What Potential Fintech IPOs Say About a Market Recovery

What Potential Fintech IPOs Say About a Market Recovery

A Problem With AI-Based Credit Models

What Potential Fintech IPOs Say About a Market Recovery

February 20, 2024

By: Tyler Brown

When Plaid hired its president two weeks ago, the infrastructure giant set off fresh initial public offering (IPO) rumors that sparked chatter of a fintech recovery. It’s too early to tell when that recovery will truly take hold, but as we recently wrote, fintech funding is showing signs of perking up. As we prepare for potentially better days ahead, there are three areas that were big at fintech’s peak which are poised to regain momentum, especially as some of the darlings of these spaces finally look to go public.

  1. Embedded finance in marketplaces and Software-as-a-Service (SaaS) companies: Stripe rose to prominence as a one-stop-shop for ecommerce payments infrastructure, but its reach has extended into infrastructure that enables its clients, which include big names like Shopify, to embed financial products like ACH and wire transfers and stored-value accounts. It made headlines in late 2020 with the debut of its financial services offering, Stripe Treasury, touted at the time as a major milestone for embedded finance. The company is one of those in the IPO conversation currently, and if it does make the leap, it could serve as a boon to others in this space. In fact, the future of embedded finance may be a blend of payment and banking application programming interface (API) solutions that combine commerce-focused infrastructure (payment acceptance, for example) with bank products (card issuance, embedded checking accounts). This would go hand-in-hand with the recent shift across the wider Banking-as-a-Service (BaaS) market toward business-to-business (B2B) propositions.

  2. Open banking infrastructure: Firms like Plaid and MX built moats in data aggregation by assembling networks of financial institutions (FIs) and fintechs ahead of the fintech bubble. The ability to connect fintechs to customer data at FIs made open banking (and these firms) extremely popular. Soon, pending regulation will protect their underlying business of pulling consumers’ data from FIs and delivering it to fintechs on consumers’ request. But basic API-based data exchange is not much of a differentiator. To compete, such aggregators are focused on enriching and processing data in ways that make them unique. Examples go beyond payment initiation, authentication, identity verification, and transaction enrichment, to use cases with fraud and compliance, credit decisions, and processing for real-time payments. We’re waiting to see what outside of consumer fintech can be built on top of those enhanced platforms, and who will be doing the building.

  3. Enterprise expense management: The value propositions for expense management fintechs like Ramp and Brex (two more names that often end up on potential IPO lists) have evolved as their customer bases have grown from small businesses to mid-market and international enterprises. They have built far beyond cards, business accounts, and expense tracking to create extensive enterprise software integration; chief financial officer (CFO) tools like accounting, tax management, and forecasting; global payments; and artificial intelligence (AI)-driven automation. The use of AI for process automation, reporting and alerts, and information retrieval make them increasingly sophisticated and useful for particularly the largest customers. Expense management may be too narrow a category as these companies push to rebundle the “CFO stack.” As such, this sector has a lot of promise, led by big names, but it can also be a tough space to compete in, and extremely cash intensive.

It could be a while yet until the market comes out of its trough, fintechs attract substantially higher funding, and more big names grab headlines or show signs of preparing to go public. But, in the meantime, the areas above represent sectors where fintech giants are picking up their heads and point to where we may see early strengthening. Notably, all three of these sectors serve businesses, none of them are consumer oriented.

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