The Rise, Fall & Reset of The Fintech Industry

FinTech experienced a boom from mid-2020 to early 2022, with 25% of venture dollars invested, followed by a downturn to near 0% by late 2022, a period referred to as "FinTech winter."

The rate cycle significantly impacted FinTech, with low rates boosting lending and rising rates shifting focus to deposits, leading companies to go "full stack."

FinTech has matured from a startup industry to being largely synonymous with financial services, with embedded finance and broader adoption of FinTech principles.

The initial focus of FinTech was on solving access issues, but the industry has largely addressed this, now concentrating on enhancing customer experience and addressing underlying problems.

The boom in 2020-2021 saw massive funding, but the subsequent "FinTech winter" in late 2022 led to a significant reduction in venture capital.

The shift towards AI is transforming product underwriting, and there's an increasing adoption of outside software and embedded finance across various sectors.

The FinTech industry has experienced distinct "seasons," from a "million flowers bloom" phase to a COVID-induced "insanity" boom, followed by a "FinTech winter," and now a "spring" resurgence.

The "million flowers bloom" phase from 2014-2019 saw the rise of digital financial services like Robinhood and neobanks, while crypto also emerged and grew.

The COVID-19 pandemic triggered an "insanity" of growth in FinTech from mid-2020 to late 2021, with substantial venture funding.

At its peak, 25% of venture dollars went to FinTech, but this dropped to near zero by the second half of 2022, signaling a "FinTech winter."

Interest rates played a crucial role, with low rates driving lending volume and higher rates pushing companies towards deposit-based revenue streams.

Many FinTech companies expanded to become "full stack," acquiring bank charters to generate revenue from deposits as rates increased.

FinTech has evolved from a startup industry to becoming mainstream within financial services, powering experiences beyond traditional banking.

The concept of "every company is a fintech company" has evolved into embedded finance, where financial services are integrated into non-financial platforms.

The next horizon for FinTech is not just digitizing financial services but making them "excellent," focusing on areas like credit scoring and understanding consumer free cash flow.

AI's potential impact is vast, with the most immediate use case being in combating financial fraud, which is currently growing at an alarming rate.

Crypto is viewed as a subset of FinTech, with a focus on how it integrates with existing consumer behaviors and the broader financial system.

The strategy for FinTech is to adapt existing consumer behaviors to newer, easier, and more accessible platforms, potentially leading to a convergence with crypto.

The meta theme is how large financial institutions are embracing innovation and technology, moving from building everything in-house to adopting best-in-market solutions.

Enthusiasm in crypto is growing around distinct financial systems adopting stablecoins or tokenizing assets, distinct from purely decentralized applications.

Plaid has become foundational infrastructure for the FinTech industry, connecting millions of accounts and enabling value-added services.

Despite market cycles, many FinTech companies like Robinhood and SoFi have become significant public entities.

Companies are now full-stack, holding deposits and generating revenue, and AI is accelerating the adoption of technology by incumbent financial institutions.

A humbling experience has made financial institutions more open to adopting external technology rather than solely building in-house.

Software companies with network effects are increasingly selling into larger financial institutions, addressing real workload challenges, with AI accelerating this adoption.

The biggest use case for AI in financial services is currently fraudsters committing fraud, which is growing at 18-20% annually.

The shift from 25% of venture funding to less indicates a recalibration of the market, influenced by macro factors and the need for sustainable business models.

Financial services is a massive part of the global economy, and while there can be overexcitement about TAM, successful companies continue to grow.

Zero interest rates fueled rapid lending growth, but rising rates compressed margins, highlighting the importance of sustainable business models beyond pure growth.

Despite economic shifts, companies that survived the downturn are stronger, expanding offerings to include lending and investments, becoming more full-fledged.

The winners in FinTech have become even more dominant, while many companies did not survive the market correction.

Consumer fintech investments have decreased due to rising customer acquisition costs, though emerging economies still present significant opportunities.

AI could be a catalyst for a new wave of consumer fintech, focusing on "self-driving money" and personalized financial management.

Plaid's evolution includes building a platform and observing emergent behavior, focusing on enabling data linkage for AI agents and optimizing for user actions.

The focus is shifting towards solving known problems within financial institutions through AI, automating manual processes in areas like risk, compliance, and treasury management.

Companies like Moment and Salient are developing AI-driven solutions for fixed income trading infrastructure and voice agents for loan servicing, addressing inefficiencies.

The reorientation from financial product-led to software-led businesses is driven by AI's ability to unlock new markets by addressing labor costs.

The biggest current use case for AI in financial services is the acceleration of financial fraud.

While the cat (financial institutions) will win long-term against the mouse (fraudsters), the mouse is currently winning.

Plaid has developed an anti-fraud suite called "Protect" that analyzes user actions to assign trustworthiness scores.

The industry is improving in fighting deepfakes, but AI-powered fraud schemes like "pig butchering" are becoming more sophisticated and harder to combat.

Plaid has navigated multiple "crucible moments" and product cycles, including the failed Visa acquisition, the COVID boom, and FinTech winters.

FinTech has experienced multiple "refounding" or "crucible moments," leading to increased product velocity and a stronger focus on long-term viability.

The "EDM pumping" phase was less enjoyable for some due to rapid growth without clear value-add, while the "winter" period fostered a sense of proving the company's resilience.

Despite pronouncements of "FinTech is dead," the sector continues to attract true believers and has fostered a strong community.

The current "spring" in FinTech shows green shoots with emerging startups that are more responsible, profitable, and focused on long-term growth.

The current wave of AI funding is also beginning to influence FinTech, leading to the emergence of FinTech AI products.

The momentum for software companies selling to financial institutions is strong, with AI enabling these companies to perform the work within the institutions.

The massive size of the financial services industry and its historical reliance on manual processes create significant opportunities for software and AI solutions.

AI is creating new opportunities for entrepreneurs to build software companies that can address inefficiencies and manual work within financial services.

Plaid's recent product launches include an anti-fraud suite and a modern consumer credit score, which are expected to be major growth drivers.

The focus is on building a "forward-deployed company" that develops technology and adapts to emergent user behavior.