Even before COVID-19, many VCs had begun to view the FinTech space as at capacity. With the economic downturn — which cut the Fed effective rate to 0.05% — many now view it as an existential moment for a large percentage of the burgeoning financial startups.
But Ross Fubini, a managing partner at XYZ Venture Capital, says he’s still bullish on the FinTech sector. Certainly, some companies won’t survive the liquidity crunch, but he thinks this economic downturn will be more like a stutter-step for FinTech as a whole.
We spoke to Fubini last week about the remaining white-space opportunities in neobanking and why he’s so excited by banking startups around the world.
Unifimoney: A lot of people view the neobanking sector as overcrowded now. But what do you see as a remaining white-space opportunity in the market?
Ross Fubini: A lot of the opportunities going forward are going to be going deeper on a vertical. For example, a set of financial solutions and a bank partner for dentists that understands their unique needs or for doctors or for real-estate developers and home-flippers. So, what’s most interesting now is not another consumer effort that’s sort of the Dollar Shave Club of Banking. What’s most interesting is being able to get real benefit from understanding not just marketing to one group, but also being able to uniquely serve them by doing a better job in either underwriting them or preparing products for those folks. That’s the area that I’m most excited about. It’s also a great way to build a startup because it allows you to focus your energy and attention, not just tune your CAC.
Unifimoney: COVID-19 has led to many VCs to pull money from burgeoning FinTech companies. Is this a disaster moment for the sector? Will the face of FinTech look completely different whenever the economy reopens?
Fubini: No, I don’t think so. There are still huge opportunities in FinTech and I’m investing there; I’m bullish there. But I do think that this creates a stutter-step for a lot of FinTechs because it affects their funding. While this is not 2008 where capital uncertainty is the main driver, the capital market’s push for liquidity means we’re seeing which business models are not as durable.
There’s a history of a number of companies saying, ‘We’ve got access to capital and we can outperform large banks that have depository lending at 75 BPs or have multiple billions of dollars on their balance sheet. We can outperform them.’ I think there are some companies that are going to see that that’s not actually true, because of the liquidity crunch and that’s gonna affect their business. Also, when interest rates are taken all the way to zero, it’s gonna affect things like deposit fees and that directly affects companies who either long-term were building their business on deposit fees or even just this year and next year were building it on deposit fees. That revenue is just gone.
But I’m still very bullish on the category. Maybe we can say, cruelly, that the water has now come out and you can see who’s swimming naked. But it’s actually something more nuanced than that — we’re seeing what happens when there’s a liquidity crunch and you don’t control your capital the way a lot of the competitors do. And some places where people were accessing capital, it’s gotten harder.
Unifimoney: What do people get most wrong about the future of banking?
Fubini: Right now, I would say it’s that people don’t realize that the banks are actually getting better. We’ve had a long history in the US of the banks being relatively terrible in terms of customer NPS and providing modern products, whether that’s your mobile banking app or your bill pay before that. But the banks are actually getting better and that is something that is a real change in the market. It doesn’t mean that every Wells Fargo, Citi, or Goldman Sachs is going to win, but they are not static players. And I think that’s something that people don’t fully grasp.
Another thing: the vast majority of the early-stage companies I see are either pitching me a marketing innovation or an underwriting innovation. But they often don’t really have an underwriting advantage; it isn’t true. That’s probably the big thing that people get wrong: do they have a really deep insight about an underserved market or are they just telling a story that they want to be true? Is the data they got rare or is that data common?
The last thing that I would mention is: these opportunities for financial services exist much more widely globally, because the US systems are more mature, do a better job serving customers, are more varied, and do a better job underwriting. As you get out into the broader global ecosystem, there are a lot more players, hence the reason we’ve had the Monzos and the Nubanks and all those folks have been successful. I think there is more and more global opportunity. That’s not where I spend a lot of my time, because I’m Bay Area-based, but it definitely is an area where I see a lot of new opportunities.
Unifimoney: Obviously, this current moment is affecting the whole world over. Will there be any regional economic realignment because of the recession? Are there regions where banking may change because of this existential economic moment?
Fubini: It will vary a lot country to country and region to region. Right now, we just can’t tell. We can’t tell where there are gonna be big capital shifts and where there aren’t going to be. We’re seeing that there probably aren’t going to be any in China — not only because they’ve gotten through this first phase of the virus, but also because the existing capital has always had such close governmental support.
But we don’t know how this is gonna pan out in Colombia, as an example. I suspect we’re going to see the same wide set of opportunities still available, because the needs are the same. Consumers and businesses still need access to capital and they’re relatively poorly served and the operational teams there are relatively poorly run. And, in general, the regulators in those countries want those companies to both be well run and they want everyone to be better served. So, I think the alignment that created the opportunity is still there. There will be some countries that will go slower because COVID significantly impacts the overall macroeconomics in the country or their currency, but that’s probably above my pay-grade to really speculate about.
Unifimoney: Our founder Ben Soppitt launched a digital bank in Indonesia previously. I know you also have an interest in investing in the region. What about Indonesia specifically makes it an attractive place to bet on a banking startup?
Fubini: I think Indonesia is a fascinating market, because it’s such a large population, it’s early in the adoption of multiple financial products — from credit cards to SMB lending — and thirdly, the regulatory structure there is being quite savvy with their enablement of new FinTechs and innovative companies. They’ve got a sandbox program and they’ve got good dialogue with the existing capital market players. So, I think those three things make it a pretty idyllic place to go develop FinTechs.
I think the last thing — this is really in the weeds of building businesses in Indonesia — is that Indonesia is actually a collection of many, many, many, many islands. And so, while you can digitally reach everyone, you can have different on-the-ground experiences, or even targeted experiences, and run different experiments in those different areas. And that’s gonna be a really interesting thing: do we see people that are strong in Jakarta or strong in certain island groups with a small business offering that is thoughtfully designed with the local providers? All that stuff is really fascinating, so there are fascinating businesses to be built in that space.
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