Looking Forward in Fintech — 2024 Outlook
With several landmark acquisitions, continued turbulence in the equity markets, and an uptick in funding, 2024 is off to an interesting start! Despite fintech’s recent ups and downs, the Thomvest team is approaching the market with fresh eyes and a strong sense of optimism. The prevailing economic climate, marked by sustained high interest and inflation rates into 2024, has nudged the fintech sector into a critical juncture, creating novel hurdles and headwinds, but at the same time, unique opportunities.
While deal flow will likely continue, albeit at a slower pace than in 2021 or 2022, fintech companies face an array of concerns. Chief among these is an escalation in regulatory oversight and the advent of new disclosure mandates, necessitating increased attention from incumbents and disrupters alike. In a similar vein, the sector must fortify its commitments to data privacy and cybersecurity, adapting to a dynamically shifting threat environment.
Nonetheless, on a macro-scale, with fintech holding a ~2% share of the $12.5T in global financial services revenue, the future still holds an abundance of untapped opportunities for venture investors, and Thomvest is excited to continue its efforts in supporting the next generation of fintech entrepreneurs.
2023 in Review
After the post-COVID explosion of activity in fintech, the sector is now experiencing a period of normalization. Pitchbook recorded $34.6B of fintech investment in 2023, representing a -43.8% YoY decline. This investment has been heavily biased towards B2B, which accounted for 72.1% of total fintech VC in 2023 compared to 40.6% in 2019. The heaviest concentration of funding was found in payments, alternative lending, capital markets, credit & banking, and solutions around the CFO stack. These investments have been driven by technological (generative AI, A2A payments) and regulatory shifts (open banking).
In 2023, $5.9B in VC exit value was recorded across 185 exits, representing YoY declines of -76.1% and -22.3%, compared to 2022 and 2021. On the M&A side, nearly half of all deals with announced amounts in 2023 totaled less than $100M. Still, a resurgence of larger deals occurred during the last half of 2023, totaling 25 $1B+ M&A deals in total. These included landmark acquisitions like GTCR’s $18.5B acquisition of a majority stake in Worldpay from FIS, and Nasdaq’s $11B acquisition of Adenza. Depressed public market valuations also prompted an uptick in take-privates such as EngageSmart, Network International, Duck Creek, and Paya. (Source: Pitchbook and FT Partners)
In 2023, valuation multiples for public fintech companies generally rallied from January to December. As a result, stock returns were mostly positive, with some high-growth fintech companies, neobanks, brokers, and crypto companies outperforming the market. In contrast, DeSPACs have continued to underperform relative to their peers in both fintech and the broader market.
Regulations continue to play a critical role in the pace of innovation and influencing how businesses manage risk. In the US, the OCC, CFPB, SEC, and other agencies have released rules and regulatory frameworks that have had myriad effects across the industry.
Looking forward to 2024, the Thomvest team has identified some key areas poised for disruption and innovation, from the application of AI/ML, the modernization of infrastructure supporting the Great Wealth Transfer, to the evolution of payments and beyond.
AI Applications in Legal and Financial Services
2023 was marked by the rise of Generative AI, with the technology’s immediate and potential impact reverberating across businesses worldwide.
Compliance
Emerging technologies such as generative AI or evolutions in payment rails, like the recent launch of FedNow, bring new capabilities to banks and FinTechs and new products and services to consumers while simultaneously posing new fraud and AML risks as bad actors find novel ways to take advantage of them. Likewise, AML requirements and risks constantly evolve as regulations change, geopolitical situations develop, and regulators and law enforcement pursue offenders.
On the other side of the coin, those same advancements in AI are providing a foundational shift in the ability of financial firms to analyze fraud patterns and anomalies, analyze and intake regulatory documents, review contracts, automate and streamline audit procedures, and provide workflow automation across the entire back office.
Workflow Automation
According to the 2023 Wolters Kluwer’s Future Ready Lawyer Survey, 73% of lawyers expect to leverage generative AI tools in their work within the year. LLMs can transform the workflows of internal and external legal and accounting teams by automating routine tasks, providing quick access to information, and assisting in complex legal analysis. Similarly, we view LLMs as extremely effective in automating various activities like data entry, invoice processing, and reconciliation. The AI-enabled workflow automation space is in the early stages of maturity and has broad implications for the financial and legal industries going forward.
The Great Wealth Transfer
Greater than $80T is poised to move over the next two decades as the Silent Generation and Baby Boomers pass wealth down to their successors. In the next two decades, Millennials are set to be the primary beneficiaries of this “Great Wealth Transfer,” which has far-reaching implications for financial services.
In the near future, an immense volume of assets — including homes, businesses, stocks, real estate, and goods — will require cataloging, appraisal, liquidation, and transfer. This will necessitate a vast array of services and professionals. Digital estate planning platforms such as Trust & Will, Wealth.com, and Vanilla simplify managing estate plans, designating executors and beneficiaries, and collaborating with accountants, attorneys, and advisors. These platforms automate manual processes for clients while simultaneously facilitating client engagement and information flow for advisors.
Similarly, tax considerations involving passing down assets are highly complex. While we’ve written on tax tech before, it’s worth noting that technology addressing the tax implications of the great wealth transfer is highly underdeveloped, and solutions abstracting value away from the estate tax planning and reporting process are largely under-digitized.
A2A Acceleration and the Evolution of Payments
For many companies, fast, efficient, transparent, and secure payments are table stakes — and not just because the flow of funds at these companies tends to be much more complex. Many payments occur over bank rails because they tend to have larger transaction sizes and volumes. However, this pattern is poised to shift.
Account-to-account (A2A) payments are taking off, driven by various real-time payment (RTP) rails. RTP schemes increasingly enable A2A payments from persons to businesses (P2B). A2A is disrupting payment value chains with lower fees than cards. Per Modern Treasury, Global A2A transaction value surpassed $525B in 2022 and is projected to grow at 13% CAGR through 2026. These faster payment rails are changing the dynamics of accounting, tracking, and reconciling money. With instant payments, manual reconciliation done in a standard 9–5 weekday window will not be sufficient, and the need for real-time reconciliation becomes a necessity rather than a fringe benefit, especially at scale. Despite that, the infrastructure supporting new payment rails is largely nascent.
2024 Represents an Inflection Point
2024 is shaping up to be a defining year for the industry, and we are excited about the future. We remain committed to supporting this next generation of transformational entrepreneurs in fintech, and we look forward to the space’s evolution.
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