical to that of FA’s jobs) will outperform and we think you’ll see a proliferation of “Best Ideas” SPV’s where capital is called down when needed. These can be in the form of hybrid activism / constructivism funds, as well as event-driven trades pertaining to certain hard corporate catalysts which are two of the few areas that have fallen by the wayside to the “Quant-ification” of Wall Street.
· Student Loans- There are ~$1.5 trillion of student loans outstanding, average debt is growing, ad wages are stagnant. There is no way for students to pay off this debt in their life time under the current construct. We’ll need to see the ability to target student loans with pre-tax dollars whether through 401(K)s or directly, and expect to see this as an added employee benefit with employer matches. We’ll also need to see new forms of financing (e.g., ISA’s).
Payments
Payments have long been the holy grail of “FinTech” even before it was referred to as such (e.g., Xoom, PayPal), and for good reason as global payments revenue is expected to approach $3.0 trillion in the early part of this coming decade.
It doesn’t take a look beyond the financials of V & MA over the past decade to see why. During that time period V revenue has grown from $8.0bn to $22.0bn at a 11% CAGR, while MA has grown from $6.7bn to $16.9bn at a 11.8% CAGR. Even more impressively is Visa’s EBITDA margins went from 59.6% at the start of the decade to ~70% this year & net income margins went from 36.4% at the start of the decade to 53.8% while MA EBITDA margins went from 53.3% to 60.3% & net income margins expanded from 33.8% to 46.5%. Why? As constructed today credit card companies are effectively a tax or royalty on global spending. They benefit from ultimate network effects first on the vendor & consumer side, but even know in the digital wallet ecosystem AAPL, GOOGL, Samsung, etc… utilize V & MA networks. These network effects provide ultimate leverage in the business.
There are a several key themes within payments that we’re focused on over the decade ahead as we believe that end user experiences are still emerging. Some areas that we’re particularly focused on include:
· B2B Payments / SMB Payments- MA estimates that in the US alone the B2B payments market is in the range of ~$25.0 trillion annually, with checks still accounting for more than 50% of the overall transaction value. This means there’s significant room for technological advancement along several key criteria including real-time, global, cross border, and interoperable functionality. Although SME’s account for nearly ~30% of global imports and regularly execute international payments, the needs of SMEs are significantly underserved. For SME’s the B2B payments space will involve the linking of payments to purchase orders, embedding links for payments to connect with broader systems including accounting, the ability to solicit financing or push payments, and simplified onboarding for the entire value chain.
· Intracompany Payments- The in-house corporate treasury market is a $5.0bn+ annual market opportunity that is riddled with manually intensive & operationally inefficient processes where the majority of transactions are recorded in spreadsheets & reconciled over the phone. This creates significant friction from an audit / tax perspective and there Is currently a lack of viable market solutions that solve for this in real time. The biggest product on the market is SAPs “in-house bank” module which costs at a minimum $1.0mn to license and $500K to build with the inability to scale alongside complex organizations. This results in ad hoc solutions constructed internally for some of the largest companies in the world. There’s white space for a company to target this market which should lead for the ability to expand into adjacent fields such as supply-chain finance, inter-company payments, and TMS/ERP replacement.
· Real Time Payments- Globally payment systems are moving to real-time, however the US continues to lag. In FIS fifth annual “Flavors of Fast” they highlight that 54 countries live with real-time payments worldwide, which is nearly quadruple the number from their 2014 study. While real-time payments services continue to roll out around the globe, the “epicenter of real-time payment development remains in APAC countries, where volumes are surging and account for two-thirds of total global spending.” In August of this year the Fed announced their plans for FedNow offering 24/7 real-time payments to be available by 2023 or 2024. We’ll take the over but expect there to be significant downstream implications for businesses and individuals to have access to real-time payments unlocking previously captive economic potential.
Underwriting Disruption
While we’ve mentioned machine learning applications across nearly every prediction there is no greater area of potential impact than underwriting itself. As we continue to have access to an exponentially growing number of data points the ability to more accurately provide credit, in real-time, based on a wide range of borrower and item specific factors will be
· Disruption of Credit Ratings- The FICO score was first introduced in 1989 and we believe it should be clear to most that it has outlived its shelf life. Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. There will be exponentially different ways to measure this more accurately than FICO scores by the end of the next decade.
· PoS Loans- Affirm launched in 2013 when the point-of-sale financing marketplace was virtually non-existent. We’ve seen a significant increase in merchant adoption since that time table and we think credit could be underwritten on a purchase by purchase basis eliminating the concept of a single APR for credit card companies to stay competitive but instead offering bespoke interest rates for the $5.00 coffee versus the $5,000 vacation.
· Quant Funds as direct lenders- Quant funds had historically avoided credit markets given the idiosyncrasies associated with different tenors of corporate bonds, compared to the uniformity of public equities, FX, and macro assets. We saw an initial foray in the marketplace lending sphere and we expect them to continue to lean in as areas such as PoS loans and bespoke underwriting take hold. These types of firms will be a new source of competition with banks for these lending opportunities. We’ve seen firms such as OakNorth look to white label their own quantitative underwriting process and we’d expect to see that to continue to expand.
Over the next 10 years’ startups have the ability to significantly alter how we interact with financial services, which is arguably the largest TAM any single company could look to target. The winners will include a mix of FinTech firms, and those technology firms that look to embed financial services across their product offering more broadly as part of the “Fourth Platform” evolution. We’re looking forward to seeing the increased commercialization of those firms early in their lifecycle today, and those companies started in the back half of the next decade that we cannot even fathom at present.
