January 11, 2023
Portfolio
Unusual

4 fintech and SaaS areas primed for growth in 2023 despite tough macroeconomics

Tyler Crown
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4 fintech and SaaS areas primed for growth in 2023 despite tough macroeconomics4 fintech and SaaS areas primed for growth in 2023 despite tough macroeconomics
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Editor's note: 

Much has already been written across Twitter, LinkedIn, and Substacks on how 2023 will be the year entrepreneurs will need to focus on cost cutting over growth. Many workers at growth-stage companies will find their options underwater and will choose to leave. There will be inevitable M&A consolidation across fintech, B2C will struggle, and a recession is the best time to start a company. 

Instead of rehashing the messages you’ve already heard, let’s highlight four areas in fintech and SaaS that are primed for growth in 2023. 

1. Real-time and cross-border payments remain fragmented, costly, and slow

Approximately 60 countries have real-time interbank payments systems, but the U.S. is not one of them. The U.S. saw 1.8bn real-time transactions in 2021 (expected to 4x by 2026) compared to China’s 18.5bn real-time transactions. 

With the launch of FedNow Service in mid-2023, the U.S. will take a step in the right direction around enabling instant payments. The FedNow Service will not solve all of the problems and challenges with real-time payments as one-third of B2B payments in the U.S. were made by checks according to a 2022 Association of Financial Professionals Digital Payments Survey.

On a global scale, the value of cross-border payments is projected to be over $250T by 2027 according to the Bank of England, and more than a quarter of e-commerce in Europe is cross-border. When money is moved across borders, two things have to happen:



1) Actually moving the money

and

2) Utilizing onboarding and compliance software to move the money and adhere to the bank’s KYC/KYB, AML, fraud, and CFT requirements.

Current payment rails and tools such as SWIFT cannot support additional regulatory or risk checks aside from basic account info. Banks are increasingly focused on this as they seek to derisk their exposure to foreign risk by exiting some of these businesses (e.g., Wells Fargo exited international wealth business to rein in risk (January 2021), global banks faced arduous process to exit Russia (March 2022), etc.). Visa and Mastercard blamed fraud for increasing their cross-border fees in the UK (August 2022)

There is a need for more comprehensive compliance and identity management solutions to reduce fraud as well as automated financial platforms that will increase the speed and reduce the cost to send money across borders.

2. More automation, risk mitigation, compliance, and cash-flow management solutions will drive margin improvement for businesses

In a recessionary environment, businesses will see stagnant or declining revenue growth. With this decline, they will seek to improve their margins by cutting costs, likely through headcount or software spend reduction. 

Internally, businesses will have a higher requirement to purchase any type of sales-enablement software. The only spend that these businesses will likely approve of are those platforms that save them money, either by automating more of their internal processes, better managing their cash flow and working capital requirements, or helping them reduce their losses from businesses that may default on their obligations. 

We are particularly excited about AI and analytical platforms that help businesses better understand the risk posed by SMBs and different underwriting mechanisms that can more effectively assess risk posed by consumers and businesses. In automation, we believe there are many processes that can be automated in proptech, construction tech, and back office tech for financial institutions. Lastly, more compliance tools will be enacted as there is more regulatory scrutiny and risk posed by consumers and businesses.

3. OpenAI GPT-4 and Modern LLMs will revolutionize the many aspects of fintech and broader vertical SaaS 

OpenAI GPT-4 and Modern Large Language Models (LLMs) will bring about significant improvements to certain areas of fintech and vertical SaaS. In fintech, much of the early OpenAI GPT-4 adoption will likely happen in the communication layer in both retail banking and wealth management. 

Consumers will no longer have to meet with bankers or wealth advisors or work with simplified chatbots to get summaries on their accounts or seek broader advice. Instead, they can receive personalized communications based on their financial history, status, and goals. 

Other instances where generative AI could impact fintech include payments where consumers could get instantaneous billing summaries on what they’re purchasing. Financial institutions may also be able to provide more information to consumers when they are denied a new credit product. From a broader vertical SaaS perspective, many companies that interact with customers have large call centers and customer service needs. Generative AI could be utilized to streamline many of these interactions and make them more efficient. 

4. Regulatory tailwinds and consumer/business sentiment will drive growth at the intersection of climate and fintech 

Governments and government agencies across the globe are enacting rules to meet different climate goals. In March 2022, the SEC proposed a climate-related disclosure rule that would require all public companies in the U.S. to disclose their scope 1, 2, and 3 emissions. While the outcome of this proposed rule is still being lobbied by multiple industry groups, ~57% of Russell 1000 companies today report their scope 1 and 2 emissions

In the E.U., an arrangement was reached for the world’s first carbon border tax to be implemented. At the same time, consumer and business sentiment is also heavily focused on meeting climate goals. 65% of consumers recently surveyed expect businesses to do more to make progress on reducing carbon emissions, tackle air pollution, and make supply chains more sustainable. 

While carbon accounting and carbon credit/offset management platforms are leading the way in terms of investor attention, we expect to continue to see advancements in other areas at the intersection of fintech and climate. This includes areas in risk management and analysis, sustainability/efficiency efforts across supply chains, and ESG investment tools.

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