Innovations in financial services have been the bedrock of business and economic development since the dawn of time: there are hardly any opportunities for business or consumer growth without access to capital. Financial services included some of the largest, highly profitable industries who have historically underinvested in new technologies & innovations to improve customer experiences..
At Headline, we invest in revolutionary founders who solve these problems and uplift others. In fact we recently raised over $950M to do just that.
Over the past 20+ years, we’ve been fortunate to partner early with global category-defining fintech entrepreneurs - Headliners include Acorns (US), Raisin / Deposit Solutions and Swile (Europe), Pismo and Creditas (LatAm), Flutterwave (Africa), Zeller (Australia) and Yeahka (China) to name but a few.
In this post, we share our take on the future of fintech, rooted in a deep track record of investing in financial innovations. What will tomorrow’s funding and exit environment look like? How will generative AI and other technologies impact it? This analysis was compiled with input from our global fintech investing team, bringing together perspectives that span geographies and stages.
With teams on the ground in 8 cities around the world, Headline takes a local-to-global approach in backing founders from the earliest stages through the lifecycle of their companies. We’ve found that founders, no matter where they’re from, are often faced with similar challenges. Pushed by the same tailwinds, using technology and innovation to solve problems in one country is often repeatable around the world, as are the learnings.
Leading fintech companies from Headline's global portfolio
A great example of this is Pismo, a Brazilian fintech unicorn who was recently acquired by Visa for $1B in cash. When we first met the Pismo founders, they were focused on solving a problem in the local Brazilian market - simplifying the payment infrastructure for health insurance players. But a much bigger tailwind had risen: challengers like Nubank were entering the Brazilian market, forcing the established banks to realize that their own outdated legacy infrastructure was preventing them from innovating fast enough. So, the Pismo team pivoted away from healthcare, putting their technology to the service of broader payment and banking institutions. This led them to an explosive growth across the US, Europe, and Asia that continues today with a major partnership with Citi and their acquisition by Visa.
Pismo is just one example of the potential of this local-to-global investment strategy, and when driven by outstanding founders, the power of Headline’s global network.
FINTECH FUNDING AND EXITS CONTINUE LONG-TERM UPWARD TRAJECTORY
Fintech funding levels continue to grow substantially - nearly 400 companies raised rounds of $100M+ in 2021, which marked a >20x increase compared to just a decade prior. Despite the recent challenging macro environment and a drop after 2021, global fintech funding remains very high compared to other categories ($15B+ in Q1 2023) and accelerated again in the past months.
Source: FT Partners
The increase in venture capital funding into fintechs over the past 10+ years has also led to a corresponding increase in M&A and IPOs exits in this category, supported by private and public acquirers globally.
In 2021, more than $300B in transaction value was achieved in mergers and acquisitions. Some of the most notable M&A deals in the fintech space in recent years include the acquisition of Worldpay by FIS for $43B in 2019, the acquisition of Anaplan by Thoma Bravo for $10.7B in 2022, and Nasdaq’s announced acquisition of Adenza for $10.5B in 2023. Many of these acquisitions were driven by private equity players including Thoma Bravo and Vista as well as strategics.
There were also a number of high-profile fintech IPOs through 2021, including Nubank, Toast, and AvidXchange. Nubank, a Brazilian neobank, raised $2.6B in its IPO, making it the largest fintech IPO in history. Toast, a restaurant payments company, raised $1.5B in its IPO, and AvidXchange, a business-to-business payments company, raised $1.1B in its IPO.
Source: FT Partners
FINTECH AND THE DIGITAL REVOLUTION
The power of fintech lies in its ability to expand the reach of global commerce and make the world more accessible for all. Anyone can spin up an online store, accept payments from international buyers, and drop-ship quite literally within minutes. Not long ago, there were multinational businesses dedicated to each of these components.
Arguably, the ability to effectuate a financial transaction is the most critical leg to this stool, which original incumbents like Fiserv and Global Payments took hold of in the 1970’s and 1980’s. Then PayPal at the turn of the century. More recently, Stripe and Adyen in the 2010’s have been key accelerants to increasing global commerce. By leveraging fintech, consumers and businesses can increasingly access global markets and grow.
There are several key technological advancements in recent years that have allowed these more recent fintech behemoths to flourish - two of which we are excited about being APIs and Generative AI. As a fintech investor for the past 20+ years, we continue to be impressed by the evolution and advancement of the space. We’re very bullish on its continued role as a massive value driver worldwide.
1. APIs (Application Programming Interfaces) and microservices
Stripe, Plaid, Robinhood, and Pismo are some of the key beneficiaries here. Their businesses exist today thanks to APIs and microservices. These advancements provide seamless integration and connectivity between holders of financial data, and movers of money. They break down financial services into bite-sized data and processes, as opposed to the siloed, monolithic architecture that has long characterized incumbent financial institutions. This has paved the way for a more modular and flexible approach to building financial services; pulling of data from banks via Open Banking, the effectuating of payments, opening of bank accounts, KYC, etc. can now be done real time and at a fraction of the cost and time it has required in the past. The broader adoption of APIs and microservices is still significantly underpenetrated, so we expect to see continued innovation driven by their uptake.
Example of Pismo’s Account Creation APIs
2. Data and Generative AI/ML
The role of this technology in fintech’s transformation has become increasingly compelling. With arguably the richest source of data on consumers and businesses that exist, financial institutions and fintechs should (and do) have the ability to build products that are highly tailored to an individual consumer and business. Generative AI, and the explosion of its associated infrastructure, will usher in new ways of allowing fintechs and financial services incumbents to serve their customers even better. This has allowed fintechs such as Nubank and Creditas in Latin America to build custom lending underwriting models based on consumer risk profiles, providing them with access to capital that would otherwise not be available through traditional borrowing channels. AI is becoming increasingly pivotal in risk mitigation and fraud prevention: by intelligently analyzing behavioral patterns and transaction data, AI systems can quickly identify anomalies and potential fraud, drastically reducing financial risk and boosting consumer confidence in fintech solutions.
HEADLINE’S DEEP TRACK RECORD IN FINTECH & WHERE WE’RE INVESTING NEXT
Headline's Global Fintech Portfolio
In addition to our deep track record investing in B2B software and consumer tech, Headline has been a long time investor in six core categories of fintech.
As the pace of innovation accelerates, so does the need for greater synergies across both the infrastructure and application layers. The opportunity for fintech startups to continue to reinvent legacy business is major, and it's fueled by technological innovation as well as regulatory progress.
Specifically, we’re interested in the following use cases and key drivers across our six key fintech focus areas:
B2B payments
Today
The digitization of B2B payments is a theme we’ve long been excited about, given the manual/cash-based nature of incumbent methods. Improved access to central payment rails and modernized banking cores have promoted the acceleration of B2B digital payments adoption.
Early Headline investments in this area include:
- Azimo (acquired by Papaya) a leading remittance company
- Recurly (acquired by Accel-KKR), a recurring billing/payments company
- Yeahka (2022 IPO), which serves SMB merchants in China with POS/QR-code payments capabilities
- Flutterwave, which allows African merchants to accept online payments
- Zeller, which allows Australian businesses to accept payments and manage finances where incumbent banks lag).
- Pismo, an embedded payments and core banking provider that was recently acquired by Visa for $1B, in which we were Seed, Series A, and Series B investors.
- Elyn created a new payment option (“Try before you buy”) alongside a return management platform for retailers to maximize market share and profitability.
Tomorrow
B2B payments in the US is a ~3x larger market than B2C, yet only 7% of the $120T B2B payment volume is conducted digitally today (1). The large majority is still processed by legacy systems, encumbered by a lack of data standards, fragmented approaches to accounts receivable and accounts payable, and limited interoperability. Banks and financial organizations globally are set to transition their payment systems from SWIFT payments to the new, highly structured and data-rich ISO 20022 standard to facilitate faster cross-border payments. Banking cores and access to payment rails continue to improve, and when combined with increased uptake of API technologies and richer data, adoption of B2B payments will continue to improve over time. As the B2B payments landscape evolves, the integration of generative AI will accelerate the adoption of digital solutions and empower businesses with streamlined, efficient payment processes.
Areas of Opportunity:
- Real-Time-Payments (RTP): payments made between bank accounts that are initiated, cleared, and settled within seconds, at any time of the day or week, holidays and weekends included (24/7/365). Account-to-account payments has a lot of potential in EU, facilitated by PSD3
- Open Banking: gives rise to personalized financial services, customer-focused banking experiences, and the integration of financial services into non-financial platforms
- Vertical: assisting complicated or siloed sectors (insurance, healthcare, manufacturing, transport, energy, etc.) with moving payments beyond paper checks and ACH, using data to provide value-added services to corporate users
- Operations and optimization: streamlining operations to avoid disconnect through digitization, rail optimization, automation, transaction verification, fraud reduction, multi-processor support, and more
- Cross Border: providing international payments in cheaper, faster and data-rich methodologies
- Alternative Payment Options (BNPL, Try Before you Buy, etc.): deferring payments with interest-free options to drive higher conversion rates and ticket sizes
Wealth and Capital Markets
Today
Wealth management was previously a luxury reserved for the top echelon of society. The barriers to entry have eroded over time as online/mobile became more ubiquitous, reducing the traditional reliance on brick and mortar for financial advice.
Early Headline investments in this area include:
- Acorns, a leading savings and investment app for the US mass market
- WealthNavi in Japan and Magnetis in Brazil, both investment management plays
- Creditas,a leading Brazilian asset-backed lending fintech
- Raisin (merged with Deposit Solutions), a savings marketplace in Europe
- Keeper, a platform to help optimize tax for the US worker
Tomorrow
Consumers desire digital experiences and active involvement in their finances while valuing human interaction, thus ensuring the relevance of RIAs, and fintech advancements are streamlining wealth management workflows, enhancing advisor performance and providing personalized solutions to consumers. As much as $84T will change hands between various generations over the next 25 years (2). This will drive the need for estate, legal, and tax planning between generations. Regulators are taking action to promote fair distribution of alternative assets benefits by implementing measures such as increased transparency, better disclosure, and increased liquidity. Generative AI will further revolutionize wealth management as it enables advisors to leverage data-driven insights, automate complex calculations, and provide highly personalized investment strategies catered to individual client goals and risk profiles.
Areas of Opportunity:
- Financial Planning: digitizing advisor workflows to optimize their time while preserving the human element
- Tax: tools that revamp how consumers and businesses handle tax complexities, updated 2023 tax code
- Alternative Assets: making historically niche asset classes like PE, VC, and REITs more accessible
- Real Estate: capturing payment flows and democratizing the asset class as investors seek to diversify their portfolios
Embedded Infrastructure
Today
We strongly believe it makes sense to customers that financial services should be adopted at every point of interaction. Financing should be available to buy a product at the time of purchase, payment options should be embedded seamlessly into a mobile app, consumers and businesses alike should be able to apply for a debit or credit card, if and when they desire.
Early Headline investments in this area include:
- UK-based Weavr and US-based Solid, BaaS players enabling business customers to spin up accounts, cards and other financial services on behalf of their end customers
- Brazil-based Pismo provides full next-gen core banking infrastructure to established and emerging fintechs
- Defacto allows platforms & fintechs to create lending programs for their own customers
- Plumery provides banks with mobile and web apps
Tomorrow
APIs have allowed for the disaggregation of traditional financial services into modular, programmable components that can be used by banks, fintechs and new-to-financial services companies alike. APIs effectively create a set of rules that allow different software applications to communicate with each other, providing a means to integrate various financial services directly into applications and platforms. For instance, in the payments sector, APIs have allowed merchants to integrate payment processing directly into their point-of-sale systems or e-commerce platforms, bypassing the need for external payment terminals or gateways. Similarly, APIs from fintech firms like Plaid and Stripe have disrupted wealth management and lending by providing developers with the tools to integrate services such as bank account linking, data aggregation, credit checks, and direct payment functionality into their own apps and products. Going forward, generative AI could play a pivotal role in embedded infrastructure solutions by leveraging advanced algorithms to optimize API communication, automate data processing, and enhance the overall efficiency and functionality of integrated financial services.
Areas of Opportunity:
- Core Banking: allow aspiring banks to conduct and manage its basic operations including depositing, lending, account management, ledger management, transaction processing
- Lending: underwriting and risk scoring management for more efficient lending. Lending offered through non-financial products or service
- Payroll: ability to partner with a payroll company via an API to pay employees and contractors
- Treasury: manage bank accounts, move and track payments, and stay in compliance through APIs
- Payments: connecting and saving a payment method for later use at the click of a button
- Insurance: any insurance that can be purchased within the commercial transaction of another product or service
Financial Management Software
Today
Businesses are gaining greater and more sophisticated control over how they run their business, but each company size and industry adds a different level of complexity and customization.
Early Headline investments in this area include:
- Horizontal financial management companies including Zeller in Australia, freee! In Japan, and Payflows in France
- Vertical software companies that feature financial services components (including payments) such as AppFolio in property management, Housecall in home services, and Shopmonkey for auto repair shops
Tomorrow
Adoption of vertical and horizontal financial management tools (combining aspects of payments, accounts, cards, planning etc) is driven by the need for operational efficiency and strategic growth. Better data availability allows organizations to glean insightful business intelligence, enabling more informed decisions. Combined with improved payment connectivity, there is a heightened desire among businesses to control spending in real-time, which such software tools provide by offering instantaneous access to financial data and enabling immediate adjustments to spending habits. These tools can significantly enhance cash flow predictability, a critical aspect for financial planning and sustainability. The integration of generative AI can also empower these financial management tools to provide proactive recommendations, automate repetitive tasks, and offer in-depth predictive analysis, revolutionizing financial planning and enabling businesses to make data-driven decisions with even greater confidence and accuracy.
Areas of Opportunity:
- Vertical SaaS: specialized apps tailored to specific industry verticals (healthcare, construction, energy), addressing their unique financial needs and owning the payments stack. Read more in our Vertical SaaS 50 piece by Taylor Brandt, VP at Headline, published in partnership with Bain Capital Ventures.
- Expense Management + Financial Planning: monitoring and managing income and expenses, effectuating and integrating pay-ins and pay-outs, financial forecasting
- Procurement: ensuring compliance and providing workflow for requesting and paying for goods and services, alongside the unbundling of ERP functionality within small customer bases
- Data Aggregation: “single source-of-truth” for accurate, real-time, financial information
Insuretech
Today
Insurance is well known for being highly manual, by way of processes and data usage. That’s why companies dedicated to automation and offering better pricing and services to both consumers and business customers have succeeded in this space.
Early Headline investments in this area include:
- Health insurance companies including Bright Health in the US and Sami in Brazil.
- Pie Insurance which focuses on workers’ compensation
- And a yet to be announced investment in a payments workflow platform to assist P&C carriers disburse payments to homeowners and contractors
Tomorrow
Software tools that can reduce the burden on insurance companies and agents and provide a variety of services, from tooling that streamlines agent and carrier workflows, to insurance infrastructure that enables companies to offer turnkey insurance products. Similarly, there’s an increasing demand for personalized and data-driven insurance solutions. Insuretech companies are leveraging technology and data analytics to offer personalized insurance products and pricing based on individual risk profiles. This allows for more accurate underwriting, improved customer experience, and tailored coverage options. Generative AI could enable insuretech solutions to unlock new avenues for growth by leveraging ML algorithms to analyze vast amounts of data in real-time, enabling more accurate risk assessment and efficient claims processing.
Areas of Opportunity:
- Digital distribution and customer experience: Improving the online customer journey, offering digital self-service options, and leveraging data analytics to personalize insurance offerings/enhance customer engagement
- Claims management and automation: Leveraging AI/ML and automation to streamline and expedite the claims process, reducing paperwork, enhancing accuracy, and providing faster claim settlements for customers
- Risk assessment and underwriting: Leveraging big data and advanced analytics to assess risk profiles accurately, automate underwriting processes, and enhance pricing precision, resulting in more tailored and accurate insurance coverage for customers
Risk & Fraud
Today
While this has historically been a smaller category relative to other financial services sub-sectors, the increasing prevalence of underlying fintech capabilities such as payments and wealth is leading to an increased dependence on improved risk management and fraud mitigation via KYC, KYB, and AML functionality.
We invested in FirstAML out of New Zealand, which is improving the AML onboard process for services organizations.
Tomorrow
As digital financial tools become commonplace and businesses face an ever-changing and diverse range of threats, they'll leverage authentication tools like 3DS2 to help them mitigate a wide range of fraud risks and stay compliant with PSD2, which sets regulatory standards on strong customer authentication (in EU). New digital payment rails (open banking, push payments, RTP) require innovative ways to mitigate economic crimes - neobanks, digital exchanges, and credit unions are more likely to quickly adopt new RTP solutions (like FedNow) and will need to protect against fraud. Rise of online exchanges and fintechs necessitates new ID verification vendors that can prevent synthetic ID fraud, which cost financial institutions over $20B in 2020 (3). With generative AI, risk and fraud solutions will be empowered to detect and prevent sophisticated fraudulent activities in real-time by utilizing advanced pattern recognition techniques, behavioral analytics, and continuous learning algorithms, ensuring a high level of security and trust in the rapidly evolving digital financial ecosystem.
Areas of Opportunity:
- Onboarding (Identity / Authentication): digital, remote account openings are becoming more common which requires more sophisticated ID verification solutions
- Fraud / Transaction Monitoring: issuing banks and other FIs need robust KYC and KYB programs and transaction monitoring
- Compliance Workflow: managing the growing complexity of sensitive financial info flows and complying with regulations leads to the convergence of compliance/security tools for monitoring and data management
- Regulatory: new regulation hopes to mandate that cards issued by the major banks must be able to be processed over another alternative network in addition to Visa/Mastercard networks
Are you building in fintech? If so, we want to meet you!
Fintech has been evolving for decades, and we continue to see opportunities across the various sub-segments we’ve discussed above - and beyond.
It's our belief that the most recent technological innovations will only accelerate the space. We expect funding and exits to continue meaningfully into the longer term, fostering an even more successful global ecosystem. Please reach out to fintech@headline.com if you’re building anything in the areas above, we’d love to hear more!