Disrupting legacy financial services with better technology
Over the past decade, while a wave of fintechs began to directly challenge incumbent financial institutions, a smaller group of fintech companies have opted for a new strategy: targeting the customers left behind by the banking industry. Larger financial institutions have been slow to allocate resources to banking these less profitable groups and at the same time, digital self-service channels have lowered the cost to serve customers—this is a huge market globally.
The financial services industry is already changing in two big ways that have helped lay the groundwork for the success of this strategy.
First, there is a generational shift as more banking customers are digital natives who don’t need a physical bank branch and don’t necessarily need or want a financial advisor—a transformation that was accelerated by the Covid-19 pandemic. Second, there are regions and populations that incumbents have traditionally left underbanked or unbanked—lower net worth households, gig economy workers, small businesses, developing economies, minority and immigrant communities, the list goes on—that have been growing rapidly in size.
These segments of the market have been left underserved because the big banks traditionally focused on the wealthier—and most profitable—segments of the population. They couldn’t afford to have wealth managers or financial advisors assigned to people who don’t have a lot of money. But now that so much of financial services is automated and less reliant on individual account managers, the economics are changing.
As underserved areas continue to see some of the greatest growth, companies solving problems in this space have huge potential. These startups are generally not looking to compete directly with the incumbents, but to thrive in places where the incumbents either don’t, won’t, or can’t serve the population. These fintech companies are building their own brands, often direct-to-consumer, direct-to-small business, or offering financial services in a modern, digital way.
In backing this sort of company, we look for world-class teams that have a clear vision of building a multi-product offering, with unique distribution models that resonate with their customer base. This thesis has led us to investments in Ualá in Latin America and tonik in Southeast Asia, which both offer a suite of financial services and products to people otherwise excluded by the incumbents in the industry. We’ve also backed First Boulevard, which is hoping to reach the traditionally underserved market of the U.S. black community.
Likewise, we’ve backed Credijusto, a company in Mexico that is serving small businesses for their lending needs; Ontop, enabling contract workers around the world to get paid and manage their money; and Crediverso, which is aiming to provide a unique financial services marketplace for the Hispanic and the Latinx community in the U.S. We’ve also partnered with Silvur, which targets an aging demographic to help them prepare for retirement with a digital banking platform and Nav, which helps small business navigate the complex and opaque lending environment.
Bringing best-in-class, differentiated financial products and services to underserved markets around the world is truly disruptive. We’re excited to support these companies and meet new entrants in the space.