Fintech's Maturation--AI's Dual Role in Fraud and Excellence

Key Quotes

"2018 2019 in fintech was late spring you get into 2020 and covid and that was utter insanity of a story like 25 of all venture dollars in that period went into fintech wow 25 the stat after that is not a good stat which is um starting in like the second half of 2022 like basically 0 of venture dollars went into fintech that's a drought maybe yeah yeah fintech winter was the second half of 2022 most of 23 and 24 things started to thaw a little bit and like now we're very much back into spring"

Zach Perret explains the cyclical nature of the fintech industry, comparing its phases to seasons. He highlights the extreme boom in venture funding during 2020-2021, where fintech attracted 25% of all venture dollars, followed by a severe drought in late 2022. Perret notes that the market is now showing signs of recovery, returning to a "spring" phase.

"it turns out the biggest use case for ai is fraudsters committing fraud against financial services companies financial fraud is growing at like like 18 to 20 a year which is insane and it's already a huge market i mean the cattle win long term but the mouse is winning right now"

Zach Perret makes a striking observation about the current impact of AI in financial services. He argues that fraudsters are the most significant users of AI, driving an alarming increase in financial fraud. Perret uses the analogy of a cat and mouse game, stating that while the "cat" (financial institutions) may win in the long run, the "mouse" (fraudsters) is currently ahead due to AI advancements.

"We explore how the industry moved from the explosive growth of 2020 and 2021 into a deep freeze, and why we are now seeing real momentum return. We also dig into the forces reshaping fintech today: AI’s outsized impact on fraud and underwriting, incumbents finally embracing external software, the renewed importance of deposits, and the rise of embedded finance across entirely new categories."

This quote from the episode description outlines the key themes discussed in the podcast. David Haber and Zach Perret aim to unpack the fintech industry's boom-and-bust cycle, explaining the transition from rapid growth to a standstill and the current resurgence. The description also highlights critical trends like AI's role in fraud and underwriting, the adoption of external software by established players, the significance of deposits, and the expansion of embedded finance.

"We've solved the access problem not completely not in every little niche but for the most part we as a collective industry have solved the access problem so i grew up in a small town only one bank in our town and if you didn't happen to be a member of that bank you couldn't get a loan easily now if you live in that same town you just go online and you apply for a mortgage and you got 30 mortgage offers in an hour or you can do it with rocket mortgage and be done in five minutes and these are awesome experiences that said what we've done is we've taken traditional financial services and we've made it digital we haven't necessarily made it excellent that's like the next horizon for us"

Zach Perret reflects on the fintech industry's progress, asserting that the primary challenge of providing digital access to financial services has largely been overcome. He contrasts his past experience of limited banking options with the current ease of obtaining financial products online. Perret identifies the next frontier as moving beyond mere digitization to creating truly "excellent" financial experiences, focusing on areas like credit scoring and overall service quality.

"The one benefit that i think has shown up more recently in fintech and the thaw period is that rates went up and it sort of shifted the mix of revenues for many of these fintech companies from lending driven kind of origination oriented stuff to deposits so many of these fintech companies decided i forget the exact timing but to go kind of full stack so you saw fintech companies like sofi you know buy banks lending club i think square got an iolc charter robinhood mercury many of these companies are generating very significant percentages of their revenue and profits today from deposit flows as rates have gone up and so that i think has helped thaw the market to some degree more recently"

David Haber discusses a positive outcome from the recent shift in the macroeconomic environment, specifically the rise in interest rates. He explains that this change has prompted many fintech companies to pivot their revenue models from lending origination to deposit-based income. Haber points to numerous companies that have become "full stack" by acquiring banks or obtaining charters, now deriving substantial revenue from managing customer deposits, which has contributed to the market's recovery.

"The one thing that we said for a long time that andrewson horwitz also likes to say is that every company's a fintech company and that was kind of quite common from 2018 onward now you see the emergence of embedded finance so some applied customers are like ford and john deere and these companies that like yes they do have captive financial services embedded within them but you do not think of them as financial services companies or large billers or it's expanded quite a lot and then you see the banks themselves historically they said oh we need to be fintech companies too now they're saying we have the biggest fintech companies like we invested as heavily in technology and so you've seen this startup industry now become mainstream and the firmament of financial services but also powering experiences well beyond financial services"

David Haber elaborates on the mainstreaming of fintech, referencing the common saying that "every company's a fintech company." He highlights the rise of embedded finance, where companies like Ford and John Deere integrate financial services into their offerings, blurring the lines of what constitutes a financial services company. Haber also notes the evolution of traditional banks, which now recognize their own significant technological investments and their role in powering experiences beyond traditional finance.