Jillian Williams~quoteblock
Two additional examples spotlight how fintech entwined with SaaS, in a B2B context, can have an impact even in categories where consumers are the ultimate end user:
Each industry is unique. This creates the need for vertical-specific fintech solutions, and vertical SaaS companies with end-to-end offerings have an opportunity to meet that need.
The best vertical SaaS companies build on deep customer knowledge, solve a quantifiable pain point, deliver quick time-to-value, and over time become a trusted ‘system of record’ embedded in daily or weekly business processes for key employees of a specific type of business. These companies are also often built by insiders with a unique perspective on a vertical’s inefficiencies and opportunities for improvement. These SaaS platforms become deeply integrated into businesses and get access to invaluable insights and data.
In our view, the best vertical SaaS companies will continue to build their offerings upon this deep customer-knowledge and data moat, and increasingly that product suite will include fintech products.
Upselling financial products via vertical SaaS platforms circumvents the high friction and high customer acquisition costs that typically characterize fintech sales.
Today, most of these SaaS companies start by offering a payments solution and often stop at working capital or invoice-financing products. However, the types of fintech products offered can scale far beyond that. This can include additional financing products, credit cards, insurance, etc. There is flexibility based on what the customer needs are and what each product can contribute, from a revenue perspective, for each specific SaaS business.
Toast and Shopify are model success stories in this space. They both began as SaaS companies and increasingly developed into fintech companies. Based on their success, some SaaS companies planning to monetize through fintech are starting to add key fintech-experienced hires early on, given the massive revenue potential from fintech.
We are excited about vertical SaaS that becomes a one-stop-shop in an industry, and is then monetized by fintech. These platforms require deep sector knowledge and often solve several challenges for businesses at once, growing to become effective systems of record for specific day-to-day workflows. Being indispensable in this way will be especially important as in the coming years businesses will look to cut back on SaaS spending and reduce the fragmentation of their spend across multiple vendors.
Q: How does the recent downturn in technology investing impact this thesis?
A: Fintech is a massive industry that has implications in almost every sector. In many B2B contexts, customer awareness of fintech’s potential is still in the early innings. Financial services for businesses remain antiquated, and legacy rails are continually improved on and, in some cases, are already being replaced.
While markets may be rocky, we still see a ton of room for new products in the fintech landscape. There is still a lot of space for innovation, despite the uphill climb suggested by some macro perspectives.
Q: If public-market investors have fallen out of love with public fintech companies, what does that mean for startups and founders interested in fintech?
A: We think it’s a great time to be building in fintech, especially for founders with more pragmatic valuation, raise, and burn-rate expectations. Two aspects of company building will be more crucial than ever for fintech founders in the coming year. These are: finding a wedge into a market and overall distribution.
Jillian Williams~quoteblock
One thing we’ve learned in fintech is, it is hard to compete with traditional financial institutions who have built brand and trust for decades and have massive marketing budgets. That’s why a smart distribution strategy has been and will remain key for successful fintech companies. You’re not going to outspend GEICO. We like companies that find a unique wedge for customer acquisition, like Affirm’s success via point-of-sale merchant partnerships, versus direct-to-consumer acquisition.
Others, like Shopify and Toast, have used traditional vertical software to address a pain point and then upsell and monetize via financial services. This distribution model is extremely sticky and enables revenue expansion without massive marketing dollars.
Brand and trust are even more crucial in fintech than in other sectors because you are dealing with a consumer’s or a business’s money. Being recognizable and synonymous with trust can make or break a company.
An adjacent opportunity is embedded fintech in non-tech businesses. Look for non-tech companies to announce and embed consumer-oriented financial products. “We will continue to see the integration of consumer finance into other industries that provide high value and a better experience for consumers,” says Williams. “This allows the underlying businesses to access additional revenue streams and use alternative customer-acquisition methods. Non-fintech companies — like retailers, education, or healthcare companies — will integrate financial functionality into their offerings.”
In Web3, models that integrate DeFi with traditional finance are worth watching. “DeFi UX leaves a lot to be desired and creates many barriers for user adoption,” says Williams. “As the future of Web3 continues to evolve, we are currently most bullish on areas that connect traditional finance and DeFi. With the new wave of traders, there are also opportunities around tools to better serve them, such as solutions that help track the impact of trades — crypto and traditional trading— on taxes.”
In the background, there’s a growing need for innovative solutions addressing rising consumer debt. “The pandemic has changed financial dynamics unexpectedly,” she adds. “With lower consumer spending, compounded with expanded unemployment benefits, stimulus checks, along with paused student loan, mortgage, and rent payments, many Americans had more disposable income and a higher personal savings rate than in the previous 60 years. Subsequently, consumers have started paying down costly debt, especially credit cards, at a higher rate than usual. As more solutions arise giving consumers access to credit, we need solutions that better guide consumers and help them navigate growing sources and amounts of consumer debt.”
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