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The State of Fintech - December 2024

Right now the industry is preparing for a massive take off for the next two years. In late October, I wrote about my recent thoughts on the Fintech industry. Many of those graphs were from FT Partners, which produces excellent fintech industry content. I recommend checking out their site.

Today I will provide a deeper dive into specific fintech verticals. I’m not an expert in each category but I do want to begin tracking my investment thoughts over time. In a year or two, I will have covered more ground so it will be great to revisit this initial post in the future.

The Biggest Shift for Fintech in 2024 and Beyond

The new Trump Administration is bullish for the capital markets and therefore a positive catalyst for fintech. For the past two years, fintech has been dead. Regulators worked hard to restrict many advancements across the industry. There are a few reasons for this beyond crypto.

Yes, I know most investors, regulators and politicians are weary of crypto. The stories of debanking crypto startups have become popularized. Crypto has become a threat to many other currencies across the world. However, before crypto before the enemy of the state, regulators attacked the banking industry for years. In fact, the number of new chartered banks in America was down to almost zero for six years.

After the Great Recession in 2008, regulators throttled the industry for the better of a decade. Banking was once a healthy, competitive market but now is concentrated in the top percentile as the banking giants continue to get bigger. I’m all for free markets but the regulators made it almost illegal to charter a new bank from 2011 to 2016. This is also the same time period when crypto started blossoming. For reference, Coinbased was founded in June 2012. Today it is a $69 billion dollar publicly traded stock.

The Regulations in Fintech

Normally I wouldn’t start with regulations or compliance because it is a boring topic. However, I want to continue from the banking conversation. The Trump Administration and the Department of Government Efficiency (DOGE) has made significant announcements regarding deregulation.

Gary Gensler, the current Chair of the SEC, is stepping down on January 20th before the new Administration arrives. This is a leading indicator for change. Bitcoin and other crypto currencies have gone parabolic to the moon since this announcement.

Before getting into the investment opportunities, let’s discuss the state of regulations and compliance. I mentioned how new bank charters have fallen off a cliff since 2011. But I didn’t mention the challenges from Silicon Valley Bank (SVB) collapsing in 2023.

This was a major failure from the regulatory perspective. SVB had a mismatching of assets and liabilities which is why they had a run on the bank when rates rose. SVB was a major custodian for the startup industry.

Now typically someone would say new compliance challenges will result in a business. But I’m taking the contrarian viewpoint here. The business opportunities in fintech regtech are connected with compliance monitoring, risk management, fraud prevention, anti-money laundering and know-your-customer (AML/KYC) requirements.

With the new Administration and launch of new LLM/A.I. models, we will see a major positive shift when it comes to compliance challenges. The opportunity in fintech will be to reduce regulatory complexity at scale. I think major banks will find ways to cut compliance costs by 30-40% while still being compliant. This will turn out to be a profitable endeavor if more businesses pursue it.

Embedded Finance

For years, I didn’t understand the importance of internet money. When crypto had first started going mainstream in 2014, my misunderstanding didn’t come from finance but from technology. All of these internet companies didn’t have the latest payment portals. The web was built for consumers, not developers. Once this changed, new payment providers were adopted across the market.

Now lending, payments, and shopping were all popularized with these new embedded finance tools. Stripe and Shopify are the obvious recent winners. The payment portals for all of these businesses are only getting better. Which is why Stripe bought Bridge for $1b. It’s the largest crypto acquisition but only the beginning of the new payments revolution. Looking back, the Stripe deal will mark the beginning of a major acquisition trend.

A.I. and Fintech

Besides being an active user of A.I. apps like Gemini and Grok, I don’t know much about the underlying software. Personally, I had no clue how far the hardware and software had advanced over the years. Now it seems like A.I. is integrated into all the major apps.

Earlier I mentioned the opportunities with regulations and compliance. However, for fintech transactions in particular the real opportunities come from fraud detection, personalized financial advice, and customer service.

They are not all revenue producing efforts but they will increase profit margins for many fintech companies. Fraud detection is a major one that has been necessary since we started accepting payments online. With the new A.I. tools, it is important for banks to be on the offense when it comes to fraud detection. Without the right tools, it is easy to be fooled by nefarious players.

Next is personalized finance. Typically investors would think this only applies to financial advisors. But I think personalized finance can and will be implemented across every asset class that has a buyer and seller. Even at the institutional level, where investors are using Bloomberg terminals to execute massive trades.

This level of personalization matches the last element which is customer service. We are seeing this right now with some call centers for major banks. I think the trend will continue to the point where one bank’s customer service department is only run by A.I. Klarna has already started this by ripping out their HR department and replacing it with A.I. Which is an internal version of customer support but for employees. It’s happening.

Blockchain and DeFi

Crypto is obvious now. Coinbase has been leading the chart, and Robinhood is following suit with new crypto applications. Right now the industry is picking up serious momentum. Bitcoin prices are reaching all-time highs because institutional investors are jumping in.

I mentioned Stripe’s stablecoin acquisition but did not reference anything related to banking and lending. The new bank charters will embed crypto rails into their institutions.

Decentralized finance (DeFi) was popularized in the summer of 2021 because of its yield products. Those were global instruments but didn’t have access to the U.S. capital markets. This will change in 2025. The cross-chain solutions will become cross-currency solutions.

There is more to this crypto story but I’ll save it for future posts. The convergence of A.I. and robotics, both of which use tokens as a unit of measure, will need crypto as well. More to come.

The Biggest Threat

There are two gaps in the market that are constantly evolving in my mind. The first is that cybersecurity threats will get worse. In the Summer of 2024, we saw Crowdstrike had a software update that crashed millions of servers across the world. This wasn’t even a cyber attack. It was an internal malfunction.

I mentioned that the A.I. threats are getting real. Combined with cybersecurity challenges, it’s possible 2-3 major companies will be impacted. While fintech are prime suspects, I think many of these companies invest a lot in cybersecurity software. But the threat is constantly evolving and hard to stay on top of.

The second gap is talent acquisition. The fintech industry has been dead for two years. The new bank charters have been almost zero for a decade. All of the best talent has been retained and maintained at the big banks. It will be hard to compete for this talent pool.

Plus the skills gap is real. No one is learning about crypto or A.I. from an online class. You have to be in the industry. These are the most in-demand skills that are in short supply. This talent gap will close over two years but in the meanwhile, it is a serious opportunity.

The Future Looks Bright

This outlook is America focused. I think there are abundant opportunities in other countries but I don’t have the bandwidth to look into. For years, the underbanked in Africa, China and India were considered the biggest fintech opportunity. But I think crypto stablecoins helped solve many of those challenges, particularly when it comes to remittance and payment.

Right now, I would be gearing up to make more fintech investments in 2025 and 2026. At the moment, it looks like Klarna and Chimo will be IPO’ing very early next year. MoneyLion was recently acquired by Gen Digital because the market demand is picking up. Investors have an appetite for more deals.

So instead of only looking at public market companies, take a look at private fintech players that are popular too. Stripe is a major example. Find out what other companies have been stifled by regulators and didn’t have the need to go public. I think the new year will change the industry, valuations will pick up and investors will demand more opportunities.