Whatever happened to fintech startups? Dollars, launches, exits, and up rounds were all hard to find in 2023 as founders and investors engaged in a wholesale restructuring of the fintech space. Some of the roles formerly played by startups have more or less permanently shifted to incumbents as previous rounds of acquisition have brought capabilities in-house.
A report from Javelin Strategy & Research titled Fintech Investment Trends: Waiting for the Next Wave looks at where the fintech industry is headed. Christopher Miller, Javelin’s Lead Analyst of Emerging Payments and a co-author of the study along with Co-Head of Payments James Wester, explored why fintech startup money has dried up, and why the artificial intelligence revolution may be quieter than some think.
The Shifting AI Landscape
New and emerging fintechs are focused on different business opportunities than the previous generation of consumer-facing companies had faced. The distinction between fintech and incumbent is blurring as former categories of differentiation, such as customer experience or specific product features, disappear.
“This new generation of startups is much more likely to be financed by existing incumbents in the first place, which makes them not really startups in the technical sense,” Miller said.
One place where startups are still thriving—and one of the key areas of investment focus for 2024—will be the suddenly ubiquitous AI. Much of the hype around generative AI has centered on creating artworks through online platforms, or customer interfaces like ChatGPT. But it’s becoming increasingly clear that generative AI’s impact will be much greater behind the scenes.
Miller thinks that one problem with these splashier applications is that they will be hard to monetize. “I don’t think a ton of people see generative AI as being primarily a direct-to-consumer play,” he said. “The impact for generative AI is going to be on the back end. It is most likely that generative AI would impact payments or financial services through services provided by existing providers. For example, Visa may leverage generative AI to improve or change the way certain services are offered. AI is a feature—it’s not the product.”
Instead of looking for consumer plays, fintechs are broadly focused on developing business-to-business services that can be sold to a relatively small number of enterprise customers. That remains much more sizable and lucrative than the consumer market.
Bringing Development In-House
Many organizations have some sort of venture fund allowing them to invest in startups. The goal can be to learn from the smaller competitors directly or to use that model to foster their own innovation. The major exception remains AI.
“When we saw Silicon Valley startups blowing up in the late 1990s and early 2000s or even in the in the late 90s, the idea of enterprise venture funds wasn’t well established,” Miller said. “The crazy stories about all the money getting thrown around and big parties and the weird, quirky culture of startups—all those stories are back for the generative AI companies.”
Although there will be deals within fintech, acquisitions aside from generative AI will continue to be smaller and rarer. The remnants of the previous generation of fintech products and infrastructure will remain “on sale” but won’t necessarily be great values. Increasingly, the technology of a failed direct-to-consumer fintech is worthless.
“Rather than looking to acquire a startup, an established business can stick lower cost engineers on the same problem,” Miller said. “There’s no point in buying somebody’s seven-year-old platform when it’s easier to develop solutions in-house.”
An Unforgiving Economy
The development of new and exciting startups is as much about the environment that nurtures them as it is about the insight of their founders. The current economic landscape, particularly the high interest rates that have shown no signs of abating, have had a strong influence on the timing and scope of M&A activity. The expectation that lower rates may continue in 2024 and 2025 may do as much as anything else to delay a number of deals.
“Sometimes we like to think of innovation as a thing that happens because brilliant people are thinking brilliant thoughts,” Miller said. “And that might be true. But what happened in the first wave of the dot-com boom was that somebody walked around with a money gun and fired it at everything that was moving. That’s not happening anymore.”
