We originally published this piece in Forbes here.
Over the last few years, consumer fintech has been all the rage. And for good reason: consumer fintech startups have greatly improved the customer experience across many financial applications. This has led to a number of great outcomes including Intuit’s acquisition of Credit Karma for $7.1B earlier this year and Paypal’s acquisition of Honey for $4B at the end of ’19. And consumers are voting with their wallets: 14.2M Americans (6% of US adults with a checking account) now consider a challenger bank like Chime, Varo, etc to be their primary bank.
While the spotlight has long centered on consumer fintech, 2020 will mark the year that B2B fintech finally steals the show. Not only b/c of the recent exits we’ve seen (Plaid’s $5.3B sale to Visa, SoFi’s $1.2B acquisition of Galileo and nCino’s recent IPO) but also because of the ever expanding purview of B2B fintech. This begs the natural question: what is B2B fintech?
A 20-year Evolution
Defining B2B fintech requires going back in time a few decades. If we look at the evolution of B2B fintech, we are effectively on the cusp of a 3rd wave: fintech 3.0. The last 20 years have witnessed a widening of B2B fintech’s mandate and, as a result, a broader base of enduring public winners.
Modern B2B fintech first began in the early 2000s with companies focused on just two “core fintech” areas: payments and banking-as-a-service. The most notable company to come out of fintech 1.0 was of course Paypal. Founded at the dawn of the internet, Paypal actually operated via a B2B2C model, embedding at the point-of-sale with merchants and enabling consumers to transact with merchants effortlessly. Paypal now has a market cap of over $230B.
In the 2010s, fintech 2.0 emerged and the definition of B2B fintech began to expand. Within “core fintech,” we saw payments and banking-as-a-service continue to deliver big outcomes (e.g. Square, Afterpay and Q2.) But core fintech expanded with the rise of lending-focused companies (e.g. LendingClub, Greensky) as well as commerce infrastructure (e.g. Shopify.) We also saw the emergence of enterprise software/SaaS companies in fintech-adjacent verticals like real estate (e.g. RealPage) and horizontals like finance operations and HR benefits (e.g. Blackline, Bill.com, Paylocity.)
In the 2020s, we are sure to see fresh winners emerge in the fintech 1.0/2.0 categories. Many of these categories (like payments) are evergreen and continuously evolving. Others are still quite nascent in their overall development arc. But fintech 3.0 will continue to further fintech’s broadening mandate. Core fintech will expand to include winners in identity, fraud and risk (several of which are already in the making.) We are also likely to see additional winners in fintech-adjacent verticals like insurance and fintech-adjacent horizontals like compliance, privacy and security.
Historically Strong Performance
Fintech 3.0’s prospects are particularly exciting given just how well earlier generations of B2B fintech (1.0/2.0) have performed on the public markets. With the notable exception of the lending category, every other category has posted at minimum triple digit growth post-IPO. In fact, the aggregate market cap of this basket of B2B fintechs has increased 1,661% post-IPO and is now worth half a trillion dollars.
Themes & Building Blocks for Fintech 3.0
As we look towards the 2020s, fintech will continue to broaden in scope and mandate. We will see core fintech areas like payments, banking and lending continue to re-invent themselves again and again. We will also see a greater number of enterprise software/ SaaS entrants rising up across verticals and horizontals in adjacent areas to traditional fintech.
Perhaps even more intriguing will be the meshing of these fintech themes with the broader trends in technology, product functionality and commercialization. Many of the building blocks seen in other parts of the technology landscape will be expressed through these fintech 3.0 entrants. This will include, for example, the latest tools in machine learning, automation and open source. This will also include a myriad of gtm approaches (e.g. top-down, bottoms up, product-led-growth, etc.)
Suffice to say, the 2020s are going to be an incredibly exciting time to be building and investing in B2B fintech. The number of B2B fintechs that will be public in 10 years’ time will triple, generating well over $1T in total aggregate value. B2B Fintech has arrived and is not going anywhere anytime soon.