FinTech Venture in 2024 & AI Trends

[00:00:00] Hey guys, welcome back. Great to have you, Frank and Mark. Happy New Year. We're here to talk about the outlook for fintech. What are the big trends you're seeing? Now we're in the horizon and we're going to have Simon Taylor who runs a very popular and excellent fintech sub stack join at the half hour mark.

With that said, a brief background Frank is one of the co founders of QE, leading fintech venture investor, Midas list investor, and was an operating executive at Capital One, and Mark is a venture partner at Two Sigma, is also an operating executive at Citibank, so we've got operator investors, our favorite combination and I always look forward to learning and sharing ideas with these guys.

It's great to have you both back. Happy to be here. Thank you. Happy New Year. Happy New Year too. So I guess jump on what are the, what's the outlook for FinTech? I'll [00:01:00] frame it up this way. When I was at the Money 2020 conference in October, it was physically crowded. You couldn't even get a seat.

Yeah, anywhere you go, it's like you go outside actually to take a meeting because you just can't find anywhere to take a meeting. I saw, I believe nine fraud AI compliance firms. Like I believe there's a need for fraud AI compliance. I don't know that if you have nine of them that you're going to have a great outcome as an investor.

I sensed a lot of cope in the venture world. As well, there was the brave face, things are great. And then after one or two beverages, you get the different story. So I think fintech was empowered by the M& A cycle from Visa and MasterCard. They create a bid in the market. And I think some of that is starting to go away.

It's become very consensus. So I think there fintech, particularly like wealth tech. Which is an underserved [00:02:00] area but I'm less excited about fintech for this vintage personally. You're both professional investors. Frank does this day in and day out. Mark is a cross asset class investor. Both have deep experience in FinTech.

Frank, do you want to lead us off with your perspective? And yeah not a surprise. I am probably a bit more bullish, than an outsider looking in, that perspective helps shape a narrative that I actually do believe in. And I think it actually starts by staring at.

Every single major stock exchange on the face of the planet. If you look at some of the top market cap companies across every single stock exchange in the world, a bunch of them are financial service institutions, right? So you're dealing with a gigantic profit pool, not just a revenue pool, but a gigantic profit pool that's really made up of a bunch of products and services that are never going away.

So unlike some sectors that come and go, some things are in and out [00:03:00] of favor, The core services within banking and financial services are services that need to exist and are going to exist in some form or fashion forever. So if you think about, some of the pillars of banking, you have the storage of money, which is deposits, you have the movement of money, which is payments you have the lending of money, which is again, lending you have the investing of money, which is investments, and then you have the transference of risk, which is insurance.

And when you think about these five pillars, like they serve an incredible purpose around the globe in different forms or fashion, but they are not going away. So it's not a bad place to build new businesses and figure out how to serve consumers and enterprises better with different services.

Now, investing is about catching a wave that usually follows some S curve of innovation where you're taking something that's old and because something new has happened in an industry, you take that new thing and you refactor whatever the business was or how [00:04:00] it was built or how it was delivered, and you're doing it in a materially different or better way.

And by doing that, you actually build a company that unseats an incumbent. So when I hear people say that they're less excited about FinTech, I think it's really a statement about, is there another S curve to really chase, to unseat some of the incumbent models with, some new model that's actually building, again, more frictionless or a superior way of delivering that product and service.

And what I would say is it really depends on the surface area that you're looking at, as well as the subsector within FinTech. So if you're looking at the US it's much more established than some other areas around the world. Like I just got back from a trip to Nigeria back in October, I think it was.

And if you think about Nigeria, like where it is in its development of delivering financial service products to consumers and businesses, it's completely different than it is in the US Now, whether you can build a big business there, whether it's ready, whether you can capture [00:05:00] enough economic rent to build a big business, like that's still a big TBD, can you overcome.

Issues with currency and stability and financial regulatory issues, like all of those things are real, but I think that places around the globe and different subsectors within fintech were in chapter one, right? And then there are other areas where we probably are in chapter three or chapter five of the story until a new S curve really shows up for new innovation to take place.

And you could argue crypto blockchain AI, like these could be new S curves to invest behind. But again, that's the real question that people are asking when they say they're either bullish or bearish and I think that's important. So today we had a great report, and I'm placing on the screen here a slide I like to look at every quarter and marvel at in reverence.

This is J. P. Morgan's breakout of the consumer and community bank business segment. This is their retail [00:06:00] banking operations and I'm going to highlight here their ROE is 33%. So the ROE is their net income divided by their equity. I think of like equity and if the three of us buy a bank. We would pay the book value, the equity.

Actually we'd pay less than that because banks on average are trading below book value. They're trading 0. 6. We would, if we were to buy this, we'd be getting 33 cents on every dollar back per year at scale. And this business would be compounding, has been compounding for a long time. So you're saying that's good.

I'm saying this is a phenomenal business. And by contrast, I look at the FinTech neobanks, lending club, upgrade, upstart, SoFi, et cetera, et cetera, et cetera. And their market caps are down in the dumps and they've failed to take meaningful share or deliver any meaningful ROE. Yeah, there's fintech [00:07:00] opportunities out there.

I think, Frank, you identified several. But the other point is look, aren't we, if we're turning over the rocks in the marginal market, If we've got to look at Nigeria now to go find the next big opportunity, maybe we've saturated a lot here. I'll pause there. I'm obviously more of the bearish case, but Mark, go ahead.

Yeah, so I understand the bear case, the counter is If you actually look at the opportunity set, and you actually look at the delivery against that opportunity set, they're not necessarily the same thing. So we're coming out of an environment where growth was valued at all basically growth was valued over profitability, and a lot of businesses were built in a less healthy manner than in a more typical environment.

So they were more worried about solving the customer problem than they were about delivering profit for solving that customer problem, right? The capture of economic rent was not top of mind. What you're seeing in the public [00:08:00] markets for some of the companies that did go public, they've adjusted from this world of growth to a world of profitability, and some amazing businesses are starting to emerge that should have emerged when they were in the private markets, not in the public markets.

So if you look at the transformation of some of the, we took five companies public in 2021, if you look at NewBank, if you look at Remitly, if you look at Flywire, like these are businesses that have basically made the transition from growth at all costs to really balancing profitability with growth and some amazing businesses are actually emerging.

And these are fintech businesses. So I don't want to conflate the two about how businesses were built in, at the peak of madness. The way I've always talked about it is that Darwin went on vacation for a few years and now Darwin is back. And I think in this world where Darwin is back, you're both going to capture the opportunity, but build the businesses in a much more healthy fashion where you are going to see capture of economic rent.

I do those names, by the way, and [00:09:00] they're very different though, right? By the way, I'm long Nubank. It's a leader in Brazil. We like market leaders. And it seems if you take a fintech business and you grow it outside of the US, it's got less competition. And the margins seem to work out better and they seem to perform better, as well.

Mark, what are your reactions and what's your view? First of all, I want to say when you showed JP Morgan, possibly the difference there between, I think they've lapped all the other banks, probably management. And they just run that bank. As well or better than the other fintech on the planet, probably they just have a great management team and it does terrific.

Um, I was also in Africa over the holiday. I was in South Africa and I couldn't be more negative on the international markets if I tried. And it's not, I think, and it's also my experience back at Citi is, Citi just took another write off in Argentina and Russia I know there's [00:10:00] companies like New Bank and some of the other places.

But, I know in South Africa, they were doing load shedding. They can't even supply power to the country. The infrastructure in these places are just falling apart. I saw in Nigeria, somebody running a fintech company embezzled or took a couple of billion dollars or there was a big fraud going on there.

I don't know how as an American citizen we can judge some of the governments and what's going on there and how people are doing business. On the international side, I'm pretty, I'm negative. In the U. S., I agree with what Frank said, and I thought there was some pretty interesting, I think there's potentially some really interesting places for fintechs one of the areas you mentioned a little bit, and I don't know if I believe it or not, but is the blockchain and more frictionless tokenization of some of these asset classes, which sort of feeds into wealth management.

Can you [00:11:00] tokenize, let me back up for a second, is, the BC funds have a lot of funds, we have a lot of investments out there, and at some point, How are we going to liquefy some of these things or raise additional capital for them, especially in the fintech, is there going to be M& A, IPOs or whatever, or can a lot of these things be tokenized and can the private markets and can the private Parts of the VC world be a little bit more liquid and a little bit more transparent so that may create an opportunity to generate, to get, the early investors get out for later stage investors that offer different types of expertise that can help things grow.

So that's some of the areas I'm thinking I'm trying to get more optimistic on. Yeah. The one reaction I would have to The international statement is that I will both agree and disagree with you about, I am what I would call a pragmatic skeptic, so I look at everything for what it [00:12:00] is and understand both the risk and the return.

And when you look at some of the emerging countries and regions, and that, by the way, includes South and Central America, which are built out a lot more than, some of the other areas like in India or in Africa, um, building a business is about having a problem statement and a solution statement that marry together so incredibly well that you can capture lots of economic rent.

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