In times of crisis, innovation often emerges as the only way to survive. Fintech companies will continue to seek out innovative solutions to make financial services more secure, reliable, convenient, and cost-effective. 

At Cohen Circle, we look to invest in companies that take a smart and disciplined approach to their market opportunity, execute innovative ideas with strong talent—and are on an accelerated path to high-margin profitability. 

Fintech funding in 2022 dropped 46% from 2021, with Q4 of 2022 seeing its lowest quarterly funding amount since 2018. Reduced venture funding puts investors in a favorable position to find deals with better valuations and higher potential long-term returns—if they choose companies that can survive and thrive through uncertainty. 

In this article, we’ll explore the three fintech trends we’re most excited about for both market impact and investor opportunity.  

1. The infrastructure layer will drive financial innovations 

The aging infrastructure of financial services has been ripe for innovation for years. Companies that can evolve the way the infrastructure layer works are positioned for success.  

Insurance, mortgage, real estate, and much of banking and finance still rely on monolithic tech stacks that keep valuable data siloed. Not only is data locked between internal teams, but third-party apps that offer valuable add-on services to customers have a tough time integrating.  

In what is known as ‘open finance’, many companies have already started to create connections between these disparate data silos. These API-first companies are freeing up financial data from legacy systems and enabling many new financial services to emerge.  

We’re most excited about solutions for the financial infrastructure layer that are based on the following tech: 

• APIs that enable a connection layer (like middleware) to connect financial data instantly and safely between separate platforms.  
• Mobile-friendly and cloud-based systems that foster faster collaboration and data sharing.  
• Microservices architecture, which essentially allows for internal APIs that can connect a company’s internal modular tech stacks and help in the effort to evolve from monolithic tech stacks. Containers, Dockers, Kubernetes, and other aspects of microservices architecture enable applications to scale as independent, modular pieces, rather than a whole, of a company's tech stack—enabling more flexible innovation and reducing drag on shipping new products. 
• Modern tools for identity, compliance, risk, and fraud prevention. Identity theft and other compliance issues are a growing concern, as fraudsters now use more advanced tactics to fool financial companies with ‘biometric spoofs’. If they don’t adopt, for example, advanced identity verification solutions they risk falling behind the fraudster's technical capabilities.  

The infrastructure layer itself is mainly a B2B play, as B2B companies are building an API-first layer and selling connectivity-based services to B2C companies. Companies that make financial data seamlessly available to other companies are positioned to do well in 2023 and beyond.  

However, some of the most exciting solutions this emerging infrastructure layer enables are in both B2B and B2C embedded finance.  

2. Embedded finance solutions to continue development in both B2B and B2C markets 

From the new infrastructure layer emerges the new application layer—in the form of embedded finance. Opportunities are presenting themselves in both B2B and B2C markets.  

B2C embedded finance outlook 

Embedded finance refers to financial products and services that are added seamlessly to an existing online product suite. For example, an e-commerce company offering installment loans or insurance during the checkout flow has added embedded finance products to its offering. A credit union integrating an equity trading platform into their online banking tool is another example. These products are an easy choice for consumers because they are available exactly when consumers need them. They’re also an excellent way for companies to add high-value revenue streams. Lastly, these products should enable better and cheaper financial products as the financial partner has lower customer acquisition costs and this can be especially true when the financial products are optimized through a marketplace.  
 

The new infrastructure layer has made offering embedded finance solutions easier, as the financial data needed is now available in seconds. Examples of consumer embedded finance solutions include binding an insurance policy during the purchase of a car or home and Afterpay, branded bank accounts like Shopify Balance for store owners, and branded payment cards like Lyft’s debit card for drivers.  

In the B2C space, embedded finance solutions need to do three things to be successful: 

1. Reduce customer acquisition costs (CAC) by being offered conveniently and timely.  
2. Increase lifetime value (LTV) through cross-selling opportunities. 
3. Seamlessly flow with the native user experience and existing interface—not taking more than 30 seconds to complete.  

Embedded finance solutions maximize a solution’s benefits and can create more value than other options. The Lyft debit card, for example, offers Lyft drivers 7% cashback on fuel, enables them to get paid instantly after every ride, and gives them thousands of fee-free ATMs to choose from. These are perks that they can only get from the Lyft card, which is an effective way an embedded finance tool can increase platform loyalty through exclusive advantages. 

B2B embedded finance outlook 

In the B2B space, embedded finance could be a blessing for financial teams and CFOs at large businesses. These organizations often rely on Excel and various disparate systems for payroll, benefits, and expense management. B2B embedded finance solutions (powered by the new infrastructure layer) offer new tools for cash management, payments, lending, and integration.  

Embedded finance in B2B is still in its nascent stage, and opportunity is starting to emerge. Growth opportunities in this B2B space are going to be faster for fintech’s and newer companies, as they are less likely to have a large and outdated tech stack in place. They have the advantage of not having a large enterprise infrastructure that will have to be ripped and replaced with a newer, faster, and cheaper solution. 

An application can be an embedded loan platform for construction materials or equipment in a web application for managing construction invoices.  

Another area ripe for disruption is B2B payments, which are known to be excruciatingly slow (think net 90 payment terms). A B2B embedded payments platform could create a bank-to-bank connection between buyers and sellers that gets rid of the need for standard purchase orders, invoicing, and accounts payable processes that can take months to complete.  

3. High-end users present an exceptional opportunity in consumer fintech 

A modern infrastructure layer enables not just delivering embedded financial solutions more effectively, but it can also help innovate more personalized financial products and solutions. This is particularly true for high-end consumers who have a more complicated financial life. They stand to benefit from connected financial data and AI-powered insights.  

However, to be successful in consumer fintech requires a 10x better product than alternative options, which is possible with personalization enabled through the infrastructure layer. The three areas we expect to see the most opportunity within the high-end consumer space are wealth management, taxes, and financial planning.  

Wealth management 

Working with all the newly available connected financial data, AI-powered tools can gain visibility into every part of a personal investment portfolio. These tools can then use other parameters such as age, risk tolerance, and number of children to help investors figure out the best options for growth, hedging against catastrophic events, and retirement. For high-end consumers with more complex portfolios, these tools will be essential in providing convenience and peace of mind. They also offer a more cost-effective option than human-managed (and often less successful) portfolios.  

Tax planning 

High-end consumers have more complications with their taxes. Data from multiple sources of income and various investments—along with expenses, deductions, and depreciation—can all be automatically fed via the API infrastructure into tax planning tools. These tools could leverage AI and/or expert insight to help people make the right tax planning choices for their unique needs. Modern technologies are enabling the creation of tools that can handle the complexity of high-end taxes, and we are expecting growth in that space to be fueled by the added convenience and greater savings opportunities this creates.  

Financial planning 

The existing financial planning models for goals like saving for college, buying property, and passing on wealth to children, are mostly one size fits all. They don’t consider unique financial situations. The data made available through the API infrastructure layer can fix that, creating bespoke models for financial planning that include highly personalized recommendations.  

What all these areas have in common is that they access the complete picture of a high-end consumer's complicated financial life and create insights from it. We believe successful solutions will use AI, but they will complement that with human expertise to provide personalized solutions at scale.  

These opportunities are all connected by one thing 

All the most exciting opportunities in fintech are linked through the newly connected infrastructure layer, which is what open finance is about. In an open finance world, all financial data is connected through infrastructure-level APIs. Bank accounts, trading accounts, insurance platforms, and all other financial tools can instantly and safely share data. The opportunity lies in the added convenience and expanded possibilities that this data sharing enables.  

In 2023, we’re most excited about fintech companies that create solutions using this interconnected financial data. We expect them to disrupt the legacy way of doing things and win.