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Earlier this year, we analyzed venture capitalists’ predictions for fintech in 2023, and what we found was surprising: Out of a group of 15 peer VC firms, the vast majority didn’t even mention the word “consumer.” Fast forward to today, and that sentiment has persisted. The agenda for the recent annual Money20/20 fintech conference only had a handful of consumer-oriented sessions over the course of its four days of programming. Consumers, it seems, are just not on the industry’s mind.
It’s not crazy that my VC friends and peers aren’t putting a ton of energy toward new consumer fintech models right now. After all, the last 24 months have brought about a reckoning in fintech: valuations continue to see “significant downward pressure” from their frothy peak of 20x revenue, heightened interest rates are upending some business models, and banking sector instability has caused everything from perceived to existential challenges for the fintech industry. Saying the last two years have been rough for the sector would be an understatement–and that’s particularly true for consumer-focused businesses.
The conventional VC wisdom is that, during a period of macroeconomic volatility, the opportunity lies in B2B companies. B2B, the thinking goes, provides greater predictability and, depending on the sector, even countercyclicality. I understand the draw of B2B. I believe fintech has only scratched the surface of what is a massive opportunity to rebuild our outdated financial infrastructure and modernize B2B financial software. However, I’m going to make what seems to be a fairly contrarian prediction: The next great wave of generational consumer (and B2B2C) fintech companies is taking shape right now.
In the wake of financial volatility, big companies get built to solve new financial pains
To understand why the next generation of consumer fintechs will emerge, we need to rewind the clock to the early 2010s, in the years just following the 2007-2008 financial crisis. While most people didn’t know it yet, technology was about to completely remake the way consumers interact with financial services. The ground was shifting.
It was in the wake of the Global Financial Crisis that the first meaningful cohort of iconic consumer (and B2B2C) fintech companies were created: Block, Chime, Coinbase, Nubank, Robinhood, Stripe, and Venmo (which was acquired by PayPal).
The convergence of three seismic events caused this explosion of companies:
- A macroeconomic upheaval
Bank failures amid the Global Financial Crisis (GFC) triggered a massive loss of confidence in the traditional financial system.
- A demographic shift
A new generation of digitally fluent consumers (millennials) began entering the workforce in droves with expectations of being able to transact with and manage the money they were earning digitally.
- A technological disruption
Mobile created a new form factor and set of potential functionality, driven by the introduction of the iOS App Store in 2008.
I felt these shifts myself and they gave me the conviction to make bets that, candidly, raised some eyebrows at the time. Take Chime, where I led a Series A round in 2016. Chris Britt and Ryan King founded the company in 2012 and, as we know now, it put digital-first banking on the map in the U.S. However, in Chime’s early years, most investors were skeptical that consumers would turn to a digital-first solution. How I wasn’t fighting tooth and nail to get into a company with such massive potential and such talented leadership still baffles me.
Here’s what Chime saw that others didn’t. For starters, new regulations created in reaction to the GFC were enabling smaller or emerging banking players to compete with large money-center banks in new ways. Second, the vast majority of millennials were living paycheck to paycheck and were also highly distrustful of legacy financial institutions coming out of the GFC. They were looking for a banking experience that engendered trust and that was built to help them solve their occasional cash crunch. Finally, for this population, the convenience of mobile-first banking significantly outweighed the benefits of brick-and-mortar branches.
That seems pretty obvious now–but it wasn’t then.
History repeats itself
Fast forward to 2023, and we are in another one of those unique moments when the consumer financial experience is ripe for reinvention. The ground is shifting again–and it looks strikingly similar to the early 2010s.
- We’re once again in the midst of macroeconomic volatility
Inflation rates not seen in decades have led to a steep rise in interest rates. This has caused everything from financial industry instability in the form of commercial bank failures to consumer sentiment touching lows not seen since 2008.
Even as inflation has cooled, consumers have struggled to afford basic everyday goods, with unit prices for essential items such as milk and gasoline averaging $1 more than they did just a few years ago and likely to remain elevated. Consumer debt levels are staggering. When it comes to major purchases like houses, it’s no surprise that consumers are expressing the most negative outlook on record.
On top of that, a recession could still be in the cards. When consumers are in financial pain, they look for new solutions.
- A new generation is coming of age.
The older members of Gen Z are now entering the workforce, and bringing with them a unique set of characteristics and views on financial life. With their deep immersion in technology also comes an expectation that platforms will offer highly personalized experiences, still absent from most consumer financial products today. Gen Zers are also much more “financially social” than their predecessors–having created the “FinTokker” and demonstrated a desire for more collaborative financial products.
Meanwhile, 52% of Gen Zers report feeling worried about not having enough money, which may explain why almost 2 out of 5 members of their generation say they earn money working both a job and a side hustle, according to research from EY. These multiple sources of income create new complexity and a new set of financial needs.
- There’s a meaningful technology shift underway
Artificial intelligence appears to be the first major–and soon-to-be ubiquitous–technology upgrade since mobile, and it has a wide range of potential applications for financial services.
AI has the power to democratize access to the financial services that were previously reserved for a select few, create real personalization, and meaningfully enhance financial literacy.
These shifts are seismic. The lessons of the past decade tell us that changes of this magnitude create space to reimagine and improve the financial experience for consumers; to solve real pains. For entrepreneurs and investors willing to make a seemingly unpopular leap, the potential impact can be enormous.
Lauren Kolodny is a co-founder and managing partner at Acrew Capital, where she leads the firm’s fintech practice. Lauren led the 2016 Series A round in Chime. Other investments include Pie Insurance, Klar, La Haus, Divvy, Gusto, Papaya Payments, Creative Juice, and Paceline.
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