Emerging From Fintech’s Cold Snap

Financial services are entering into a new era defined by AI + further regulation. Large banks and FI’s are as powerful as ever, best in class scaled fintech companies are continuing to compound efficiently, fintech valuations have normalized, and the tectonic shift of AI is bringing about massive step changes in efficiency.

It’s clear that the coming decade of innovation in fintech will be underpinned by a few core themes, including:

• Gradual (and then sudden) adoption of AI as companies start to realize actual operational gains
• Increasing digitalization of legacy financial services outside of core banking: accounting, capital markets, commercial banking, asset management, insurance, and more
• Increased demand for novel identity and fraud products in an era where we can no longer trust our eyes and ears
• Increased regulatory scrutiny and actions across banking and fintech
• New real time payment rail adoption, whether through stablecoins, RTS, FedNow, etc.

But first, a lookback

Fintech in the US has been through a wild ride over the past decade. In 2012, fintech was a bit of a sleepy industry, with just over $2B of deployed venture capital. The space proceeded to explode over the next ten years, with a peak of $90B+ deployed in 2021 as Covid dramatically accelerated digital adoption across consumers and companies while ZIRP + stimulus capital added more fuel to the fire. 2022 and 2023 saw a rapid pull back from fintech as interest rates, inflation, regulatory landscape, and multiple compression all hit the industry hard, with $62 billion deployed in 2022 and just $35B deployed in 2023 – what we’ve termed as a fintech cold snap.

The 2010s era of fintech was around the great platform shift to digital – first mobile / tablets then APIs and embedded brought products closer to the point of transaction with an intuitive user experience –  fundamentally changing the entry point of users interacting with financial services. This was empowered by infrastructure that allowed up and coming startups to compete for mind share (and dollars) amongst consumers and SMBs. As those companies have reached maturity (and lofty valuation expectations), they’ve increasingly started to rebundle and bolt on additional SKUs.

The 2020s era of fintech has been defined by the confluence of external black swan events, a swing in internal momentum and funding from underdog to hype and back to underdog again, and transformations across payments, regulation, and AI.

Over just the last 3 years, we saw one black swan event after another including:

• Covid 19 pandemic
• Wirecard scandal
• Gamestop short squeeze + rise of wall street bets
• Archegos Capital Management collapse
• Crypto volatility and crashes (Terra, FTX)
• Bank crisis after bank crisis (SVB and First Republic Bank)
• Regulators cracking down on fintech / bank partnerships (Synapse)
• Rapid inflation + supply chain shocks
• Dramatic interest rate increase

As we exit the fintech funding cold snap heading into 2025, we wanted to highlight a few of the areas that we’re excited about and where we are actively looking for startups to back!

Peering into the present and what the next decade will look like

Bank Infrastructure + Software

The pandemic dramatically accelerated the need for digital adoption across the banking landscape, from small community banks and credit unions all the way up to large bulge brackets. The ongoing labor challenges and high operating costs driven by regulatory oversight have driven the step change in demand for technology products and solutions.

As a result, banks have also now become an incredibly lucrative customer base for start-ups to sell into. Sales cycles are still long and difficult, but gone are the days where banks would only buy software from the IBMs, Fiservs, and Oracles of the world.

“Efficient” is probably the last word that anyone would use to describe the tech and operations at any bank regardless of size. Advancements in agentic technology have now created an opportunity to streamline and automate the work done by armies of operations and support teams.

In particular, we’re excited about opportunities including:

• Codegen for core modernization: The biggest ongoing technical risk to our financial systems today remains that most systems are heavily reliant on outdated systems, largely written in COBOL, a dying programming language. As codegen tools mature, can they finally start to tackle the root of the problem: reducing friction on the path toward new cores and off mainframes? ‍
• Modern payments infrastructure for banks: Consumers and businesses now expect money to move faster and settle instantly, but existing infrastructure can’t keep up.‍
• Verticalized loan-origination systems (LOS) for specialized bank lenders: There are opportunities to help banks and non-bank lenders modernize the systems of records that power their lending operations and deliver better customer experiences across mortgage, business loans, personal loans, and more. ‍
• Bank-facing governance, risk, and compliance (GRC) software: Strict and industry-specific regulatory requirements and the need for strong internal controls creates an opportunity for an Auditboard like solution that is purpose-built for banking.  ‍
• Treasury management solutions for banks: The volatility in bank balance sheets is only going to become more acute and visibility into current positions as well as the ability to scenario plan against potential shocks is limited today. There is a need for new software as well as new deposit and/or lending marketplaces that help improve bank resilience. ‍
• Next gen RPA – agentic workflow products for deposit operations: Too many processes are still manually managed today – check processing, lockbox operations, wire approvals + fraud detection, and account closures to name a few. Agentic workflows can tackle these inefficiencies.‍
• Verticalized ITSM for IT ticketing and auto-remediation: A single employee password change or internal help desk need involving another department (IT, legal, customer support, etc.) can become an agent of chaos. The opportunity to build an agentic central ticketing system that connects to all internal documents and departments and can auto-remediate questions based on company-specific policies is upon us.

Risk / Fraud / Compliance

AI and compliance has become a hot spot area for early stage fintech investors given the amount of regulatory scrutiny being levied towards banks and fintech alike. We’re excited to find founders that are looking to automate more of the tasks across risk and compliance with a mix of AI + human in the loop services as well as teams using LLMs in unique ways to detect and deter new AI powered fraud vectors. Examples include:

• Solutions tackling first party fraud: As money movement and account opening friction goes to zero, the first party fraud problem (i.e. using your own identity to commit fraud) is skyrocketing across disputes/chargebacks, ACH fraud, and more. Solutions tackling first party fraud (and dare we say… maybe even a consortium?) are more needed than ever.
• Financial crime “pentesting” / “redteaming” and posture management: There’s an opportunity for an AI platform for red team financial crime + dark web fraud vectors that is constantly testing financial institutions for gaps and improving the posture / configuration of their customers automatically to reduce the risk of fraud and fines while also increasing security for those who are the most vulnerable.
• Next gen RPA – agentic workflows / business process offshoring (BPO) for back office operations: So much of the work done by risk/compliance departments today is outsourced overseas because it requires repetitive manual intervention (e.g. AML reviews, sanctions checks, escheatment, call center verification). This is a space ripe for agentic workflows to automate.
• Anti-money laundering (AML) software designed for a real time world: SWIFT alone processes 45M transactions a day. As borders continue to fade away on the global stage and money starts to move around the world in real time, the old ways of doing AML can’t keep up.

Insurance + Wealth Management (RIAs)

These industries, although massive, are still defined by a value chain full of pens, paper, and data transmitted in archaic ways. They are ripe to be transformed by AI, which can empower the incumbents and reduce the challenges in finding skilled and willing talent. LLMs provide a unique modality across text analysis, summarization, voice, and more that can drive true ROI for industries that have historically been reluctant to adopt software or are suffering from point solution fatigue. AI based solutions can meet users where they are while adding significant leverage.

Areas where we’re interested in injecting AI include:

• Producer management software (for both insurance and RIAs): The atomic unit for how insurance is sold is through agents – their commissions are a cross-functional, multi-party jigsaw puzzle of reconciliations and data across distributors’ and insurance carriers’ systems. This is both a CRM and accounting ERP and one that yearns for change.
• Insurance and RIA compliance software: Given the underlying regulated nature of insurance and asset management – similar to healthcare providers – it requires every worker to be licensed and approved by states and at the national level, which is fundamental to driving revenue. We’re incredibly excited for tooling that helps manage licensing that empowers agents and advisors across the US, Europe, and internationally.‍
• Next generation of underwriting: Commercial underwriting is challenged by the morass of admin expenses (40% of a typical policy may go to admin expenses), which affects the pace of underwriting (revenue), operational and manual workflows (costs), and underwriting profitability (profitability per policy). We’re excited to rebuild the entire value chain including submission, intake, underwriting, clearing, triage, and broker management.‍
• Third party administrators: TPAs are the operational backbone of health insurance and employee benefits, managing complex claims, compliance, and administrative services between insurers, employers, and policyholders. As the linchpin in benefits delivery, TPAs orchestrate in a high-stakes environment of data management, regulatory adherence, and client service. With the increasing demands for transparency, efficiency, and digital transformation, this space is primed for technology that can empower administrators to streamline processes and enhance user experience on a global scale across claim disputes, denials management, and more.

Tech-Enabled Services / Vertical BPO-in-a-Box

GenAI is opening up the ability for companies to “sell work” instead of software and creating leverage for traditionally human-led services industries. Across the financial services ecosystem there are whole industries that are poised to shift dramatically from human to human + software. The result: services that look and feel much the same but are faster, cheaper, higher quality, and higher margin. The ideal model can guarantee 80%–95% accuracy to customers, reducing costs by 80% and keeping humans in the loop for the final manual checks. Companies from EvenUp to ScaleAI are variations of this model already.

A couple areas we’re excited about include:  

• SMB tax return software: A one-click tax return type solution that enables SMB business returns for solopreneurs to brick and mortar businesses.
• Legal: Vertical legal solutions from employment, to personal injury, to contract review that provide the full workflow output while keeping a trusted human in the loop that empower either SMB legal teams or companies that are looking to reduce their legal spend
• Audit: Auditing services are a painful, expensive necessary evil for many companies past a certain size and represent a $50B market in the US alone. We’re looking for agentic platforms that enable end to end audit workflows
• BPO for banking / insurance: AI products that can fully replace BPOs targeting deposit operations, loan operations, call centers, customer support, compliance, fraud ops, and more.

Capital Markets

In the last decade, we saw a wave of innovation in capital markets focused on enabling retail investor access to different types of products (e.g. digital fee-free trading, alternative investments, fractional shares). As institutional and retail capital continues to flow into different segments of the capital markets, the back office infrastructure to support this growth has remained woefully behind.

We’re looking for companies that are tackling pain points in the plumbing of our financial markets including:  

• Back-office trade operations: Post-trade operations from clearing, settlement, and reconciliation across many asset classes are still handled manually today. All markets (equity, fixed income, FX) are increasingly trending to T+0 (i.e. same day) settlement. This shift will require automated software solutions to handle the operations typically done manually today.    
• Transfer agents: Transfer agents are record keepers for publicly traded companies and the market is effectively a duopoly today. Insiders have had little incentive to innovate – is this a wedge to a broader suite of back office software for large public companies?
• New securities lending infrastructure: Securities lending allows a security holder to temporarily “rent out” their holdings to a borrower (typically a hedge fund that is looking to short the stock). There are $34T of lendable securities today and more institutional investors are looking to come to the lending markets to optimize returns. This creates a window for a new automated marketplace or exchange to emerge.
• Private markets software: There is $15T of AUM in the private markets growing 15% yoy. Managing this on the back end is an army of finance and ops folks using spreadsheets – limiting the growth aspirations of GPs. We need better systems of record, portfolio management, reporting, and admin software to enable the next era of private market growth.

Payments… and Crypto!

The payments pie continues to grow rapidly with no end in sight. Many venture-backed giants, including Stripe, Adyen, and Wise, have already emerged in the category, capitalizing on the rise of ecommerce and digital activity. As the way money moves continues to evolve both in terms of frequency (e.g. subscription, usage-based) and complexity (e.g. cross-border, real-time), we believe there are opportunities for tailored solutions that address these including:  

• Payments for professional services (e.g. next-Gen Affinipay): professional services firms like lawyers, accountants, architecture/design, and consulting have specialized needs in the way they manage billing and payments with clients. This market is currently dominated by clunky old school players and as software increasingly looks and feels like services (e.g. AI Agents that “sell work”) the payments infrastructure will also need to be upgraded.
• Stablecoin infrastructure and B2B use cases: As the global correspondent banking network continues to shrink, stablecoin-based infrastructure can have the added benefits of instant settlement/reconciliation and lower costs to move money internationally. We believe we’re still in the early days of stablecoin adoption and, in particular, are excited about infrastructure providers that enable true b2b payment use cases.
• Agentic payments / defi: Just a few months ago, we witnessed the first ever AI to AI crypto transaction. We believe the next generation of defi + crypto will push the boundaries of agentic payment infrastructure and we’re excited to meet founders that are building at that intersection with the mindset of also bridging the gap to fiat infrastructure in the future.
• Healthcare payments: Medical practitioners, particularly smaller, independent providers struggle to manage the complex web that is collecting payments from patients and (where applicable) payors. There are still unmet needs for revenue cycle management (RCM) solutions for the long tail.
• Top-of wallet / card management: The average consumer has ~4 active credit cards. As payments for goods and services increasingly move behind the scenes (a la Uber), merchants and consumers alike need ways to help them update old / outdated stored payment information and optimize card usage.

If you're building in one of these spaces, please reach out to us or fill out this form. We'd love to hear from you!

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