By Julian Ostertag, Managing Partner and Co-Founder of Drake Star
2021 was a banner year for Fintech investments, with long-term trends and short-term pressures combining to accelerate the digital transformation of the financial services industry. One BIS study estimated that fintech has attracted a trillion dollars over 35,000 equity deals since 2010, and grown from 1% to 5% of deals globally.
2022 will most likely see this trend continue and perhaps even accelerate – but only if institutional players in the industry can stay ahead of the curve, something they have struggled to do in recent years. So what can we expect for Fintechs in 2022?
Fintechs are here to stay – if you can’t beat’em, join’em
The top 100 Fintechs already account for a value of $2.7trn, while the top 100 banks achieve a value of $7.1trn. There is no denying that challenger banks, insurance, wealth managers, payment companies as well as B2B Fintech solution providers have established themselves and they are here to stay. Laser-focused on the slowest-moving incumbents and the tech-savvy, demanding 20-40 demographic, these new services have siphoned off millions of customers with their convenient, web- and mobile-first approaches.
Basic mobile banking has become commonplace, and challengers are leading the charge, and while the establishment has been playing catch-up the fast-moving startups have moved on to wealth management and digital insurance solutions. The simple truth here is the age-old adage: If you can’t beat ’em, join ’em, or in many cases integrate ‘em. Incumbents will need to partner with complementary Fintech companies to fend off threats from others.
Decentralising finance – blockchain, cryptocurrency and smart contracts
The idea behind decentralized finance is to replace the traditional intermediaries like banks, brokers and insurances with peer-to-peer relationships offering the entire world of financial services. The core components are blockchain, cryptocurrency and smart contracts (and like always – data). It’s clear that blockchain-based services will be a major part of any financial institution in the next 5-10 years, perhaps replacing centralized banking altogether for a generation raised on the tech. The goal is to offer more accessible, transparent, efficient and cheaper financial services.
Venture capital has supercharged the development of these new categories and most traditional financial services companies are still at the starting line. However, even the best-funded startups need the reach of established incumbents, and perhaps even more importantly, their data.
AI in the archives – data will change customer experience for good
Deep reserves of data are the crown jewels of incumbent banks and insurances. But decades of records are as much a liability as an asset if one doesn’t know how to access the insights inside them. The next phase of innovation and investment in Fintech will be data-driven applications that cater to and engage with individuals – an unexpected and valuable business proposition in an industry defined by regulation (and highly regulated) services.
Accessing the insights in this data will necessitate the use of AI and machine learning. These technologies may sound like buzzwords when shoehorned into pitches and product ideas, but they’re a perfect match for anyone trying to make sense of huge piles of semi-structured data. Here again startups will lead the way, offering services that can securely and safely access and analyze billions of bytes of financial records to improve customer experience.
Diversify and conquer – the rise of embedded financial services
Equipped with highly specific and data-derived trends and perspectives, a financial organization will be able to offer improved and faster risk assessment, customer-product matching, personalized recommendations, and better security and customer services. Happy customers are the best bulwark against hungry and trendy Fintechs.
Equipped with data, non-bank entities like Amazon and other tech giants are now offering financial services like buy-now-pay-later and other loan-adjacent products, since consumer investment in one platform makes it far more likely they’ll use its other offerings as well. Convenience is key, but trust is also hard to come by when large sums are in play – an advantage incumbents have against startups that have yet to become household names. Embedded finance therefore also gives incumbents the opportunity to integrate other financial products into their offering.
Values on display – ESG can no longer be ignored
It’s important to note that with the rise in visibility of matters like climate change, systemic racism, political disinformation, and other key issues, ESG values will be more important than ever going forward. Not only do consumers care, but regulations, board decisions, and business logic are tending towards favoring socially responsible investments and products. This is one area where institutions may be able to lead, as it is rarely a surprise when a small startup claims carbon neutrality or offers progressive benefits – but it definitely is when a major bank or 50,000-strong corporation does so.
Value-driven business decisions aren’t just smart in this market, they’re the mark of forward-thinking leadership that believes we can build an economic system that benefits both people and the planet they live on. Ignoring ESG is no longer an option.
About the Author:
Julian Ostertag is Managing Partner & Co-Founder of Drake Star Partners. Julian is passionate about entrepreneurs and technology innovations. He is a seasoned investment banker whose experience spans both domestic and cross-border M&A, private equity and debt transactions, fundraisings, and IPOs across the US, Europe and Asia.
Julian began his career as an M&A and Equity Capital Markets banker with Deutsche Bank in Frankfurt and London focusing on IPOs, secondary offerings, convertibles, structuring and executing M&A transactions for international corporations. Prior to co-founding Drake Star Partners, Julian was Vice President with marketing responsibility in the Technology Team of the successor of the SG Cowen operations in Germany.
Julian is a regular speaker and panelist at industry events. He holds a business degree from Heinrich-Heine Universität Düsseldorf and studied at Universidad de Salamanca and Universidad de Alicante (ERASMUS scholarship).
About Drake Star
Drake Star Partners is a global investment banking firm serving the technology, media and communications sectors (TMC) with offices in New York, London, Paris, Munich, San Francisco, Los Angeles, Berlin, Geneva, Singapore* and Dubai*. The firm focuses on M&A and corporate finance for its clients worldwide. Drake Star Partners completed over 400 transactions since 2004, 70% of which are cross-border.
Drake Star Partners is the marketing name for the global investment bank Drake Star Partners Limited and its subsidiaries and affiliates. In the USA, all securities are transacted through Drake Star Securities LLC. In the USA, Drake Star Securities LLC is regulated by FINRA and is a member of SIPC. Drake Star UK Limited (FRN 942020) is an appointed representative of Kession Capital Ltd (FRN582160) which is authorised and regulated by the Financial Conduct Authority. © 2016 Drake Star Partners Limited.