What a year. No need to rehash 2023, but between multiple bank failures, interest rate drama, the CFPB finally proposing open banking guidelines, and the launch of FedNow (just to name a few), it’s been a volatile year for the financial sector.
Now , that the dust is settling. The outlook is bright: Fintech venture funding has normalized. Public fintech companies are regaining ground. And with financial services representing 24% of the world economy, the opportunities are as big as ever.
Looking forward, there are four meta-themes that have caught my attention:
Fresh infrastructure designed for an instant settlement world
Software that simplifies multi-party coordination
Tools that unlock true “peace of mind”
AI adoption at the edges (not the core)
Fresh infrastructure designed for an instant settlement world
We’re barreling towards a future where our financial systems operate instantly. Users expect their money “on demand” and are willing to pay a premium for it. The lines between the atomic units of transactions—initiation, clearing, and settlement—are blurring. And it’s not just happening in payments (although it has dominated headlines). In the capital markets, many asset classes have transitioned from T+3 to T+1 settlement in just two decades. T+0 settlement feels like an inevitability.
Many of the new rails also come with the ability to transmit richer data—streamlining settlement and reconciliation headaches. To support this, underlying systems will need to be totally rearchitected. Across banking, payments, and wealth & asset management, the old guard infrastructure that was designed for a low-bandwidth, batch-processed world will need to be replaced.
Categories of opportunity include:
Digitization of trade processing in capital markets: Securities in many asset classes (FX, fixed income, munis) transact in ways that are still incredibly manual. This means high operational overhead and risk of fat finger mistakes. Modern tech can reshape how these markets operate, lowering the cost-to-serve for market makers and even opening up access to participants (e.g. retail investors) who have been previously shut out.
Modern payments infrastructure for FIs: What’s the use of faster rails if there are no stations? 40% of banks in an Aite survey know their legacy / outdated systems are a blocker to adopting faster payments even though users want it. Similarly, cross-border payments through correspondent banking networks are slow and expensive. We expect to see new solutions emerge that bring these processes into a modern era.
Real-time visibility and scenario planning for finance teams: As capital markets and supply chains change faster than ever, business leaders need real-time visibility. Today 89% of finance leaders report making decisions they know are based on inaccurate or incomplete data. Across cash balances and positions, mark-to-market valuations of securities, debt covenant management, tax compliance and allocation, vendor and third-party dependencies, and more - there are too many moving pieces to keep track of. Closing the books once every month / quarter / year just doesn’t cut it anymore and systems need to be overhauled to arm decision makers with the insights they ned when they need it.
Software that simplifies multi-party coordination
There are no “simple” transactions in fintech. Delivering any financial product requires managing, controlling, and transferring risk between multiple parties. The past year has seen many partnerships breaking down: from Apple and Goldman calling it quits to Blue Ridge Bank trimming 50 fintech partners. Regulatory and macro turbulence is highlighting the need for tools that enable seamless cooperation between multiple stakeholders.
Some areas we see this playing out include:
Coordinated compliance x customer support as a core differentiator: According to Klaros Partners, 17% of fintech partner banks have been hit with formal enforcement actions in the last 2 years. Tight coordination on compliance responsibilities and ongoing monitoring are a must for functioning partnerships. This is not enough. This also needs to extend to end users. Too often have outages left customers frustrated and in the dark. Solving this will be a massive differentiator.
Industry-specific billing workflows (where payments are the cherry on top): All businesses just want to get paid. Industries with particularly complex transactions (e.g. insurance commission splits, milestone-based billing in construction) have armies of people making sure the right parties are paid the right amount at the right time. This is doubly true in highly regulated industries (e.g. alcohol, cannabis). Solutions deeply addressing specific industry pain points can ultimately earn the right to unlock payments revenue streams and expand TAM. Examples include Ply (construction), Ascend (insurance agencies), Loop (logistics), and Accelpay (alcohol)
Collaborating to prevent fraud: Fraud is a $40B headache that is already being used extensively by fraudsters. Scam losses were already growing 30% yoy and are set to go exponential. New age solutions are desperately needed – and we have our eyes on biometric and device based solutions in particular. But that won’t be enough. Fraudsters are known to go knocking on every single door and new forums for collaboration (a la Early Warning System) or data aggregation layers are needed to stop them in their tracks.
Tools that unlock true “peace of mind”
Worrying about money is universal. New products like earned wage access, roboadvisors, loan refinancers, and buy now pay later (BNPL) have helped ease some financial burdens but in aggregate these are largely treating symptoms and not root causes. It’s still not possible to “set it and forget it” when it comes to personal finances.
This applies to businesses as well (of all sizes). The last couple of years have seen supply chain disruptions, geopolitical conflicts, inflation, labor shortages, etc. making it especially hard for business operators—many who are operating on razor-thin margins—to find peace of mind.
Some areas where we see this trend in play:
AI scales wealth management: There is a discovery problem in the financial advice industry. Only 15% of households in the U.S. are being served with any sort of real financial advice. On the other side, advisors spend more time on prospecting (2-3 hours a day) than anything else. A new breed of wealthtech infrastructure including Altruist and Farther are helping modernize back-office processes for RIAs. We see additional opportunities for new tools to help advisors scale their clientele while still providing high-quality highly personalized advice.
New superdrug for finances: A decade of advancements in fintech infrastructure have opened up the aperture for the types of consumer experiences that can be built. There’s an opportunity for dynamic consumer fintech products that actually influence and incentivize real behavior change (think Ozempic not Weight Watchers). Imagine software that can analyze past spending patterns, automatically send parts of a paycheck into various investing / savings accounts, and dynamically implement merchant-category or location-based card controls.
Democratization of hedging: Recent volatility in financial and commodity markets have painfully highlighted the need for effective hedging. Historically available only to the sophisticated, there is huge demand for the certainty that hedging can provide if it’s easily accessible. For businesses, this could look like access to better FX management tools or to relevant commodities markets. For consumers, the popularity of I-bonds when inflation spiked demonstrates that there’s demand for more sophisticated ways to hedge major macro shifts. New solutions can help democratize access to these sophisticated financial products for the masses.
AI adoption at the edges (not the core)
There’s no doubt AI will transform financial services. The opportunity is huge: McKinsey estimates that over 20% of a typical bank’s annual budget is spent on highly manual processes across underwriting, ops, risk, and compliance. Much of this can be automated.
The question is but when?
Financial institutions move slowly. The riskier the tech, the slower they go. Case in point: we’re 20+ years into the shift to cloud and banks are only just starting to catch on… For core financial services manufacturers (large banks, carriers, payments networks) with high barriers to entry, the risk–reward for adopting new gen AI based solutions today just isn’t there.
Early Gen AI tooling will be at the “edges,” tackling the workflows and services that today are already being outsourced. This work is low risk, low margin, and high volume. The set of applications is broad and will end up being very industry specific but some examples of spaces we’re watching include:
Solutions for insurance brokers and agents (e.g. agent productivity and broker management software)
Third-party administration and claims adjustment
Receivables / debt resolution and collections (first and third party)
Form-based origination and servicing workflows
Dispute / chargeback handling
Tax and accounting services for consumers and businesses
Regulatory reporting / filing and stakeholder communications
Startups tackling this space can take two forms:
Software solutions selling to existing players
Tech-enabled providers (i.e. new industry entrants that do the work directly)
For those in 1), the biggest challenge is that wrappers on top of popular LLMs (e.g. OpenAI, Anthropic) are easily commoditized. Over the past year, many categories have quickly been saturated by dozens of new entrants. To create enduring value, companies with this approach need an initial wedge that is easy to implement with quick time to value. Once trust is established, they’ll earn the right to own critical workflows and data.
Meanwhile, companies in 2) can scale quickly by going head-to-head with services-led industry players but need to be able to evidence superior unit economics (driven by tech) that offset an eventual multiple contraction. The approach that ultimately wins will come down to vertical-specific characteristics.
The Ask
So what did I miss?
There’s so much going on that it’s impossible to capture it all. In fact, there are ideas that I couldn’t find a way to fit in this piece (don’t worry they’re saved for future pieces)!
At Primary, we’ve been lucky enough to work with some of the biggest names in fintech including Alloy, Vestwell, Pinwheel, and Orum, among others. We lead rounds from pre-Seed through Series A and bring our full set resources to bear to help navigate early day challenges. We’re actively looking for the big ideas and about those tackling them so if you’re a builder, operator, or investor in the space, I’d love to hear from you. Drop a comment below or forward this along to a friend!