The Future of Financing, Part I

#2024 #Wrapped #Fintech #AI #BaaS #Outlook #Predictions #Thesis

Happy almost 2025! I took a hiatus from writing Substack to build Gestalt (although you can still find me on Twitter). One day I’ll write about how Gestalt bagged a 3x over-subscribed Seed raise in the worst fintech fundraising market.

But first, time for 2024 wrapped and 2025 predictions.

Key events and themes from 2024 that I believe will continue to shape the future of financing in 2025:

1. The BaaS Aftershocks

   A long time coming, the fragility of the BaaS model was laid bare in the Synapse bankruptcy case. The short-term impact on end-users and fintechs has been well documented and discussed.

   The longer term impact on the industry, however, will continue to play out into next year. For example, the cost of doing business has gone up for fintechs (e.g. banks may require a higher headcount and more funding from prospective fintech partners), but will a bigger headcount prevent fintech failures?

   For another example, the bar for third-party risk management is now much higher for banks, but will more frequent reporting instill a culture of compliance among these vendors?

   Taking a big step back, it’s time we ask “what is BaaS good for?” For community banks to grow new accounts? For fintechs to launch quickly? For non-financial service companies to offer financial products?

   After Synapse, many are starting to realize that BaaS may not be the answer they are searching for.

2. AI Hype vs. Reality

   Last month marks the two-year anniversary of ChatGPT. Two years later, AI’s hype cycle is still going strong 🙃 (hello 30% carry on [insert any hot AI’s SPV]!)

   To separate wheat from chaff, I’ve been exchanging field notes with AI leaders, especially this October, November, and December.

   What’s hype-y: Gen-AI powered personal finance management, Gen-AI taking over underwriting, and many others

   What’s actually valuable: a lot! I’ll dive more into this in the outlook section.

   Also here’s your annual reminder that regulators would love to understand how AI is used in the financial services industry. I dived into SEC’s subpoena of Upstart here.

3. The Rise of Community Commerce

   Coming out of COVID, consumers and businesses want to deeply connect with other like-minded individuals, and the community commerce segment is going stronger than ever.

   In 2024 alone, some of the largest fintech fundraising rounds came from the community commerce segment: Bilt ($350mm Series B+), Imprint ($75mm Series C), and Kalder ($7mm Seed round).

   Some may say that the community commerce model is flawed, marked by recent failures in the fitness community and creator community space-then they are not looking deep enough. In each case, the failure was driven by something other than people’s desire to connect and belong. The human need to connect is stronger than ever, and we’ll continue to see that play out in 2025.

4. Financing Fintech, Class of 2024 🎓

   2024 marks the graduation of many financing fintechs: Money Lion (acquired), Brigit (acquired), Tally (RIP), Petal (acquired), Salt Labs (acquired), Funding Circle (acquired), Theorem (acquired), Ampla (RIP), and more.

   After two years of soul searching (i.e. building toward profitability) post fed rate-raise, many in the financing segment is moving on to the next chapter, ready or not.

   A few more names remain on my bingo card. I’ll dive deeper in part II.

5. New market structure in the financing vertical

   Private credit is not new, but 2024 is the year when private credit elbowed its way into the big league: Atlas (former Credit Suisse) was acquired by Apollo, Atalaya by Blue Owl, and HPS by Blackrock; Met Life is on the hunt for its own private credit venture; the list goes on.

   The proliferation of private credit creates a new market structure marked by decentralization and specialization:

   1. Decentralization: Risk exposure is diffusing away from money center banks to hundreds of sub-scale private credit funds.

   2. Specialization

      1. Insurance companies becoming the new shadow banks, as they increasingly funnel capital into credit funds

      2. Funds not affiliated with insurers face increasing pricing pressure and may be challenged to raise new capital

      3. Facing pricing pressure, non-affiliated funds are specializing to differentiate: emerging markets, niche asset classes, smaller deals, or more flexible capital structure

   What does this all mean?

   To me, the new market structure makes raising debt capital more cumbersome for financing fintechs; but where there’s friction, there’s innovation. Further, the new structure also presents exciting exit opportunities for many financing fintechs.

In summary, 2024 was a year of resilience and discipline. A year where discipline during the ZIRP era was rewarded; a year where resilience to forge ahead sets the foundation for the next super-cycle.

What’s ahead in 2025 for fintech? I’ll share more in Part II.