a16z Fintech: The Big Ideas that Fintech Companies Will Tackle in 2023

Below are some of the big ideas in Fintech that Andreessen Horowitz is excited about for 2023:

Compliance as a Competitive Advantage

If “software is eating the world,” it has not yet taken a big enough bite out of compliance. Post-Dodd-Frank, financial services companies face more than?50k regulations?across dozens of federal and state agencies (and that’s just in the United States). The existing and very manual compliance and risk processes are failing at both large financial institutions and at fintech startups supported by sponsor banks. Furthermore, while compliance is complex for businesses operating in just one geography, it’s even more difficult to manage across multiple countries. As more global companies embed fintech, the need for global compliance and risk infrastructure increases.??

In 2023, companies of all sizes will turn to software to solve their challenges. We expect to see more tools for sponsor banks to manage third parties; for fintech companies and companies embedding financial services to manage all aspects of risk and compliance; and more compliance infrastructure serving?default global?companies.????

— Angela Strange , General Partner, and Joe Schmidt IV , Partner, Fintech Team (@astrange) (@joeschmidtiv)

Tools for Stretching your Dollar

While we’ve seen significant focus and investment over the past 5+ years on innovating around the front-end of financial transactions, we’ll see a market shift in 2023 toward building tools to better manage the often unseen (yet vital) back-office functions of running a healthy financial services business. With the backdrop of a challenging macro environment, a renewed focus on cash management, equity efficiency, and preserving capital markets relationships will spawn both the adoption and proliferation of a host of new tools and services to help companies better manage their financial health. Stretching your dollar is back in vogue (as are the tools to make it happen)!

— David Haber , General Partner, Fintech Team (@dhaber)

GPT Unlocks Credit Counseling

OpenAI — the ChatGPT interface in particular — is driving one of the most interesting new product cycles in fintech and financial services.

One way to think about this technology is that it unlocks labor supply at 10x a lower cost than humans. Previously, for example, the only cost-effective way to deliver credit counseling was to subsidize the human costs with high fees (either directly, or bundled into the cost of financial products) or to deliver a less personalized experience with an app. Since neither of these is a great solution, most folks have been left to fend for themselves.

The ability of ChatGPT to take input and deliver a near-human-quality credit counseling experience changes all of this. We expect to see this capability — and services like it — become available for subprime and early-credit consumers in particular. In that simple financial coaching could dramatically improve many consumers’ credit files, this technology could act as a counterweight to some of the negative macroeconomic factors currently affecting consumer credit, such as inflation, job loss, and depleted savings accounts.

— Anish Acharya , General Partner, Fintech Team (@illscience)

The Infrastructure Stack for Business Banking

As?every company becomes a fintech company, we have seen an explosion of fintech infrastructure companies: KYC/AML, data APIs, bank accounts as a service, issuer/processors, etc. Thanks to these companies, it is much easier to launch a new fintech company, and for software companies to embed fintech.??

However, many of these infrastructure companies cater to consumer use cases, forcing companies tackling business use cases to continue to build some of their own infrastructure. In 2023, we expect to see more companies tackling the infrastructure layers needed to bring business banking into the digital age (at most banks, the business owner is still required to show up in person just to open an account!). These infra tools will also accelerate B2B marketplaces and software platforms adding financial services for their business users.??

— Angela Strange , General Partner, and Marc Andrusko , Partner, Fintech Team (@astrange) (@mandrusko1)

The Race for “Know-Your-Everything”

In 2023, both new founders and existing startups will continue to vie for the most coveted spot within fintech infrastructure: the one-stop-shop for identity verification and onboarding. To date, Know Your Customer (KYC) software has been more developed than Know Your Business (KYB).?That said, given the latter’s obvious pain points — from onboarding to credit decisioning — we expect the KYB ecosystem to mature. Currently, the challenges are especially onerous for cross-border use cases, as different data sets across geographies can compound the verification process.?This need for better identity tools has been exacerbated by increased regulatory scrutiny on fintech companies, particularly around AML and fraud.?

What might we see? First, we expect the leading players in KYB and KYC to each offer the other service. Much of the subcomponents and data from the KYB process overlaps with KYC. This is particularly true for businesses attempting to serve SMBs — since most components of sole proprietorship registration are entirely self-reported by an individual, they require more extensive KYC checks. Second, we’ll see more proprietary analytics and identifiers. Many leading KYC startups aggregate hundreds of disparate data sources to provide comprehensive coverage, but few have been able to convert this data into a proprietary identifier. Finally, the identity verification players can vertically integrate by expanding more broadly into areas like onboarding and credit-related workflows.

— Seema Amble and Marc Andrusko , Partners, Fintech Team (@seema_amble) (@mandrusko1)

Fintechs Are Becoming Banks

With deteriorating credit performance in 2022, capital providers have tightened their requirements, making it more challenging for marketplace lenders to grow originations. Digitally enabled lenders are increasingly focused on access to stable capital sources, such as long-term forward flow agreements, warehouse facilities, and customer deposits.?

SoFi and LendingClub have highlighted their decision to purchase bank charters for providing certainty and lower cost of funding. With customer deposits on the balance sheet, they “control their own destiny” in an uncertain macro climate. By contrast, this environment has been less favorable to Upstart and other marketplace providers.?

In 2023, we expect more digitally native lenders to pursue bank charters. In the current higher interest rate environment, marketplace lenders are offering high-yield accounts to collect deposits on behalf of their capital partners who in turn buy their loans. This strategy may be a first step toward building their own capital base. As these digital lenders look to become banks, what remains to be seen is how regulators will respond. That’s always an open question…?

— Alex Immerman and Justin Kahl , Partners, Growth Team (@aleximm) (@justin_kahl)

Payment Infrastructure Opportunity In Latin America

Over the past decade, a wave of vertical SaaS companies — Toast , ServiceTitan , and Procore among them — empowered SMBs in the U.S. to run their operations more efficiently. Though the vertical SaaS revolution has not yet come to Latin America, we are seeing early indications that SMBs in the region understand the value of software.?

For vertical SaaS companies in the U.S., offering integrated services such as payment processing and payroll was key to strengthening and monetizing their relationships with merchants. In Latin America, where there’s a low willingness among SMBs to pay for software, these integrated services play an even bigger role for vertical SaaS players.?

Hence, I see an opportunity for a white-label payment processor in Latin America. Until now, there have been very few players offering such services with legacy technology; those that do are mainly focused on enterprises and large startups. However, there is currently an opening to serve high-growth, early-stage vertical software players (and later expand to a broader market). In addition, by taking advantage of new technologies such as NFC (near-field communication), which turns cell phones into point-of-sale terminals, startups can cut into the high cost of hardware that legacy players currently contend with.

— Gabriel Vasquez , Partner, Fintech Team (@GEVS94)

Embracing Large Language Models While Maintaining Trust

In 2023, fintech companies will need to strike a delicate balance between pushing the envelope by building with new technology rails such as Large Language Models (LLMs), but also maintaining customer trust. While potential use cases within fintech are still emerging, LLMs like GPT-3 and the upcoming GPT-4 may help businesses train datasets much more quickly and cheaply. In addition, they may finally be able to fully automate data-heavy and manual tasks, such as insurance claims processing or loan origination, that have only been semi-automated in the past.?

But while LLMs can address some low-hanging fruit, more complex use cases will require reserves of user trust. When dealing with, say, fully automated investment decisions or automatic financial reporting for businesses with complex money flows, companies will need to balance these new services and experiences with potential skepticism from customers.

— Sumeet Singh , Partner, Fintech Team (@sumeet724)

FedNow May Be Just the Beginning

Skeptics of the highly anticipated launch of the?Federal Reserve’s real-time payment network, FedNow, point to the limited use of the existing networks in the U.S. The one key difference, however, is ownership: RTP and Zelle are owned by consortiums of the largest commercial banks in the U.S. Why will government ownership of a national real-time payment rail make a difference? It will incentivize third-party infrastructure built on top of payment rails, as has been the case across the world.

In Brazil, Nubank offers its customers the ability to pay via PIX with credit, creating an alternative to its own credit cards. In Australia, Zepto helps merchants issue and settle refunds in real-time, driving increased customer loyalty. And in Europe, Volt.io enables pay-by-bank (in real time) across national payment rails, a key necessity for cross-border ecommerce. These use cases and more are built on top of “public” payment infrastructure, which has not been possible in the U.S. until now.?

A public payments infrastructure is an invitation to create new use cases, features, and functionality of real-time payments. Maybe now we can catch up to the rest of the world?

— Santiago Rodriguez , Partner, Growth Team