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When I first heard that QED Investors and BCG were putting together a report on the future of fintech I knew it was going to be good. I was not wrong. Never before have we seen an in-depth and rigorous analysis of where the industry is today and more importantly where we are headed.
The report is titled Global Fintech 2023: Reimagining the Future of Finance, and it provides a level of optimism that has been missing in fintech for the past 12-18 months. But this is not blind optimism, it is based on data and research, both qualitative and quantitative. The finished product is a seminal report that has been the talk of the industry for the last month and a half.
My next guests on the Fintech One-on-One podcast are Nigel Morris, the Co-Founder and Managing Partner at QED Investors and Rishi Varma, Managing Director and Senior Partner at the Boston Consulting Group. Nigel gave a presentation on this report at the recent Fintech Nexus USA event (video here) but in this interview, we delve deeply into the genesis of the report, some of its key findings, and what it means for the industry.
In this podcast you will learn:
- Why QED and BCG decided to come together to produce this report.
- The size of the financial services industry globally and fintech’s part in it.
- The methodology they used to arrive at these global revenue numbers.
- A chronicle of the last three years in fintech.
- Where we are at today with equity funding in fintech by stage of company.
- The growth of fintech globally over the next 7 years and where this growth will come from.
- The eye-popping size that fintech is expected to be in 2030.
- What verticals within fintech will see the most growth.
- Why embracing financial inclusion has enormous potential.
- How and when will fintech become as profitable as the incumbents.
- The biggest risks to the growth of fintech.
- What is most exciting about the future of fintech.
Read a transcription of our conversation below.
FINTECH ONE-ON-ONE PODCAST NO. 437 – NIGEL MORRIS & RISHI VARMA
Welcome to the Fintech One-on-One Podcast, this is Peter Renton, Chairman & Co-Founder of Fintech Nexus.
I’ve been doing these shows since 2013 which makes this the longest-running one-on-one interview show in all of fintech, thank you for joining me on this journey. If you like this podcast, you should check out our sister shows, PitchIt, the Fintech Startups Podcast with Todd Anderson and Fintech Coffee Break with Isabelle Castro or you can listen to everything we produce by subscribing to the Fintech Nexus podcast channel.
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Peter Renton: We have a special treat for you on today’s show, I am delighted to welcome Nigel Morris, the Co-Founder & Managing Partner at QED Investors and Rishi Varma, the Managing Director & Senior Partner at Boston Consulting Group. The reason I have these two gentlemen on today is QED and BCG came together to produce what I think is one of the most important reports in fintech that we have seen in a long time. Basically, it’s taking where we are today in fintech and extrapolating out where we’re going to be by 2030 and there’s actually a lot of optimism with this report. Let’s face it, fintech in general, for the last 12 to 16 months, has been pretty negative, there’s been a lot of negative talk, there’s been layoffs, there’s been companies going out of business.
What this report does is sort of tells us, shows us where we are today, but then shows us the trajectory on where we’re going to get to and talking about 6X the size globally that fintech is today by 2030 and we break that down, we break it down by region, we break it down by vertical and we talk about, you know, what is going to help us get there, the challenges that we’re going to have to overcome to get there. We talk about the profitability of this industry and how we’re going to become more profitable, we obviously talk about valuations, but this is a report that was really grounded in, you know, rigorous, rigorous analysis and that will come through as you’re listening to the show. Hope you enjoy the interview.
Welcome to the podcast, Nigel & Rishi!
Nigel Morris: Hello, sir, thanks for having us.
Rishi Varma: Hi, Peter.
Peter: Of course, of course. So, let’s kick it off with some introductions and a little background. I mean, Nigel, most people, most listeners will know who you are but I still think we should give you, give a formal introduction and a little bit about yourself in QED.
Nigel: Yeah. So, thanks for having us on, great to be teaming up here with Rishi from the Boston Consulting Group, they’re very excited about this conversation. Me, I’m actually the Founder at QED Investors, we are a global fintech investors, 200 companies over 15 years, $4 Billion under management, 28 unicorns, really very focused on this space from seed all to the way to later stage. Prior to that, I was President & COO of Capital One for ten years, I co-founded it with Rich Fairbank and before that, like Rishi, spent some time as a strategy consultant so really happy to be her.
Peter: Okay. Thanks, Nigel, and Rishi, I don’t think most people know the Boston Consulting Group, tell us a little bit about yourself and what you do there.
Rishi: Thanks, Peter. So, you know, I’m a Managing Director & Senior Partner at BCG, the Boston Consulting Group, you know, based out of the US, of course. You know, I grew up as a software engineer, so my heart is more on the tech side of the fintech. While I love the overall aspect of, you know, what fintech is bringing to market but the disruptions are the core of it, you know, from a tech perspective and that’s where I find my passions lie more so than anything else, of course, working closely with my colleagues that focus on the financial services industry in particular.
You know, this is the combination of the FI practice within BCG and the tech practice coming together and really taking a point of view on an industry that we are so excited about, the future of and, you know, the level if disruption that’s possible. And we believe is going to happen in the next decades to come, you know, makes us really excited about it and me, personally, you know, I feel that being part of this evolution, if you will, gives me a lot of energy and, you know, hence when the opportunity presented, you know, I jumped at it and so really excited to be here today.
Peter: Alright. Well, excited to have this conversation because, you know, obviously we’re coming together because of the report that came earlier this month. We’re recording this in late May and titled “Re-Imagining the Future of Finance” and it was really just an amazing report, we’re going to dig into it deeply over the next half hour or so. But before we do, I just want to hear about the genesis of this report, how did it come together, why did you decide to do it?
Nigel: Let me kick off on that and then Rishi can engage on it. Look, we got through the processes, a lot of really in-depth conversations with our investors at QED and we found them asking a very transient question which was look, where are we in this revolution or evolution? Are we are the early stages, Chapter 2 or are we in the later stages, the low hanging fruit has already been taken down. established and the incumbents will now dominate Chapter 8. And, you know, they were asking that question why because they, I think, were seeing the long arch of digitization, taking away friction, some of the benefits and the powers that young startups bring to the table to break through.
But they were also seeing, you know, pessimism, shall we say, and adjustments in values, public and private, across tech, for sure, and particularly in fintech and therefore asking the question where are we? I thought it was just an amazing question and we reached out to BCG and said look, can you help us think this through, I mean, you’re analytical on how are your perspective worldwide financial services is uncontested and look, let’s partner up here. We have a unique insight at what’s happening at the molecular level with small entities where the breakthroughs are coming from and BCG has this enormous, big picture so we started chatting, Deepak and Rishi and Steve Thogmartin of BCG and it came together really quickly. We said, okay, let’s take a run at this and what was marvelous was in a really relatively short of period of time we really started to get our arms around that Chapter 2 versus Chapter 8.
So, I think, and I really believe that this report is actually dripping with optimism and dripping a long term perspective which is sadly not out there in the media as much as it should be because the longer term trends are, in our view and in the report’s view, inexecrable and we’re going to see enormous growth in fintech over this next seven or eight years to 2030, one. And two, we quantified a number of things in this report that I think many of us know intuitively but we didn’t really ever get our arms around the specific numbers and when you start to stare at those numbers, I’m sure we’ll get into them, you really go, my golly, the opportunities are massive.
Peter: Right, right. So, Rishi, when was this and how did sort of BCG kind of, you know, how did you kind of decided to get involved?
Rishi: Yeah, Peter. We, as you know, always are looking to find innovative perspectives on the industry, and in particular the financial services industry, and where the bucket’s moving. You know, we have a wealth support, we have a payments support and many other things and we just felt there was a massive vacuum from our perspective in the dialogue around the future of fintech. And just, you know, the power of disruption that we were seeing in the market relative to how fintechs were disrupting the market, the rise of Web3 and crypto and many other elements in there, you know, neobanks and payments layers and lending, players, etc. just, you know, a real fascination for how this market was evolving.
We thought, you know, we need to take a perspective and as we were starting to construct that perspective it was a really, really amazing time, Nigel and his team also reached out and we had that connection and we said oh my God, this will just be the most amazing thing to bring both perspectives together to really drive an objective point of view on the market. And, you know, when we did not just, you know, look at QED as a co-collaborator here but we wanted to be objective. We spoke to a number of different VCs, we spoke to many incumbents, we spoke to a number of CEOs of leading fintech companies to get their perspectives, globally too, not just an American point of view, but many of them across different geos to say alright, what is an objective, quantitative view of the market, especially forward looking.
That was one thing that we quickly identified as we looked at all the different reports and perspectives that were there in the market. A lot of it was, you know, not done on analysis, done on a look-back basis to explain where we are now was where we think the path is going and what is it that we are going to see the overall arch of this industry as Nigel suggested earlier is going. While we don’t have a perfect crystal ball but I think we’ve taken a pretty quantitative, fact-based view to where we think this, you know, what the arch of the possible can be.
Peter: Right, right. So, it sounds like there was a co-related piece of it and a qualitative piece with the interviews but before we get to the guts, I want just sort of put the lay of the land out there because one thing that I’ve never seen before was the size of the financial services industry and where fintech stands within that globally. So, maybe we could start there and just talk about……maybe, Nigel, you can give your perspective here on how big are we talking about?
Nigel: So, let’s start with some basic sort of building blocks of the edifice of financial services, You know, in many countries we see financial services and we define it as banking and insurance as 20, sometimes 25% of GDP, enormous. If you compare the size of financial services with other major industries and verticals, it’s often the biggest or next to the biggest across any geography. Two, the study points to the fact that revenue across global financing services, again, banking and insurance, is $12.5 Trillion, yes, yes, with a T not a B, a T, and it’s just an incomprehensively large number and the profitability from that $12.5 Trillion is $2.3 Trillion.
A way of putting that into context is I went back and looked at how big $2.3 Trillion profitability is vis-a-vis the size of various countries and it’s bigger than the GDP of Italy so it’s an extraordinary number and it’s just absolutely massive. When we started to peel the onion on building up from different fintech, you know, platform by platform and doing it, you know, building up in a very, I should say, atomic basis, we found that the revenue from fintech against that $12.5 Trillion was $245 Billion as I remember it right, Rishi……..
Rishi: That’s right.
Nigel: ……..which means that fintech revenue as a percentage of total revenue is a whopping great 2%. So, in some ways the Chapter 2, Chapter 8 question is almost resolved when you look at those numbers, 2% penetration and Rishi can go into this. I’ll let him take it in a second and what the study projects forward how the growth of fintech will accelerate vis-a-vis the growth of the incumbents and, you know, that $245 Billion going forward we think will go up by 6X, if I’m not mistaken, to 2030 so that’s going to go up by an X basically every year. So, I thought these numbers were just astounding and I do have a dog in the fight even though BCG did not. It was just reaffirming and corroborating the fact that we are just at the beginnings of an enormous change that’s going on in financial services.
Peter: Right, right. So, Rishi, those are big numbers. How did you come to those numbers, can you at least give me some methodology because we’re talking about revenue here and much of financial services are public companies with publicly available financials but fintechs, plenty of private companies, I’m just curious about the methodology in arriving at those numbers.
Rishi: Yeah, Peter. As you can imagine, within BCG working with, you know, many of the incumbents, we track very closely all the revenue that is available on public domain relative to each one in the markets and by segment. So, we have a really good point of view on just, you know, proprietary data that we maintain within BCG as those revenue boards, and we track them pretty closely based on the available information.
In additional to that, we do have, you know, open data on some of the fintechs that are publicly available and then we looked at penetration rates relative to that in all the different segments and, you know, we extrapolate it, you know, different leading fintech companies and the impact within a certain segment. And we extrapolated that, made some assumptions around that to come up with the overall penetration numbers by segment, where it’s stands to make and then how we think that is going to grow relative to a growth model of where we think the overall segments expected to grow within the next ten years and then what share of that is going to be for fintech, Peter. So, that was broadly the methodology that we used.
Peter: Right, got you, got you, okay. I want to talk about that growth a little bit, but before we do I want to go back to sort of where we are today because, you know, people talk about the fintech winter that we are in and obviously funding has dried up for fintech compared to where it was certainly in 2021 and early…….and we also have, you know, there has been I think……the public companies are clearly, you know, being valued every day, it seems, at a lower valuation of what they were even just a few months ago. So, I’d like to maybe……Nigel, you’re following this and obviously you’re still investing in the space, where has the slow down in funding been most dramatic, I’m talking about what stage of funding.
Nigel: Yeah. Just a second of what Rishi said, you know, we broke down into a series of arithmetic assumptions that we listed at each of those assumptions for intuitive validity and historic growth rates and then we……I know you multiply them through to get to what you think is going to happen. We could quibble about whether or not fintech is going to grow by 4X or 8X over the next seven years, but the momentum and the pace I think is very hard to contest. So, you know, Rishi pointed into this, there was as lot of science and a lot of art that went into pulling something like this together so it was a sort of complete and really sensible piece of work.
So, let’s go back to….in QED’s history, we’ve been investing now for 15 years, and specifically in fintech and when Frank Rotman and I began this journey there was no such thing as fintech.
We were just applying Capital One style heuristics to early-stage companies so we had 13 years where everything basically went up into the right, it was a wonderful time, I talked about them being the salad days and glory days, etc.
And then what happened is, you know, we had this last two to three years has been a series of shocks to system, this is diagnosed in a little bit. So, first of all, COVID happened and then we saw we were going to go into a very deep and awful recession. I mean, three years ago we were all worried about our own health and not many of us had not had COVID touch our live or the lives or the lives of loved ones in palpable ways. So we were worried about that, but there was enormous government reaction and injection of liquidity into the system and we rode it out. What happened at that time was fintech took a step function in its adoption.
I point to a company like Remitly where I’m on the board, a public company, we led the A stage oh so many years ago. People did not want to queue up at Western Union at the time of COVID and they realized that the mobile phone was a wonderful way at a lower price with better customer service to send money from developed to developing countries and they did it in droves and they got over the inertia of moving from an analog model to a digital model. That phenomenon occurred in hundreds of different situations across financial services. So then, we saw the growth started, then we had everybody beginning to jump on the bandwagon of look, fintech is a real thing, these companies are really exciting, they’re growing at dramatic rates, they’re creating breakthroughs all love the place.
That led to a whole new cohort of investors that came into the space often motivated by FOMO who beat up the valuations dramatically and diligence effectiveness compressed dramatically, and we found that the valuations of these companies went from, you know, 5 or 6X revenue before all these happened to 20X revenue. These were days when capital was cheap and plentiful, and we saw an enormous injection of liquidity into the system. And like all things that feel so good for a short period of time, it started to come on down, Putin invades, provides chain disruption, everybody’s worried about inflation, interest starts to go up, capital becomes more expensive, capital becomes less available and many of the people who would jump in, jumped out just as quickly as they jumped in.
And with that, we saw the winter emerge and I think understanding and chronicling that, and I’m sorry it was so long, chronicling that, the last three years, is really important to understand because these are short-term, relative short-term prohibitions (?) against the arch, the long-term perspective the study points to which is inexecrably there is going to be a move to digital, inexecrably there is going to be a focus on inclusion of customers that don’t have access today or don’t get access easily and the friction that’s involved in analog and traditional delivery is going to be whittled away over the next ten years.
Anything that’s analog or anything that is paper-based is going to come under siege through digitalization and with that new data sets emerge, with that customer performance satisfaction improves, efficiency goes up and lots and lots of opportunities to embed lending, payments and insurance. Maybe I’ll pause here and let it Rishi take it from here, but I think we find ourselves at that arch, that three-year period. Now, looks like it’s coming to an end and we now begin to build back up to what was a sense of normalcy and equilibrium three years ago and I think that’s evidence that we’re moving in that direction.
Peter: Right, right.
Rishi: And just to add to that, Peter, maybe just two data points that could be helpful here, you know, very specifically as we analyze the funding, the flaws in some of these companies at different stages, clearly, the late stage companies are hit much greater with Series D, C and D getting impacted by over 50% but, you know, Series E even more than that, those are the 70/75%. You know, early-stage, on the other hand, continues to stay resilient, you know, as long as you have good unit economics, have a good kind of product fit story, you know, I think that’s still value to be had in that space.
In addition to that, there’s one other thing that was interesting. As we were looking at some of the valuations come down and also kind of funding, you know, being much more tighter, we still saw revenue expansion within the fintechs which was really interesting just like yeah, you know, we may be coming down, you know, some view of extra exuberance but the core fundamentals where these companies were being focused there was still uptake and the revenue growth in that so that gave us a lot more confidence.
Peter: Right, right.
Nigel: Yeah, yeah. A lot of the companies that had those very high revenue multiples were positioning themselves as tech companies. I heard Rishi talk about how his software background says he leads with tech. At QED, we tend to lead much more with fin than with tech, particularly the ones that went public. They were positioned as tech companies when they were really balance sheet companies and I think that led to a substantial inflation in the underlying valuation and multiple. But we had five companies go public in 2021 at QED, that’s SoFi, we had AvidXchange, we had Flywire, we had Nubank and we had Remitly.
Now, if you look at them en masse they’ve all come back substantially from their lows at the end of last year. Nubank is trading, as we speak today, nearly $7, it came out $9 a year and a half ago at the IPO, they’ve beaten their numbers handily and they dropped down to 3.5 so they’ve doubled. Remitly is $18 now, it was in the 6’s last year. So, profitable growth companies, and I underscore profit, as if the market is rewarding profitability now substantially over growth, particularly in later stages, the market is beginning to respond to that.
Peter: Right. So, I want to talk about the growth of the industry globally. You know, you talked about $245 Billion and, again, that’s revenue, actual revenue today and you said this is going to grow 6X which when you do the math is around $1.5 Trillion which is, you know, a pretty substantial number. Maybe, Rishi, do you want to just give us a sense of how this growth is going to be distributed globally because there’s obviously some geographies that are much more advanced than others and I imagine the growth will not be even.
Rishi: Yes, that’s a good question, Peter, and, you know, I think there is a great story to tell. I think North America has been leading the charge today and I think it will continue to be a much, it’s going to continue to be a major player in the growth of overall fintech. But we think APAC is what, you know, including the whole breadth of APAC is going to take the lead over this time period up to 203. So, we expect APAC revenues to grow to about $600 Billion which is going to be 8.5X, 8.5X, you know, where they are today. Notwithstanding, I think, you know, starting from a higher base, North America is going to continue to grow and will be almost half a trillion dollar industry by 2030 with the growth of 4X in there.
You know, geographies like LatAm and the Middle East and Africa are also going to be promising in terms of their growth though from a much lower base as they are today. But, you know, we see as access requirements continue to grow, especially if you are thinking some of the underdeveloped economies in Africa, etc. access is going to be a key thing and I think fintechs are going to play a key role in helping drive financial inclusion and general access overall.
Peter: Right. So then, what about within verticals? Obviously, payments and lending are the two largest verticals today, where is the growth going to come from and are those verticals going to continue to dominate?
Nigel: Go ahead, Rishi, give it a shot.
Rishi: Yeah. Listen, I think, you know, payments has been the headline story, so far, in the fintech space. Payments has been leading the way, so far, in almost 40% of all revenue of fintech revenue today is payments space and, you know, these are payment solutions but we see the shift over the next ten years. Not to say payments will not continue to be a significant portion but I think there is going to be a shift towards what we are calling B2B directs and B2B kind of focused companies that are going to be core infrastructure, you know, as enabling companies to what we are going to call B2B companies that are infrastructure related and other companies that are such that have really helped build the fabric of the financial systems globally and help drive that.
But in addition to that, we think companies that are going to serve what we are calling B2(small)B which are kind of small business, these SMEs that dominate the globe, you know, they are quite starved for being served by some of the incumbents today. They are still quite whirly and I think this is place where we think fintechs are going to step in, especially as we think about the greatest needs around credit and lending are going to be bigger as a focus for, you know, the small businesses around the globe that dominate the economies of many, many, many countries and I think especially in the emerging markets in Asia or even in Africa and others. These are the small businesses that are really going to drive the revolution and I think fintechs are going to be core to that equation.
Peter: Right.
Nigel: I certainly agree here that the opportunities for breakthrough companies are, I think, across the full vista of lending and payments and wealth management and deposits and proptech and as we start to look into a crypto or blockchain. I think all of them have different shapes and interest levels, depending on certain geographies. For example, you know, in India with UPI it’s very hard to make money on traditional payments, in the US, because of Durbin we have a whole series of neobanks that can make money purely than a deposit-based debit card, so I think there are opportunities across the board.
The second thing is that inclusion and giving access, particularly to other consumers, but also with SMBs, as Rishi said, is enormous. You know, even in the US, it’s very hard to reach the heart of America because people, for the FICO score of 650, to access credit. And certainly the banks, by and large, do not serve that population and if anything in the last six to nine months have actually pulled back from serving that population. But that phenomenon is massively amplified as you go into the geographies, as you go into Brazil where you see Nubank, as you go into India, we have OneCard and Jupiter, as we go into Indonesia which is still massively open field running and the fourth largest population in the world. So, embracing financial inclusion with debit and credit and then into wealth management, I think it’s just an enormous potential.
The last thing I’ll say is that so much of what became fintech, Peter, was driven on the back of mobile technology and the move to digitalization for mobile. We’re going to see there’s a series of massive trends in terms f technology that will fire up the next generations of fintech plays across the verticals. There are a lot of talks about generative AI now, you know, the opportunity we’re just starting to get our head around how massive that can be, you know, API-based connectivity, particularly on open banking particularly in Europe there. There’s a lot of entities attempting to become the super app model.
Distributed ledger and the blockchain, you know, a lot of promise there and that’s starting to take shape over the next six or seven years, content computing and the cloud dropping expenses. And then the last thing, embedded finance where anything, anything that’s logistical that is paper-based, and analog becomes digitalized and then with that the opportunity to be able to embed lending and payments and insurance. I think we’re just breaking the surface there and I think it’s a lot of excitement in the QED ranks about all these opportunities.
Peter: Right, right. So, I want to dig into profits for a minute because you mentioned, Nigel, it’s more of a focus on profitability now than there has been in the past and I’m always struck when I look at the earnings reports that come out and you look at the banks and they’re making astounding profits, particularly recently. Whereas the fintechs still seem to struggle, you know, they’re doing better than I think they have, but I think a lot of the publicly traded fintechs still are losing money.
Where do you think, I’m just really curious to get your perspective on when is fintech going to catch up because financial services, you mentioned the profits, it’s a highly profitable industry but it’s really the traditional incumbents that are making most of that profit. When’s that going to change and how’s that going to change?
Rishi: Maybe I can take a quick comment and maybe Nigel, you know, you definitely have a great perspective on this. I mean, Peter, as you know, within financial services the greatest profit pools lie in lending and that business is a very different biz compared to, you know, some of the other more debt-focused businesses using a balance sheet, you know, getting the low cost of capital to be able to make lending products effective and in a way that you are focusing and having discipline in those lending practices that you have. Perhaps you’re acquiring, you know, banking licenses as you know which have become really, really difficult globally.
You know, that really created some kind of barriers for fintechs to enter the space and then, you know, after that any compliance overheads, regulatory oversights that you have to consider as you go into those kinds of models becomes increasingly difficult for fintechs to navigate. And so, I think, you know, that’s the challenge and that’s where the pot of gold is as the neobanks, etc. look to you, expand the offering, move into the more profitable places where they can create offers in a way that they’re going to have to consider, you know, looking at lending seriously because that is where the banks really make their money.
Peter: Nigel?
Nigel: Yeah, so much to unpack in that question. Well, first of all, and I agree that the pots of gold, the economic trends to be bigger in lending than any of the other categories, it’s true and there is a structural collision between venture capital and lending. Venture capital is by its very nature impatient and lending requires enormous patience and I think what we are geared at, any fool can lend money, as I often say it but the challenge is getting people to pay you back. You see a number of entities who have yet to prove that their unit economics makes sense. If your unit economics don’t make sense, you can’t build a P&L that makes sense. So, what we’re seeing, I think, in the public markets, back to your question about when will fintechs become either major profit centers, is that some of them are not going to ever make money and some of them their business models don’t make sense.
And what we’re seeing is that the public markets figuring that out now, it hits on a couple of companies earlier and they are profitable and are growing because their fundamental business models were incredibly sound and durable. So, in a Darwinistic world a lot of fintechs aren’t going to make it because they didn’t choose the right place to enter, they didn’t have a business model that worked, their overhead costs were too high, they didn’t understand what skills they needed and they will disappear. But that means that the ones that do win are going to be winning in the big profit pools where they have comparative advantage and that’s just the nature of startups and Darwinism. Every one of our portfolio companies is now credibly focused on a pathway to profitability because they recognize the market.
The funding market is, you know, precious, perhaps, its austere, it’s hard to get capital and if you do, it’s often the valuations that were very different to what they were 18 months ago, people have rationalized their cost structures massively and extended their runway. But the focus on EBITDA is absolutely right and we will see…….the EBITDA will not fully realize until we see growth slow in the fintech because markets can cost money and I’ve flushed my monthly expense immediately through my P&L which means that my earnings are always going to be low relative to growth. This is the conundrum that we chatted about, profit versus growth, but until the growth rates slow, we’re not going to see the profit gushes that you would imagine.
I would point to the fact that if we look at the banks, even though they’re making loads of money, Peter, they’re not growing, I mean, I don’t know what the average growth rate would be of banks in the US, but I would imagine it’s probably in the middle single digit range if it’s that and probably on a normalized inflation adjusted basis, they’re probably losing revenue on a normalized basis. So, fintechs are where the growth is and until the growth slows for certain fintechs the profitability will not gush and, of course, then there’ll be other generations of cohorts of other fintechs that will be, you know, driving revenues and breakthroughs after the first generation. For example, we see Nubank, of course, the juggernaut, but we’re seeing sons and daughters of Nubank emerging in other geographies who are going to go through the same cycle.
Peter: Right, right, okay. So, we’ve sort of talked a lot about the potential growth, but I want to just focus on the risks and the challenges that the industry is going to face, at least we have more needs to be dealt with in order to achieve this growth. So maybe, Rishi, we can start with you and talk about what are the biggest risks for the fintech space to achieve the growth we’re talking about.
Rishi: Yeah. You know, we highlight a couple in the report there, Peter, as you think about, you know, what is the actual potential that is achievable, what can be achieved in practicality and what I would say is to achieve the potential we’ll have to address on these key risks that we clearly see in the market. We’re starting with the easiest way, one is, you know, as you think about regulatory oversight for most, you know, this growth has been……you know, fintech has been left alone by a lot of the regulators in a while. Depending on the geography, you know, there has been, in some cases, reactive to what’s happening in the market, was this being proactive in there so, you know, I think having a real call out to regulators to consider this industry, to create a level playing field, to take a much more proactive stance.
There are geographies where that’s happened, if you look at Brazil, as Nigel suggested or India, the regulators have taken a pretty active role. Again, they can always do more but they have done so more than other perhaps developed economies where they are creating public digital goods, infrastructure that is aligned for some of these fintechs, you know, is a real good shining light where many others can take inspiration from that. So, you know, the role of the regulators is going to be interesting, but the risk, of course, is regulatory overage, right.
As you think about immediate reactions around, you know, things that happened with SVB and other situations, right, if they tend to clamp down more in terms of the oversights that are going to be needed, they can in some way impact overall innovation and, you know, what fintechs can draw. So, we are going to be looking also bad in terms of, you know, just the proactivity of the regulators in the space who’s looking at how they may perhaps stifle innovation in that regard.
You know, reputation continues to be a big thing in the space, like ban a reputation as you think about some of the recent crypto blowouts that we’ve seen, you know, that has an overhang on the overall industry and there’s enough trust in the industry, if you will, in terms of people’s money and protection and all of that and how that’s going to play out. So, there is a cloud that continues to stay with the industry in that regard and, you know, we’ll have to deal with some of these reputational things. We always will see one off things in the market but in some way, we have to make sure we dimensionalize those in terms of the practices in that specific context versus an overacting team that is industrywide so that’s going to be an important thing too.
You know, the other element is around the role of Big Tech, it’s going to be interesting and see how they are going to continue to evolve their offers and services as they look to leverage their scale, you know, in this regard and how they create infrastructure that perhaps creates greater opportunity for tech companies versus fintechs and the role that they play is another one that’s going to be interesting for us.
And then, you know, lastly, it’s just geopolitical tension and overall macro environment is going to continue to play a role that’s not a fintech-specific thing, but I think that will continue to create a, you know, headwind for us overall but we believe strongly they’re going to be local champions that are going to emerge out of this even within a broader political environment. We will see local champions emerge that are going to be impactful in the local markets.
Peter: Right, right, great, okay. So, I want to close with sort of hear from each of you what you find most exciting now because you’ve done all this research now, the report is out, it’s really optimistic for fintech, I think a breath of fresh air for the industry, but maybe, Nigel, I’ll start with you and just talk about what are you personally most excited about when it comes to the future of fintech today.
Nigel: At the macro level, I’m really excited about how it can make a difference in the lives of hundreds or billions of people in this world. Taking away the friction, taking away the stress, empowering consumers to have ownership and SMBs of their own data, making decisions that are not based on inertia or based on lack of confidence and with that be able to manage their own finances better with less friction and taking away the inefficiencies in the market that candidly the incumbents have been able to take it on to just eons. At the global level that’s the most exciting thing. I
I think financial inclusion is a huge deal, if you go to Indonesia, if you go to Nigeria, you go to Kenya, I mean, and even in the US where there are people who are not terribly well off. The opportunities are massive in putting really high-quality products in their hands, when you do that you get wonderful net promoter scores and with that you can actually create a huge value in their lives. And, you know, if I go back to my Capital One days it was really wonderful, it was Capital One who helped democratize access to credit cards, you know, to wrestle that power that the large incumbents have not had to innovate and candidly are still struggling to innovate, it’s very difficult. So, I think at the global stage, that level, that’s what I’m most excited about.
In particular verticals, I think I’m excited about all of them, in their own way they all have major opportunities and, in a sense, as an investor, it’s not about…this one is where all the opportunity is, it’s how do you horse race an idea across one vertical and one geography against other ones at a margin.
But embedded finance, I think, is absolutely critical; lending is really very important and if I just go back to what Rishi said, you know, where the risks are, it’s around access to debt financing, particularly as fintech, because you don’t have access to banking windows and low-cost durable deposits.
And just a shout out on the regulatory front is we see so many now regulators around the world leaning in to fintech and being progressive and saying, this is valuable, it creates a multiplier effect, it’s mostly inclusion, squeezes out the black economy. And I think the call for the US and the developed country regulators is look, let’s stop, let’s not focus so much on regulating last year’s problems, let’s create the opportunities to create environments where you can promote and support fintechs because, you know, it makes our world a better place.
Peter: Rishi, last word.
Rishi: Firstly, data of everything, nice or fair, you know, which you said really well, Nigel, from my lens, right, I think just firstly, the unevenness of the overall evolution of fintech while it’s been in the US and other parts of the world, but just to see how that is starting to spread globally and in areas like the Middle East and Africa taking the lead, you know, and other places where it’s creating that inclusion really warms my heart to say, you know, the force that it can be and the force of good that it can be and to me that is hugely, hugely exciting.
But also, you know, I think it’s a real call to local incumbents, financial services companies and others that are of influence in those markets, like, you know, it’s an opportunity to really embrace and partner in some cases even acquire some of these innovative companies and really see how you can do the math of 1+1 is 3 and really drive that next level of acceleration within these markets and bring new innovative offerings to market together as against thinking of this purely as fintechs as being disruptors. But the idea of partnership and collaboration, you know, the importance of this ecosystems are so important. To me, just that opportunity in itself gives me a lot of confidence and excitement around the future of this industry and, you know, I’m thrilled to be part of it and I’m excited to see the future.
Peter: Alright, hear, hear. You know, you guys, Rishi and Nigel, you’ve done tremendous service I think to the fintech industry and this is a report that will really, I think people will be referring to again and again over the years. So, thank you so much for joining me on the show today.
Nigel: Thank you, Peter, thank you, Rishi. Bye, guys.
Peter: Okay, see you.
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Anyway, on that note, I will sign off. I very much appreciate your listening. Bye.
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