Even if you’re just a casual follower of the fintech space, you’ve probably noticed that, historically, most fintech startups don’t go public.
In 2018 and 2019, 77 tech startups went public. But only five of them were fintech startups. For an industry that was injected with $254 billion of venture capital in 2018, there seem to be a lot of IPOs that aren’t happening.
However, in Q2 of 2020, fintech looked like it might be turning a new page. Over a span of just three months, a flurry of five startups decided to go public and have already filed for IPOs:
- In May, SelectQuotes (insurtech) filed its IPO and raised $360 million.
- In June, Shift4 Payments (payment processing) and Fusion Acquisition (wealth management) filed their IPOs and raised $345 million and $305 million, respectively.
- In July, Lemonade (insurtech) and nCino (lending) filed their IPOs and raised $319 million and $250 million, respectively.
So, with all these young challengers gaining access to plenty of public capital, should enterprises in the finance space be worried? They don’t need to be. But they do need to be ready to compete.
COVID-19 has accelerated the time to IPO
Prior to COVID-19, most fintech startups were fattening up on mega-rounds of venture capital ($100+ million investments) rather than filing for IPOs. In fact, there were 28 mega-rounds in Q2 of 2020, which is a new quarterly high. Serving as late-stage capital and lacking the intense scrutiny that IPOs come with, these types of investments were what most fintech startups preferred
However, as COVID-19 speeds up global digitalization, many fintech startups are growing at a breakneck pace. In fact, the Nasdaq Financial Technology Index has grown 61% since bottoming out on March 23, 2020, when the U.S. economy went into a deep freeze. In less than six months, the index had nearly regained its pre-COVID-19 form (as of September 2, 2020).
One major driver of this rapid growth is that companies are more dependent on fintech to manage their businesses, and consumers are more dependent on fintech to manage their finances. For instance, when COVID-19 ran rampant in Europe, there was a 72% increase in fintech app usage, and as social distancing and shelter-in-place orders persist in many parts of the world, we expect this surge in fintech usage to continue.
This surge is pumping cash into the most valuable fintech companies and, in turn, contracting an IPO process that usually takes years into a matter of months. These companies, such as Stripe, SoFi, and Chime, also happen to be mostly six to ten years old, have multi-billion-dollar valuations, and have yet to go public.
In Europe, though, fintech faces a grimmer future. According to McKinsey, the injection of venture capital into the space plummeted by 30% in the first half of 2020 and dove down to 44% in July, compared to the previous year. Before COVID-19, the amount of venture capital injected into fintech had increased by 25% each year since 2014.
With this sudden plunge in venture capital, McKinsey projects that the space needs an injection of €5.7 billion to sustain itself through 2021. And with VC firms investing significantly less in the space, fintechs having little access to bailout schemes that require profitability, and government stimulus packages being scattered across hundreds of companies, European enterprises don’t have to worry as much as their American counterparts.
But on the other side of the Atlantic, incumbents now have to face fintechs who not only boast stellar branding but also have access to public capital. So, what should enterprises do? A crucial first step is understanding where startups are beating them: the rapid adoption of new technologies and product development methodologies.
The secret to startup success: New technologies, agility, and product development methodologies
Fintech startups are obviously smaller than enterprises, but what they lack in size and resources, they make up for in flexibility. Startups can quickly adopt new technology, examine if it’s a good fit for their business, and decide if they should stick with it or move on to the next platform without incurring enormous technical costs like enterprises do.
And in a world where everyone craves instant gratification, this flexibility has allowed these startups to flatten the learning curve for the newest iteration of customer service technology, which helps them provide a top-flight customer experience.
One example of this is the use of AI chatbots that leverage natural language processing to automatically respond to customers 24 hours a day, seven days a week.
Providing instant feedback to your customers through chatbots is crucial for attracting, retaining, and nurturing them. In fact, according to Mobile Marketer, 40% of millennials interact with chatbots on a daily basis. And according to Gartner, chatbots are expected to become the main line of communication between businesses and their customers. By the end of this year, the global research firm predicts that 85% of customer interactions will be powered by chatbots.
However, startups aren’t just implementing AI chatbots to pander to their customers. The technology also benefits their bottom line, enabling their customer service agents to spend more time working on high-priority, complex problems. According to Salesforce, 64% of customer service agents who use AI chatbots are able to deal with those more in-depth issues compared to only 50% of agents who don’t use them.
Of course, AI chatbots can’t handle every case under the sun. They need to turn over certain cases to customer service agents. Fortunately, though, these chatbots can learn from the responses that the customer service agents use when handling these types of cases, understand when to use them, and boost the number of cases they can effectively respond to.
Buddybank, the world’s first conversational bank, takes chatbot-driven customer service to the next level. They only serve their customers via chat with real employees or AI-powered chatbots and don’t even have a phone number.
So, whether their customers need a new digital credit card, want to check their transactions, or would like help planning trips or buying meals, Buddybank can provide instant feedback through the app, regardless of whether it’s from a real person or from AI. According to LivePerson, Buddybank’s AI chatbot platform, the conversational bank boasts an average wait time of 30 seconds for first response and a customer satisfaction rating of 95%.
Another technology that fintech startups are leveraging to push past enterprises is blockchain. In regards to security, blockchain is as effective as it is innovative. The technology leverages a complex node network and proof-of-work system to record and verify each transaction made on the platform it supports.
Put simply, it’s a public, decentralized digital ledger that serves as a single source of truth and is virtually impossible to alter. Robinhood, for instance, built its app on top of blockchain to publicly record and verify each of its trades. This way, no one can manipulate a trade after the fact.
Finally, startups are leaning on the agile methodology to build their software, which enables developers to constantly use customer feedback to iterate an entire software project in sprints.
Still, for many enterprises, their go-to software development model is the waterfall methodology. According to Pulse of the Profession, 44% of projects rely on the waterfall methodology while 30% lean on the agile methodology. The remaining 23% use a hybrid-model.
As a linear-sequential life cycle model, the waterfall methodology requires project managers to complete one stage of the model before you can move on to the next, like a waterfall cascading down a set of rocks. This can make the product development process quite lengthy compared to the agile methodology.
The waterfall methodology is also more rigid than the agile methodology. Customers define the project’s exact functionality during the earliest stages, so not only do developers have to set the requirements early, but they also have to wait until they complete the project to see if it actually fits customers’ needs. This drains the creativity out of the project and poses the risk that it doesn’t actually meet the right needs.
At Netguru, we’re firm proponents of the agile methodology. Validating and innovating ideas at a swift pace is more important than ever now. And if enterprises can adapt, they can separate themselves from the innovative startups that are hot on their tails.
However, startups don’t have every advantage over enterprises. The latter have a few weapons in their arsenal that the former don’t even have a shield for—namely, robust data, years of experience, and widespread brand awareness.
The enterprise advantage: Data, experience, and brand awareness
According to Pavlina Popova, the director of banking at Berlin-based fintech Barzahlen, the largest bank-independent payment infrastructure in Europe, enterprise companies have built sizable customer bases and long-term relationships with these customers that startups just haven’t had the time to foster.
And with all their customers’ data at their fingertips, enterprises can glean certain kinds of insights about their customers that startups can’t. This allows enterprises to develop mobile apps, products and services that can better accommodate their customers’ needs.
For instance, Visa has developed machine learning algorithms that have detected over $2 billion in fraudulent transactions each year. This has enabled them to reimburse their customers before their money gets stolen.
And that’s all because Visa has mountains of data, like card membership information, spending details, and merchant information, that they can feed to their machine learning algorithms to spot the slightest discrepancies in each of their customer’s transaction history.
Enterprises have also accrued years of experience building an established company, giving them a distinct advantage over startups when building new lines of business. And according to McKinsey, one of the best ways incumbents in the finance industry can compete with fintech startups is by building their own internal fintech companies, which McKinsey has also discovered creates more value than acquisitions do.
With sturdier infrastructure, larger amounts of capital, more advanced technology, better talent, and access to an established customer base, incumbents have plenty of resources to build fintech startups that can rival the likes of Robinhood and Monzo.
For instance, McKinsey has seen incumbents hire entrepreneurs from outside of the company, tap the C-suite, and bring in specialists to build their new businesses. They’ve also seen one established bank let its new businesses market their solutions to existing bank customers, enabling their new businesses to hit the ground running.
On the brand side of things, enterprises benefit from their established presence in the market. As a result, consumers automatically have more trust in them, especially as first-time buyers. For instance, when you think of banking and lending, the first company that pops into your head is probably HSBC. Why? Because it’s had over 150 years to stake its claim on the market.
How enterprises can win the fintech wars
To compete with the young guns, enterprises need to work on their strengths and weaknesses. In conjunction with wielding the vast amount of experience, knowledge, and data at their disposal to truly understand their customers, and leveraging their brand to keep winning first-time customers and retaining loyal ones, enterprises should stay cognizant of three essential things:
Invest in the customer experience
Nowadays, people expect instant feedback at all times from businesses. Whether it’s through an AI chatbot or an actual customer service agent, providing prompt feedback is crucial for creating a pleasant customer experience that gets people coming back to your site or app.
Explore novel technologies
New technologies like blockchain allow you to publicly record and verify your app’s transactions and, in turn, ensure maximum security and privacy for your customers. In a day and age where a single security breach can dismantle even the most established brand’s reputation, exploring these new technologies could protect yours for good.
Embrace the agile methodology
The agile methodology not only allows you to stay relentlessly focused on the customer, but it also allows you to remain refreshingly creative during the product development process. By constantly using customer feedback to test and iterate projects, you’re much more likely to build a product that customers actually need.
Staying relevant in fintech
In the fintech industry, the current influx of public startups proves that it doesn’t take decades to climb to the top of the ladder. In fact, the ten most valuable fintech companies in the world are mostly between six and 10 years old, but none of them have gone public yet. However, with all of the innovation happening in fintech right now, that could change in an instant, creating even more competition for enterprises.
Fortunately, to avoid drifting off into the old guard and secure a permanent spot in the new, enterprises have the data, experience, brand awareness, and, most importantly, the ability to emulate the top qualities in fintechs that have taken these startups to the top.