Co-Founder at Klaros Group | Advisor to Bank & FinTech Boards and Mgmt Teams | Board Director | x Chief Banking Officer, COO, EVP | x Counsel to the Senate Banking Committee | x Senior Deputy Comptroller of the Currency
Here’s a one-word summary of the current outlook for innovation in U.S. financial services: bleak. Take a look at the chart below, which shows the launch dates of fintechs currently engaged in partner banking. (Note that our definition of fintech entails offering financial services through a bank.) Almost one hundred new fintechs launched in 2021, just three years ago. But in 2024? It’s an open question whether we’ll make it to five. We may well see the lowest level of fintech formation since 1993. What happened? In a nutshell, two essential hurdles to launching a fintech have become much higher. For wannabe fintechs, raising capital and finding a bank partner are both a whole lot harder than they used to be. Is that a bad thing? Not all bad. Fintech valuations seemed nutty a few years ago; they’re arguably less nutty today. And we’ve learned some painful lessons about the consequences of poor risk management in fintechs and their partner banks alike; arguably, bank partnerships should have been harder to come by all along. Sound valuation and prudent risk management matter. But innovation matters, too. For the past two decades, financial services innovations powered by fintechs and mainstream financial institutions responding to fintech competition have benefited all of us. This chart says those days may be over.
From my work in the civil service on banking competition in the U.K. post-GFC and subsequent evolution of that market - it’s clear to me that new entrants are only part of the “innnovation” story but a critically important one. Without innovative new entrants biting at their heels and threatening to take market share because they solve pain points for existing customers, incumbent banks don’t have an incentive to innovate or improve customer service. I don’t doubt that your chart shows the (probably previously too free, probably now too constrained) flow of capital to start up fintechs, but I also think a bit of creative destruction (or acquisition) among those launch fast fail fast new entrants is also needed to make them true challengers or spur sustained changes to large, incumbent banks.
From my perspective representing almost exclusively startups, I don’t see how the number could be that small. We are only one [tiny] law and consulting shop and we’ve had three clients launch this year, with two others likely to launch before 2025 (in’shallah). I guess we need to define “fintech”? (And I don’t disagree that the outlook is bleak when compared to 2017-2021). I’ve had multiple clients close >$10M funding rounds in the last six months. Stripe acquired Bridge for a $1B. Finix just closed a huge round. Another client was just acquired. I felt inspired at Money2020.
The lesson I see in today's scenario is that responsible innovation matters not just innovation. Nobody ever thinks innovation is wrong. It is necessary. But it can succeed only if risk Management becomes a necessary part of financial innovation as it involves life savings of consumers. Hopefully the next generation of financial innovators will learn from this
Konrad Alt Provocative chart. Two observations: 1. Not all innovation stems from start-ups. Arguably most start-ups were driven by founders/VCs chasing moonbeams. The chart is more about realism being injected into the industry. Ron Shevlin 2. Innovation is arguably limited at this time. We are witnessing variations on a theme rather than breakthroughs. ETFs were a breakthrough with an impact well beyond just lower costs. ATMs might have been the last real innovation in retail banking!
That's a powerful way to show what many people know by experience.? In 2024 the number is definitely higher than 5 though. Unit alone saw bank customers approving programs well above this number this year. But directionally it's very true- banks are slower and more picky.
this is only because the outlook for banks is bleak. There is tremendous and widespread fintech innovation happening outside of regulated banks.
This is an interesting chart. But I think context and details do matter here. "fintechs launched" certainly is one sliver of innovation (I presume you mean, new fintechs only?) But innovation is wider scope that just that, no? Existing fintechs and incumbents ... or tech firms creating new solutions with FIs?
For FinTechs that focus on Payments and not Deposits or Lending, what we need is a simplified federal Payments/ Money Transmission law/Charter but for this, we will have to wait for Congress to act!
Trend looks convincing for the reasons you mentioned. Numbers in 2024 probably don’t include unfunded or companies based outside US but serving the US market.
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9 个月Dangerously misleading data (though I am normally a fan). The problem for me is how to define a FinTech; and I’m guessing “business model is financial services focused” is your parameter (which is a fair definition). However we see an explosion of embedded BaaS in our data, the vast majority of which is non financial services companies so while I loosely agree with your direction it’s only half the story and today it’s the wildly unimportant half. BaaS is hotter than ever in brands…