Where We’re Looking to Invest at Cowboy Ventures — Consumer Fintech-Enabled Companies

By: Jillian Williams

The growing embedded finance space has laid the foundation for the next generation of consumer fintech-enabled companies. With the idea that “every company will be a fintech company”, founders are building incredible fintech infrastructure companies, the “picks and shovels” that will create the financial service industry’s future. We at Cowboy are looking toward the products and services enabled by this and are excited to invest in the innovation to come.

There are four main areas we are most excited about in embeddable finance:

• Convergence of Fintech and Other Sectors — We will continue to see the integration of consumer finance into other industries that provide high value and a better experience for consumers while allowing businesses to access additional revenue streams and use alternative customer acquisition methods
• Verticalized Finance — We are taking a broader view of groups of people, their needs, and the opportunity for more personalization and customization in financial services. These can be traditional demographics such as age and ethnicity but also based on job, income type, or hobbies. This can apply to the financial services needs for consumers and SMBs
• The Consumerization of DeFi — DeFi UX leaves a lot to be desired and creates many barriers for user adoption. As the future of Web3 continues to evolve, we are currently most bullish on areas that connect traditional finance and DeFi
• Addressing Rising Consumer Debt — As more solutions arise giving consumers access to credit, we need solutions that better guide consumers and help navigate growing sources and amounts of consumer debt

Convergence of Fintech and Other Sectors: customer acquisition and experience advantages of other sectors

We’re excited about embedded finance because it allows non-fintech companies to offer products and services that provide high-value incremental margins. Non-fintech-oriented companies (like retailers, education, or healthcare companies) can integrate financial functionality into their offerings. Shopify is an excellent example of this. It started as an e-commerce enablement platform and has evolved to become a massive financial services platform for both consumers and businesses. Shopify first built a tech platform for sellers to quickly put up a digital storefront and sell their goods globally. Now, services like ShopPay and Shopify Capital drive over 50% of their annual revenue. This will happen more often in the future and there will be more opportunities at the intersection of fintech and other sectors.

Embedded finance allows fintech companies to focus more on product innovation. Previously, consumer fintech companies had to put a ton of time and energy building bank accounts as a starting point, leaving little room to build differentiated features early. Now, there’s a panoply of financial infrastructure-as-a-service companies (Unit, Pinwheel, Atomic, Power, and Alpaca, to name a few) who make it easier to build on top. This has enabled founders to focus on product innovation rather than spending time dealing with the regulatory hurdles and infrastructure requirements that formerly took lots of money and time. Embedded finance will enable B2C and B2B2C product-driven innovation we haven’t seen before.

While there have been terrific companies built in this space (e.g., Chime, Current, Varo) we don’t believe the basic checking account will continue to be the needed or impactful starting point for customer needs. As more innovation happens away from the checking account, we are excited to invest in products supporting consumers in earning, spending, and interacting with their money. Today, consumers take a more active relationship with their finances and interact with them on more platforms than before. This offers considerable opportunities to move away from one size fits all financial solutions and build platforms that meet changing life needs while engaging the preferences of different consumer profiles. D2C financial products will become even more personalized, and brands will need more tools to interact with consumers, broadening what it means to be a consumer fintech offering.

Consumers interact with their money as a means to an end — can I purchase this product? How should I make this purchase? What should I invest in? With the increased understanding of consumer behavior in and around financial services, companies have more data than ever to use to guide consumers through their best financial life.

Verticalized finance: fintech addresses how different consumers earn, shop, decide, buy and save

Financial services for Gen X — While there’s been some innovation with companies such as Trust & Will, Retirable, Noah, and Silvur, it remains comparatively untouched compared to other generations and has very different needs. Customer acquisition has proven a challenge in this space, but we are excited about companies addressing this growing population and some of the changing dynamics, including:

• This population is past their wealth accumulation years, creating higher barriers for new services and products to build trust; however, they are increasingly open to digital innovation
• Wealth transfer that puts more money into the hands of women who have not typically been the financial decision-maker previously
• Increasingly tech-savvy is not digitally native means need for a different user experience

Financial services for Gen Z — The way Gen Z interacts with money is opposite to baby boomers. There are existing banks for teens and kids, such as Greenlight and Step, but opportunities go beyond checking accounts. The opportunities for the generation will focus around personalization of finances and the use of social-driven by:

• Inherently social generation and that plays a role in their finances including how they learn, earn and spend their money
• Bucking many traditional products (such a credit cards) and looking for solutions that are best for them, not just because their parents did it
• This consumer is offered an overwhelming number of financial options (e.g., countless payment options at checkout) and needs help navigating what financial decisions (products, financial advice, payment options, etc.) are best for them based on their financial situation/behavior

Financial services for gamers — The average gamer is 34 years old, with 60% of Americans playing video games every day. Video games are both entertainment and social hubs. Gaming has also evolved beyond GameStop and consoles. Mobile game revenue is expected to cross $100bn in 2023. Gamers’ unique financial, interests, and spending habits pose a host of opportunities. New companies could offer solutions such as improved gaming rewards, in-platform p2p payments and microtransactions, and better engagement with payers and earners within or beyond the gaming platforms.

Creator / Gig economy workers — The continued growth of the gig economy and the rise of the creator economy expanded ways for consumers to earn and manage their “atypical” income. While there are companies such as Catch in the benefits space and Stir and Creative Juice specifically focused on managing finances for creatives, there continues to be a lot of under-tapped opportunities with the rapid expansion of this space.

• The growth of the 1099 worker is not a fad, and it creates more need for access to financial services away from the traditional employer
• Challengers around underwriting and financial planning with unsteady incomes
• Technology that improves the ability to earn money, whether it’s helping with the payment infrastructure or increasing a creator’s following — many content creators are unable to get compensated for their product

The Consumerization of DeFi: the rise of the retail investor

With more time, money, and prolonged low rates, consumers became more engaged with their finances. The broader stock market, crypto, and decentralized finance are becoming increasingly mainstream and attractive given the yield they offer to investors. In June 2020, retail traders made up 25% of the market, up from 10% in 2019, and most of Robinhood’s most recent growth has been driven by crypto as consumers look for new and exciting areas to invest.

The average consumer is not necessarily driven by the fundamentals or long-term prospects of most coins or NFTs, but by the excitement and the potential of high returns absent in traditional markets. We don’t think this is a problem. Demand for access to crypto is real. We see room for innovation around the consumer experience and usability as there are high barriers to entry (e.g., on/off ramps, storage risks), and user-friendliness leaves much to be desired. We’re excited about opportunities at the intersection of DeFi and Traditional finance, similar to the Current — Compound partnership, that can act as a gateway for the average consumer and improve usability challenges. With the new wave of traders, there are also opportunities around tools to better serve them, such as the impact of trades (crypto and non) on taxes, a concept many first-time investors will not understand.

Addressing rising consumer debt: A Need for More Solutions to Manage Debt

The pandemic has changed financial dynamics unexpectedly. With lower consumer spending, compounded with expanded unemployment benefits, stimulus checks, and paused student loan, mortgage, and rent payments, many Americans had more disposable income and a higher personal savings rate than the last 60 years. Subsequently, consumers have started paying down costly debt, especially credit cards, at a higher rate than usual.

Despite the record paydown of debt, consumer debt remains high, reaching almost $15tn in 2020. However, we have also seen the rise of BNPL platforms as an alternative and expect the market’s growth to continue to soar. While BNPL is a great payment option, there are some consumer and lender risks that will need to be addressed as this market continues to evolve:

• 43% of BNPL users have missed a payment, primarily due to consumers forgetting when a bill is due, creating a need to improve the repayment and management process
• Most BNPL don’t run credit checks but do report missed payments to federal bureaus. This means consumers miss out on the benefits of on-time payments but feel the repercussions of missed payments. Consumers should be rewarded for their good financial behavior and not solely worry about penalization.
• Often BNPL loans don’t show up on a credit report, so consumer debt is likely understated. This means underwriters don’t get a complete financial picture of and risk extending consumers beyond their means

So what’s next? These dynamics and market shifts are just examples of the many ways in which consumer fintech is evolving and expanding. We are excited to invest in startups that dynamically meet consumer needs and interests and back founders with unique, real-time insights into these changes.

If you’re an early-stage founder building in this space (or in the fintech space broadly), we’d love to hear from you at Jillian@cowboy.vc.