The Rise, Fall & Reset of The Fintech Industry

0:002018, 2019 in fintech was late spring. You get into 2020 and COVID, and that was utter insanity of the story. Like 25 % of all venture dollars in that period went into fintech. Wow, 25%. The stat after that is not a good stat, which is starting in the second half of 2022, basically 0 % of venture dollars went into fintech. That's the drought, maybe. Yeah, yeah. Fintech winter was the second half of 2022. Most of 23 and 24 things started to thaw a little bit. And now we're very much back in the spring. It turns out the biggest use case for AI is fraudsters committing fraud against financial services companies.

0:35Financial fraud is growing at like 18 to 20 % a year, which is insane, and it's already a huge market. I mean, the cattle win long term, but the mouse is winning right now. At the peak of the boom, roughly 25 % of all venture dollars were flowing into FinTech. Two years later, that number was close to zero. Today, with A16Z general partner David Haber and Zach Paré, co-founder and CEO of Plaid, we trace what happened between those extremes and why the market is heating up again. We look back at how the industry moved through its boom and bust cycle from the explosive growth of 2020 and 2021 to the freeze that followed and where things stand now as activity returns.

1:12We dig into the biggest forces shaping fintech today. AI's impact on fraud and underwriting, the shift towards deposits and full-stack financial products, incumbents finally adopting outside software, and embedded finance showing up far beyond traditional banking. Zach, David, we did this podcast, I believe, seven years ago, and it's great to have the gang back together. Thanks for joining. Thank you for having us. Great to be here. Of course, a lot has happened since the last conversation in our personal lives, and a lot has happened in fintech more broadly. I was listening to the episode that we did the last time we spoke, and we were talking about what has changed in fintech from early 2010s to just before 2020.

1:50And I'm curious if we could just sort of check in or reflect back since the last time we spoke to now would have been some of the major themes in fintech. Catch us off if someone was in a coma after listening to the last episode and just woke up and said, hey, what's changed in fintech? What would we say? Let's see. So last time we talked, we just call it 2018, 2019. Is that right? Yes. Yeah. So let's see a lot. There's been like a bunch of different areas or like maybe we can think of it as like almost seasons in some sense. 2018, 2019 in fintech was, I guess, kind of late spring. A lot of really good growth.

2:26Like the industry had a name. The name probably came about. I actually think that David, you created the name, but no one will give you credit, but I will give you credit. I think you created the name in like 2015, but we now had a name for this industry. We had gone past like, oh, some people are maybe building financial services products too. Like it is an industry and there are a lot of things being built. We started to see the million flowers bloom to really overextend this analogy. The million flowers bloom from call it like 2014, 2015, up until 2019, 2020, like zillions of first time, hey, can I take this thing outside of a physical bank branch and deliver it to a consumer digitally?

2:58So you saw applications like Robinhood come up and grow incredibly well. You see all sorts of Neobank, Neobank for X or Y or Z sub market. Those were everywhere. You saw crypto, like the first crypto apps really start to emerge and grow a lot. And then kind of from 2019, you get into 2020 and COVID. And that was just utter insanity of a story. The first few months of 2020 were totally normal. Then you get into early COVID where everything froze. Basically, every business kind of locked up, including all the fintech companies. But within two, two and a half months, you then had this total inversion of fintech.

3:33So you went from late spring to like big EDM pumping summer really fast. Like the EDM music turned on very loudly, very quickly. So you just had this insane growth period for fintech from kind of mid 2020 through kind of like the end of 2021 and even into early 2022. And yes, a lot of new companies formed, but every investor, whether venture or public markets or whatever it was, wanted to push money into fintech. And so you had just this huge boom in funding, tons of new stuff grew. It was like really fun and very chaotic time. Honestly, a hard time to manage because the feature chase, the things that we had to build were going so rapidly.

4:06I think like 25 % of all venture dollars in that period went into fintech, which is insane. 25%. It's a crazy stat. Actually, I think it's a great stat. The stat after that is not a good stat, which is starting in like the second half of 2022, like basically 0 % of venture dollars went into fintech. That was the drought, maybe. Yeah, yeah. So summer went into a very, very short fall. So that was kind of like mid-2022 and then immediately into winter. And fintech winter was the second half of 2022, most of 23, and 24 things started to thaw a little bit. And like now we're very much back into spring.

4:38Yep. Different format, but it's been a fun cycle of the seasons. Totally. I think even to describe maybe what drove some of the seasons, the rate cycle was a big part of that from a macro perspective. Having very low rates kind of drove Zerp, obviously not unique to fintech, but a lot of technology broadly. But certainly a lot of lending volume in the space grew massively in those periods. The one benefit that I think has shown up more recently in fintech in the thaw period is that rates went up. but it sort of shifted the mix of revenues for many of these fintech companies from lending-driven kind of origination-oriented stuff to deposits.

5:14So many of these fintech companies decided, I forget the exact timing, but to go kind of full stack. So you saw fintech companies like SoFi, you know, buy banks, Lending Club, I think Square got an ILC charter, Robinhood, Mercury. Many of these companies are generating very significant percentages of their revenue and profits today from deposit flows as rates have gone up. And so that, I think, has helped thaw the market to some degree more recently. Usually, yeah. In 2018, 2019, fintech was a startup industry. Having gone through this entire cycle, yeah, some ups, some downs, but a lot of maturation, a lot of expansion.

5:48We've ended now with fintech is, in my opinion, synonymous with financial services. I agree. And it goes beyond just financial services as well. So you've seen a few themes emerge. One thing that we said for a long time that Andreessen Horvitz also likes to say is that every company is a fintech company. And that was kind of quite common from 2018, onward. Now you see the emergence of embedded finance. So some apply customers are like Ford and John Deere and these companies that like, yes, they do have captive financial services embedded within them, but you do not think of them as financial services companies or large billers or it's expanded quite a lot.

6:23And then you see the banks themselves. Historically, they said, we need to be fintech companies too. Now they're saying we are the biggest fintech companies, like we invest heavily in technology. And so you've seen this startup industry now become mainstream and the firmament of financial services, but also powering experiences well beyond financial services. Let's go deeper into where we are today and where we're going, given that we're kind of in an exciting period. Like, is it still early in terms of a lot of things to be built and some spaces you're excited about? Maybe Zach, you take the first step.

6:54Platt ourselves have gone through a few phases and we're lucky that we have this really broad view of what's happening in fintech. I'm going to keep calling it fintech, But at this point, realize that I mean financial services plus plus. So we have this really broad view of what's going on in fintech. And the things that we're seeing today are very different and much more varied than they were before. So V1 of Plaid was how do we create access for everyone? And I would say largely the fintech industry was focused on the same thing. So instead of making you walk into a bank branch to open a bank account, how can you open a bank account on your mobile app?

7:28Instead of making you carry money and go to an exchange when you're trying to cross a border, How can we create a digital way to do remittances so you can actually move money across the border a little bit more easily? And apply that across kind of every subsect, basically every product that banks were building at the time. We've solved the access problem. Not completely, not in every little niche, but for the most part, we as a collective industry have solved the access problem. So I grew up in a small town, only one bank in our town. And if you didn't happen to be a member of that bank, you couldn't get a loan easily.

7:57Now, if you live in that same town, you just go online and you apply for a mortgage and you get 30 mortgage offers in an hour, or you can do it with Rocket and be done in five minutes. And these are awesome experiences. That said, what we've done is we've taken traditional financial services and we've made it digital. We haven't necessarily made it excellent. That's like the next horizon for us. And so a lot of things that we've been investing in now are things like credit scoring. How do we make credit scoring more logical and something that a consumer can understand? If you get a new job and your income goes up, but your expenses don't go up, you are a better loan risk.

8:27However, that doesn't show up in your credit file for like many, many years, because your credit file is a long history of your repayments. It's not necessarily indicative of your free cash flow. And so that is the next horizon that a lot of the FinTech companies that I'm seeing are starting to solve. So that's kind of one big area. It's kind of solving those endemic problems that are long-lasting, things like fraud, things like credit scoring, so on and so forth. The second is making financial services really easily available in places that you might not have otherwise thought it to be. So putting BNPL on kind of everything.

8:57Yeah, or issuing a card, kind of everywhere, or issuing a wallet, kind of everywhere. And so now we're entering this like, fintech is everywhere. Not every company is a fintech company, but like every consumer is surrounded by fintech and all the places they might want to go. And the future horizons are always looking at the next few things that are happening. Like we look at AI and agentic financial services. And right now, it's mostly hype and people talking about it. And there are a few interesting use cases, but fast forward two years, and the way that you get a mortgage is going to be talking to an AI application because that is just the most efficient, fastest way to do it.

9:29So that's been a fascinating one to watch. And then seeing what's going on with stables is, of course, fascinating as well. So lots more to come. On that note, is crypto basically just fintech? Or, you know, people said it is the new version of the new internet. Maybe hopefully it still happens. But in terms of where it is right now, is it mostly just a subset of fintech? Well, David, you're an investor, so you probably know better than me. My take is sometimes. Ultimately, I don't think that consumers change all that much over time. And so the kind of things that a consumer would want to do five years ago are similar to the kinds of things that they might want to do today, but the form factor in which they can do it is very different.

10:07So, you know, five years ago, a consumer might want to speculate. And, you know, you can speculate on gold, you can speculate on a few of these other things, and Bitcoin and other coins made it very simple for consumers to speculate. So great, you can pull up an app, you can speculate on things. Speculation continues. The form factor has changed. Another thing that consumers like to do is make predictions. So in the past, you might make a bet with some friends. Now you might go on CalShare Polymarket and enter prediction markets, or you might do that via Robinhood or whatever it is. Other things that consumers like to do are spend money, save, invest, so on and so forth.

10:43And inasmuch as consumer behavior doesn't change, it's a question of how and where does crypto and fintech fit into the existing set of consumer behaviors. So I think if you look at, again, what a bank does, they're roughly tailored to what consumers want. Consumers want to save money, invest, get loans, so on and so forth. And I think the wisest product development strategy is to kind of take the things that consumers already do and just make them newer, easier, more accessible, so on and so forth. And so I suspect that there will be a convergence of one side of crypto and core financial services, be that exchanging, you know, like checking accounts with dollars in them for checking accounts with USDC in them.

11:23wallets with USDC in them or similar. I think there's a convergence that will likely happen there. But then also crypto does some crazy out there stuff and really pushes the balance on innovation. I'm not sure that that's necessarily going to end up merging with banks but who knows. Totally. I totally agree with what Zach was saying. I think part of it is culture and how people, to Zach's point, want to interact with financial services. I think part of this has been driven from a regulatory perspective and I think maybe the more meta theme as I've sort of watched fintech evolve, and I think this is permeating into crypto, is just how the large incumbent financial institutions are embracing this innovation and technology writ large.

12:02I think a lot of the, I'd defer to my crypto colleagues who are much deeper in this space than I am, a lot of the enthusiasm I would say here is about the existing kind of financial system adopting things like stable coins or maybe even tokenizing kind of real world assets. And I think that's different from a lot of the more frontier stuff that I think the team had talked about internally, which was kind of more purely decentralized and kind of owning the internet. But I think for crypto to go very mainstream and kind of plug into the broader financial system, that probably is and will continue to happen.

12:35What Zach and the team at Platt have done over the last 14 years, 13 years is remarkable. I mean, from my vantage point, you won the hearts and minds of the developer community. You built this sort of foundational infrastructure that really catalyzed, like, you know, I can't take credit for creating the FinTech term. You, like, created the enabling infrastructure to, like, create the industry in many ways. You know, now have, I don't know, hundreds of millions of accounts, you know, connected. And you're, to your point, now bringing kind of this whole ecosystem of kind of value-added services and analytics, you know, to make financial products better.

13:12and I think while we saw different seasons kind of over that period, you know, you know, hay fever and long winters and, you know, euphoria in some moments, you know, many of these companies are now bigger than ever. I mean, Robinhood is now, I don't know, $100 billion public company. You know, I looked up SoFi stock price. You know, they're a$35 billion public company. Affirm is a$20 billion company. These are outcomes that you couldn't even imagine. Revolut. Yeah, I mean, Revolut,$75 billion, you know, or for new investors. And that phenomenon is not just U.S.-centric to that point. It's become a global one.

13:47I mean, NewBank, you know,$100 billion, you know, you know, company, you know, in Brazil, you know, my good friend, Pierre Paulo, who runs Walla in Argentina, you know, Colombia, Mexico. You know, so these companies have worked and they've kind of proliferated and brought access of financial products, you know, everywhere. And I think that that trend will continue. You know, I think while they started off in with, point solutions and they kind of perfected whatever their wedge product was, you know, many of them have now rebundled, right? They want to become kind of the full, you know, financial picture for their customers, whether that's through cards or accounts or lending.

14:23Again, many of them have gone full stack and actually bought banks and actually hold deposits and are generating significant revenue, you know, from that float. I think the other meta theme, which has been interesting and I think is accelerating now with AI is just, again, the posture of a lot of the incumbent financial institutions, you know, to fintech and technology broadly. You know, I saw this kind of firsthand, certainly, you know, as an investor back at Spark, as a founder, and then inside of Goldman, just even their own sort of evolution and posture to technology. You know, for a long time, many of these institutions, like, if the technology wasn't built there, they weren't interested.

15:06I mean, Goldman had literally created their own email client. Like, they didn't operate on Outlook or on Gmail. They had this thing called Orbit. I don't know why Goldman Sachs needs to create their own email client, but, you know, that was like a window into the psychology from a technology perspective. Don't they still use, like, SecDB internally? Like, they have their own database that they built? That makes more sense to me because it was like a centralized risk system for managing all their trades. But Outlook equivalents, like, makes no sense. You know, then I think there was this period where, you know, many of the large institutions were like, we want to be the fintech companies ourselves and Goldman went very aggressively into Marcus and others followed suit, I think there's a bit of a humbling that has happened.

15:48Maybe I'm using them as one lens, but more broadly, I think the positive impact of that experience made them more open to adopting the best technology that exists in the market and no longer building everything in-house. And so a lot of where I've been spending time the past several years has been in, you know, fintech companies that lead with software that, you know, ideally have the potential for a network effect and are selling into these financial, you know, larger financial institutions and solving, you know, real workflow challenges for them. And I think we're at this interesting moment where because the software itself can actually do the work, you know, with AI, there's sort of this bottoms-up momentum and top-down pressure that's happening that I think is accelerating this cultural change You know, many of these institutions are beginning to adopt products like Cursor or, you know, even GitHub Copilot or a broader ecosystem of kind of AI products in their employee base and people are seeing the productivity gains.

16:49And then unlike, I think, prior periods of kind of product cycle or platform shifts, if you were the CEO of a big bank and you said, you know, do I need to be in the cloud? Like that was sort of an esoteric question. Now it's like any CEO, any board member can plug a prompt into one of these models and sort of intuitively understand the impact that it could have on their business. And so I think that's broadening the aperture, at least from my vantage point, of what fintech is. And it's really, I think to your point, just financial services. And I think software in large part sold into financial services as well.

17:19Yeah. And David, say more about sort of that change around when, you know, it went from 25 % to, you know, less than that. What was changing in these businesses that caused that? You mentioned sort of the macro environment, but is there anything else we could learn from it? And more around now, where are you particularly excited to invest or what are the sort of different, you know, sort of subspaces that you're looking at or excited to? I think 2021 period was sort of wild for lots of reasons. I think, you know, financial services is and remains, obviously, one of the biggest parts of our global economy.

17:57And so I think people, you know, often get overexcited maybe by TAM, you know, and so every venture firm created a fintech team, you know, was deploying a lot of capital, you know, to that market. You know, and again, many of these companies have continued to succeed, but I think it was probably too much euphoria going into that space relative to the amount of dollars. No, no, I think it was the exact right amount of euphoria just to pull back afterwards. Exactly. Yeah, exactly. You know, again, part of that was that companies, you know, when rates are zero, you can lend money and grow very quickly.

18:31And there's a lot of, you know, margin to capture there. I think when rates go up, your cost of capital goes up and that margin, you know, shrinks. And there's a natural ceiling on borrowing that people, you know, both from a regulatory perspective and a kind of consumer appetite perspective. So the business model of a lot of, on the lending side, I think, you know, kind of compressed. But you also have to look at like the underlying growth rates of these apps were insane. Totally. You look at the number of consumers that were signing up to invest or signing up to take a loan or signing up to buy a Bitcoin or whatever it was.

19:01We just looked at the charts and if the app was growing at 25 % a month, it was actually a great venture investment. Yes, you might know that the music at some point is going to slow down or stop, but 25 % a month's growth is insane. Totally. Yeah, totally. And this was like stimulus and there was a lot of... Helicopter money everywhere. Yeah, there were a lot of reasons they were growing that fast. A hundred percent. And look, I think like from a, I don't know, industry health perspective, like I think things have normalized, but the companies continue to grow and succeed. I mean, again, now they're, you know, bigger than they've ever been.

19:35The great ones. There was a washout. And there were a lot of fintech companies that died or shut down in the second half of 22, in the first half of 23. There were a lot that, you know, kind of went sideways for quite a while. and a lot of lenders especially who just like basically closed off shop or merge or things like that. But the ones that succeeded coming out of it across all of FinTech, they were much, much stronger for it. Totally. So as you said, like if you started off with a neobank and all they did was have a checking account and a savings account and maybe a card, well, in this period, if they wanted to survive, they needed to build the lending side of their offering.

20:15And so, you know, they expanded there or build the investment side of their offering. So they expanded there. And so now you come out with these much more full-fledged, long-lasting companies. So the winners became even more so the winners. And yeah, there was an unfortunate number of companies that also didn't make it. Totally. David, I'm curious how we look at the sort of investable universe or sort of divide. Is it that there's a certain type of form factors and each region is going to have their new banks, so to speak, or is it by sort of form factor or value prop to the... How do we think about the universe and how do we map it?

20:54You know, it's been interesting. I mean, I would say from our vantage point, we haven't made as many consumer fintech investments in recent years as we have historically. I think part of it's just it's more expensive to acquire customers and hit the kind of scale you need to really be in a kind of venture scale outcomes. And I think that's a function of, you know, just, you know, consumer acquisition channels getting more expensive and some of these companies starting early and it was easier to acquire. and then build massive LTV with their existing customer bases. That does change around the world.

21:25I think, you know, in some markets, people were entering the formal financial economy for the first time. And so offering a fee-free mobile-first, you know, bank account and a debit card, you know, literally gave them access to, you know, e-commerce and things like Netflix and Spotify and Amazon for the very first time. Credit doesn't exist, you know, equally in every market around the world, nor do credit bureaus and credit data. So there's, I think, still, you know, tons of interesting kind of macro opportunity from a financial product perspective, I think, especially in emerging economies. I think AI could be an interesting, you know, kind of catalyst for a new resurgence of consumer fintech.

22:02I mean, there's always been this promise of, you know, kind of self-driving money or, you know, PFMs that actually do the work for you and help you make, you know, not just give you advice, but actually, you know, help you earn, you know, save and spend better. And I think we've yet to see as many of those companies today, but I think the technology might be ripe. I'm curious if you're seeing this on your side, to actually deliver on that promise. Yeah. You know, it's funny. When we think about prospective apps, the app that I wish that existed, I wish that there was a self-driving money app that I could just say, hey, my paycheck goes in here, sweep enough money into my checking account so that I can pay my daily expenses, but put all the rest into this high-yield savings account and invest this percent of it in the market.

22:50I wish that this thing existed. I don't actually know that that's necessarily a very good app to build because I'm a weird power user. I have insane trust in fintech companies to do all this stuff for me. I understand all the actions that the agent would take and I have enough background in the space that the actions seem logical to me. But if I gave that to my mom, she'd be like, where's my money? What's going on? Like, I don't trust this thing. Like, wait, why did it move money over there? I have all these questions. And so, you know, I'm not sure that I'm necessarily the best at this. Like, so I have all these visions of like the prospective apps that should exist out there.

23:28But then, you know, for us as Plaid and in a lot of senses for you as an investor, like certainly for us as Plaid, like our job is like, we need to build the platform and then figure out what emergent behavior starts to exist on it and then go optimize for that emergent behavior as new interesting companies start to emerge. And so that's how we think of our job. So our job as it relates to AI is like, let's build tools that allow consumers safely to link their data with agents. Then let's build tools that allow those agents to take the proper actions, be that just analyzing data or be that actually moving money or something else.