This could be a banner year for fintech, according to one of the industry’s most dialed-in CEOs.
Zach Perret runs Plaid, which links more than 20 million customer bank accounts to financial technology apps like Robinhood, Venmo and Coinbase. The start-up recently raised $250 million at a $2.7 billion valuation and added Kleiner Perkins partner Mary Meeker to its board.
The San Francisco-based firm is also backed by Andreessen Horowitz, Index Ventures, NEA, and the venture arms of Citi, American Express, Google and Goldman Sachs, among others.
The start-up, founded by Perret and the company’s chief technology officer, William Hockey, plays an important role in the fintech ecosystem. As of December, 25 percent of people in the United States with bank accounts have connected to Plaid through an app — a 13 percent increase from last year, the company said.
If nothing else, Perret has a unique bird’s-eye view based on Plaid’s back-end role for the most well-known start-ups in Silicon Valley. He has 11 things to watch in the burgeoning industry in 2019:
This year, banks will finally launch digitally native products “in earnest,” Perret said, while fintech companies will add checking and savings cards.
“Headlines will say that the two are converging, but will miss the underlying shift to demographically-tailored products,” he said in a Twitter post. “The products that win big are highly tailored to the demo they serve. The day of ‘big box’ banking (all products to all people) are over.”
Robinhood unsuccessfully tried to do this in December. It unveiled checking and savings accounts with an eye-popping 3 percent interest rate. But just a day later, the CEOs announced they would rename and relaunch after regulators and Wall Street sounded the alarm.
The year has already gotten off to a rocky start for stocks, and cryptocurrencies aren’t holding up much better.
On Thursday, the Dow dropped more than 600 points on fears of a global economic slowdown fueled by a quarterly revenue warning from Apple. The S&P 500 dropped more than 9 percent in the last month of 2018 to notch its worst December performance since 1931. President Donald Trump said this week that it was a “glitch,” and stocks would recover when trade deals are reached.
But Perret sees consequences from all of that.
“Market volatility will cause less stock investing. Consumers will avoid crypto as prices continue to languish,” he said. “High-yield savings products have already seen massive adoption, and will continue to grow.”
The Durbin amendment was part of the 2010 Dodd-Frank financial reforms that cut the fees merchants had to pay to banks when customers used debit cards. Exempt firms have, together with their affiliates, assets of less than $10 billion and therefore are exempt from the interchange fee standards, according to the Federal Reserve.
“Durbin-exempt debit interchange has proven to be a viable revenue model. Expect lots more apps issuing debit cards. Likewise, expect more instant cash-outs,” Perret said.
Ad-based acquisition is no longer profitable, Perret said. Instead, companies “will shift to referrals, brand, product, and pricing differentiation.”
“Free P2P was the magic feature for acquisition from 2013-2018 as was crypto trading in 2016-2018. Perhaps high-yield savings will be next? Good PFM tools may also be a viable hook.”
The U.S. Supreme Court this year ruled that states can legalize sports betting. It varies state by state, but it’s something to watch this year, Perret said.
“Growth will restart for betting, gambling, and payday lending as regulations solidify.”
Europe will continue to emerge as a major force in fintech, Perret said.
“European fintech companies will successfully move to the U.S., taking share from incumbents. Lending companies will struggle to internationalize.”
In December, Square reapplied with the Federal Deposit Insurance Corp. for a special industrial loan company license that allows less-traditional financial firms to accept government-insured deposits. Other fintechs may follow suit.
“Bank charters will finally be issued. Some may realize that renting a charter is actually easier than having one’s own,” he said.
Payment rails could improve this year, threatening a big revenue stream for credit card companies.
“U.S. card processing rates will come under increasing pressure as other payment rails improve (ex: RTP) and new rails are launched (possibly including the use of cryptocurrencies). Debit push will continue to grow and threaten the ACH network.”
Those processors will also look to become business-to-business lenders, and issue cards.
“Processors will become B2B lenders and issue cards. Those that don’t have consumer apps applications will seek them,” Perret said.
The Federal Reserve is forecasting two rate hikes this year and has brought its benchmark funds rate to 2.25 percent to 2.5 percent. As a result of rising rates, Perret said new loan issuance will go down.
“Lenders chasing profits will push harder to digitize. Pullbacks in mortgages and SMB lending will put pressure on community banks and credit unions.”
A global slowdown has been on the mind of most investors, especially as Apple sounded the alarm on China and a trade war drags on. Fintech investors are no exception.
“Macroeconomic volatility will scare fintech investors. Dollars will become highly concentrated in companies with strong economics,” Perret said. “Brewing at the seed stage is a new class of consumer-driven fintech founders that shouldn’t be missed though.”
As people stay glued to their phones, the financial technology industry is set to become even more ubiquitous.
“As the functionality becomes more atomic, fintech will be embedded everywhere,” Perret said. “Moving money, holding funds, lending, etc. will become an important feature for a wide range of products.”