What to Watch for in Next Generation Fintech and Commerce
By Dan Rosen and Matt Nichols, Partners at Commerce Ventures; co-authored by Reetika Grewal, Head of Payments Strategy and Solutions for Silicon Valley Bank
There is a fundamental transformation underway in retail and financial services, driven by a new generation of consumers, proliferation of mobile devices and the adoption of advanced technologies like artificial intelligence, robotic automation, and blockchain.
This transformation challenges traditional operating models, but also creates enormous opportunities for innovative organizations, technology-centric startups and their venture capital investors. We explored these trends and important topics with the leading innovators at the Commerce Summit, a two-day event co-hosted by Commerce Ventures and Silicon Valley Bank.
Here is a summary of what we heard from more than 50 speakers, including VCs, corporate executives and entrepreneurs:
Distribution is the differentiator for growth. Startups may have breakthrough products, but incumbents still own the relationship with the customer. The race is between startups solving for distribution (customer acquisition) and incumbents trying to innovate…and the race is on.
Fintech: Real adoption, not just hype. After years of promise, fintech has moved past early adopters and into the mainstream. One in three consumers uses fintech products on a regular basis, up from 16 percent in 2015, according to E&Y’s recent Fintech Adoption Survey. Adoption rates in China are nearly double the global average, as WeChat Pay and Alipay quickly gain share. These new services also target a broader audience, offering access to nearly a billion underbanked consumers. Fintech innovators and their investors are reaping early rewards from this momentum, while financial services incumbents decide whether to partner, buy or compete to maintain the trust and mindshare of their customers.
Blockchain is changing the game for investors. Investing in blockchain-related companies has been a challenge for traditional investors, but sitting out doesn’t feel like the right approach either. Value created by new web protocols historically accrued to the eco-system of tech companies employing them (e.g. HTTP, SMTP), rather than to the protocol developer. Today’s blockchain ‘bulls’ are excited about startups building the next generation of web protocols that are developing token economies to monetize the value of these protocols. These tokens enable startups to raise non-dilutive (i.e. non-equity) funds by pre-selling access to the usage of their protocols, thus bypassing traditional sources of venture capital. Investors hoping to catch this wave of innovation are forced to abandon their historical investing practices if they want to participate. Despite a likely near-term bubble here, expect to see fundamental innovation by startups, venture funds and hedge funds that exploit these new financing structures to raise and invest capital in the pursuit of short and long-term riches.
To bundle or unbundle? Previous waves of fintech innovation mirrored classic low-end disruption: less for less. In fact, the most successful challengers in the last wave of were called “mono-lines” for this purpose. Today’s fintech challengers have adopted this approach for the past few years, focusing principally on one simple offering that consumers love more than the traditional, bundled alternative. This singular focus, however, is now starting to shift back toward a pursuit of bundling and cross-selling. An optimist’s view is that the millions of collective consumers using these products want more from these trusted providers. Alternatively, these players may not be generating enough economics from their core product to reach the long-term exit valuation goals that they have pitched their backers. In modern history, cross-selling has been notoriously challenging for all but a few traditional financial institutions. We will watch closely to see if today’s fintech challengers have more success.
Don’t follow the money, follow the need. Wealth management innovations, even those offering disruptive pricing for digital investing, still mostly target affluent consumers. However, recent personal finance startups such as Acorns, Digit and Stash are bringing automated savings and investing to the mass-market consumers who may benefit the most. Transparent pricing and set-and-forget products are helping average American consumers accumulate a basic savings safety net that has historically eluded them. Given the early success of this approach with younger consumers, expect more of these types of offerings in other categories of financial services.
Security is at a breaking point, but there is hope. The falling cost of computing power has increased the number of cyberattacks and attack surfaces, and the success of these attacks has led to an increasingly sophisticated hacker eco-system. Experts at the Commerce Summit said that security is at a fundamental breaking point with too many vendors, too many products, not enough skilled professionals and a hard-to-prove ROI. Enterprises must view security as a standard business risk, rather than a fight that can be “won”. The increasing willingness of the industry to share cyberattack and defense information is expected to help everyone succeed together.
Offline shopping can be hip. Retail has seen a flurry of retail store closings. However, newer brands recognize that millennials seek a different experience that may be delivered in brick-and-mortar locations. Pop-up experiments have generated exciting results, which have led to waves of new store openings for digitally native brands. The compelling opportunity comes when digital enables physical retail sales and vice versa.
AI: Yes, but… Two things seems certain: 1) Artificial Intelligence is and will enable fundamental change in the retail and financial services worlds, and 2) AI may be an often overused moniker, according to some, being employed by tech-centric enterprises and startups to close more sales and raise more venture capital dollars. Still, the experts love the potential of the associated technologies, but mostly see near-term value being captured by applications leveraging AI utilities, such as machine learning and natural language processing.
Delivery matters. Digital commerce in an increasingly on-demand environment is exacerbating logistical challenges, from manufacturer to warehouse to doorstep. Most innovation in digital commerce has been focused on the discovery, selection and checkout process, but now there is a long overdue investment in post-purchase, fulfillment and returns experiences.
The Amazon effect: Amazon continues to dominate online retail, but doesn’t do everything well. While it excels at product search and logistics, Amazon is weak in discovery and social, according to the experts on hand at the Commerce Summit. Focused brands and retailers that know how to talk to and influence their target customer segments can maintain an advantage over Amazon in their categories.
Want to learn more from the Commerce Summit? We surveyed more than 140 executives and investors at the event to hear their perspectives on key market trends. Please read Top 12 Trends in Fintech and Commerce.
