Themes for Global Fintech & Crypto Adoption
Cobalt Capital’s Ben Futorinsky shares some critical themes he thinks will shape the future of fintech and crypto, and propel both to widespread global adoption.
Theme: Identity, Fraud and Risk Management to Enable the Future of Crypto
Both retail and institutions will need transparency, security and predictability to reduce high decline rates, false-positives, price volatility and market manipulation. Building foundational trust is essential for the future of this industry and to protect retail and institutions from losses. Crypto criminals stole $14B in 2021 due to losses from scams and thefts, growing 79% YoY. At the same time, total spend on digital wallets is expected to 2x to $10T by 2025 with 83% of digital wallet growth being fueled by adoption of digital payments. Core infrastructure needs to be built to prevent this.
Consumer-facing crypto applications and on-ramp solutions need fraud and compliance solutions to onboard customers faster and meet regulatory compliance. Infrastructure needs to be built to make crypto more accessible as offering easier fiat-to-crypto on-ramps will be instrumental in adoption and fraud is one of the biggest challenges for enabling instant access to crypto. Fintechs and crypto companies alike need end-to-end fraud services to manage risk and compliance (Sardine and Alloy as examples). On the DeFi side, the ecosystem has grown in complexity and needs strong risk mgmt. infrastructure to continue capital inflows towards protocols. Companies need better on-chain protocol management and risk assessment tools (Gauntlet and Chaos Labs for example) to manage blockchain protocols and provide more transparent information.
Theme: Fintech Companies Will Want To Spin Up Banking and Crypto Products
Navigating the existing financial systems is difficult. Fintech companies will need to adopt new systems to deploy and manage products for an increasingly complex and global user base. Despite all the innovation and growth, it is still very expensive and time consuming to launch a fintech company. Embedded infrastructure allows any platform to integrate banking or digital assets into their own customer experience quickly and easily (via API endpoints). Banking-as-a-service (BaaS) enables companies to spin up checking and savings accounts quickly and offer more sophisticated features (Synctera as an example).
At the same time, many fintech companies are under pressure from digitally savvy users to deliver native access to crypto and DeFi. However, integration is a heavy lift, compliance is complicated, and most companies lack the resources and in-house expertise to do so. Crypto banking-as-a-service enables companies to embed crypto and DeFi features directly into their products, providing all the necessary infrastructure, compliance and security. Specifically, it enables fintech startups, neobanks, exchanges and payments companies to offer digital asset trading and custody, crypto-backed rewards, yield products and much more. Companies in this space aim to be a one-stop shop for financial institutions to plug their own products into these ecosystems. Ultimately, consumer demand will put pressure to meet compliance requirements across digital asset investing. Companies like Zero Hash, Conduit and SeriesFi are setting standards in this space.
Theme: Accelerating Time to Money
Real-time payments and funding are essential to match heightened consumer expectations around the products and services they use. Whether as a business or consumer, there is a demanding need for instantaneous “time to money” or rather, the ability to transact with digital payments. Manually intensive payment methods are likely to lead to high error and failure rates, making companies and individuals vulnerable to security risks and increasing costs. Building payment rails, facilitating international payments and enabling money movement via instant ACH helps time to money accelerate. Astra as an example, helps provide automated, bank-to-bank transfers for fintech startups and enterprises, acting as a fast and risk mitigated funding solution for users. As of 2021, the ACH network moved ~$73T, growing 17.7% YoY. The top 50 financial institutions by volume amount to <$25T of the portion, resulting in large incremental TAM.
By default, crypto has an irrevocable transfer model where you receive instant money. Users, must be on-ramped from the fiat world, have instant funding in their accounts available to use, trust the platforms they are using with security in place, and be able to stream dollars from one account to another, in real-time. Software must facilitate fiat-to-crypto payments conversion, underwrite risk of accounts to provide instant funding via ACH, enable continuous settlement with per-second netting, and offer gateways to access DeFi yield earnings through treasury management.
Treasury management is a large opportunity for innovation. There are three focuses:
- Web3 Companies: DAO treasury mgmt. players focused on serving corporate treasury teams at these companies
- Web2 Companies: Treasury mgmt. players focused on helping startups with considerable cash balances in the bank to deploy
- Enterprise and Institutional: Treasury mgmt. focused on large corporations and hedge funds deploying capital into crypto
Another area I’m interested to explore is the evolution of the subscription business model which I cover in a previous article found here. Ultimately, the rising adoption of subscription models based on consumer and business demand created an increasing need to upgrade legacy systems. The potential for the subscription model grows even further when DeFi enables payments to be “streamed” in real-time. The vision here, for a user, is to receive wages by the second, simultaneously stream money into savings and investment accounts, pay back any loans, and buy, and schedule ongoing buy/sell orders based on event driven outcomes.
A large part of the world is still underserved and underbanked by existing financial institutions. Fintechs need to adopt systems to deploy and manage products for an increasingly complex global user base. With this, real-time money movement is essential. For this to exist, the future of payments and onboarding revolves around transparency, security and predictability in the services we use. I believe in a world of financial inclusion and I’m excited for the technologies that will help enable widespread adoption of the services we need to exist.
If you are building, investing, or involved in this space, I’d love to chat at [email protected].