Preparing for fintech’s second decade: 4 moves your firm must make now

This year marks the 10th anniversary of the fintech phenomenon.

Companies such as E*TRADE, Rocket Mortgage and TurboTax began to disrupt the established financial services sector well before 2012, but that year marked the turning point when fintech morphed into a sustained movement that would drastically change how most people manage their money.

If you’re a fintech startup, you will face four main types of competitors over the next decade:

1. Traditional financial firms offering more of a “super app” experience with strong member benefits and perks.
2. Advanced decentralized finance protocols that can offer financial products that involve real-world assets.
3. Increasingly common embedded financial products sold by non-financial firms.
4. A government-issued CBDC in many (but not all) countries.

Your firm will need a very strong value proposition to compete with all four types of competitors.

This leaves most firms with two options over the next decade. One avenue is to specialize in a handful of products or services that you believe will have value on their own that consumers will sign up for despite robust competitor ecosystems. Alternatively, you need to develop a comprehensive strategy to compete and build a compelling suite of products, services and perks.

How can fintech startups prepare to compete in the next decade? Here are four steps you can take to remain competitive.

Your tech stack must support fintech’s cutting edge

The foundational step of any long-term strategy for the 2020s is to revamp your firm’s tech stack to support future needs. You will need modern tech infrastructure that can support greater cross-product automation, a sophisticated AI assistant, more integrations with external parties such as the crypto ecosystem and non-financial perks/benefits.

The process for improving your tech stack varies based on the type of firm. If you work for a large bank still running COBOL, the first step is likely a massive investment in a multiyear process to migrate to a modern and streamlined tech infrastructure. If you are a relatively young fintech company, you generally have more “white space” to design your stack. The challenge for smaller companies isn’t dealing with decades of tech debt; rather, it’s optimizing limited engineering resources to build the best possible tech stack.

Modernizing tech infrastructure is a difficult and expensive proposition. Generally speaking, the best way to get company leadership on board with such investments is to highlight what competitors are doing to help them understand the competitive threat.

For example, in Citi’s Q2 2022 earnings call, the bank’s CFO highlighted its investment in a multiyear process to transition 16 bank ledger platforms deployed across 121 instances to a single cloud-based bank ledger. Stash, a smaller fintech company, recently said it moved off Green Dot’s BaaS platform and is developing its own banking core.

Any corporate strategy document will remain a fantasy on paper if your tech infrastructure is outdated and incapable of meeting your future needs.

Build a complete suite of products to retain clients

Given recent events surrounding crypto exchange FTX’s decline, it’s important to distinguish between centralized exchanges like FTX and decentralized finance (DeFi).

Over the long term, global DeFi protocols accessible from almost anywhere are a much bigger threat to your business than you might think. When building for the next decade, your firm must focus on the challenge posed by this new paradigm.

You will need to provide a comprehensive product mix to keep clients within your ecosystem. This means offering core banking, investing, lending and insurance products as well as more niche products — all within an integrated experience. The breadth of products offered by SoFi (from wedding loans and education financing to crypto trading and renter’s insurance) is a good example of what you should strive for over the next decade.

The need to build a complete financial ecosystem ties into the previously mentioned necessity of having a modern and forward-looking tech stack. Your roadmap for developing these services cannot rely on white-label solutions from external vendors. Excessive outsourcing will likely result in a messy tech stack that will be unable to offer customers a streamlined and integrated experience.

Just offering a full suite of financial products is not enough. To be competitive in 2032, you must offer a streamlined experience that automates the client’s financial life across products and accounts.

Develop a roadmap for adding non-financial perks and services

Traditionally, consumers have selected financial products based on a combination of prices/fees, brand reputation, interest rates, performance and/or a relationship with a firm’s local salespeople or financial advisers. Over the next decade, however, top competitors will offer a compelling suite of non-financial perks and benefits to attract users to their financial ecosystem.

While most firms do not have the resources for developing a new in-house travel agency like JPMorgan, there are plenty of low-cost options you can use to build a suite of perks. Examples include services to help customers save money (such as Capital One’s shopping extension), cross-account rewards programs (like SoFi’s rewards program), partnerships with tech companies (look at Chase’s partnership with Lyft and DoorDash), helpful dashboards (offered by Bunq) and subscription management tools (like this one by Revolut).

While the specific perks you want to offer will vary based on your firm’s strengths and strategy, your long-term roadmap must include developing a compelling offering of benefits that draw users to your ecosystem.

Build crypto services to attract crypto assets and compete with DeFi

As the crypto ecosystem continues to grow over the next decade, your firm will need to compete with DeFi protocols.

You will need to offer customers a custody option (the ability to store crypto with you rather than in their personal crypto wallet) and crypto services. Examples of crypto services you could offer to include are the ability to contribute to a staking pool without meeting the minimum asset threshold (e.g., ETH staking requires 32 ETH), trading and lending, and asset management services (such as robo-managed accounts or index products).

Building crypto services will likely incur significant time and resources over many years, but having in-house crypto services will likely be the only way to compete with DeFi in the long term. If you don’t build crypto services, you may hamper your company’s ability to attract and retain clients’ assets.

Conclusion

The financial services landscape will be much more competitive in 2032. It’s time for your firm to start thinking about a long-term strategy to build a compelling set of products, services and perks to face this challenge. Multiyear investments are a challenging prospect in a negative macroeconomic environment, but the next decade’s winners will be those who can invest and improve during a down cycle.

This long-term strategy exercise — and taking the time to scope out the timelines, budget and talent needed to build your future state — will be incredibly valuable to your startup. You may find that the costs and talent needs are prohibitive, and your firm may be better off focusing on relatively niche areas with a “moat” to defend against compelling competitor ecosystems. Either way, achieving success in the second decade of fintech will be much harder than it was in the first, and you must start preparing now.

For more information on what the second decade of fintech will hold, you can read my two-part fintech 10th anniversary piece: Part One and Part Two.