Broadhaven Ventures’ Michael Sidgmore on global trends in embedded finance
- The future of financial services will be driven by non-financial companies that add a financial services layer to serve engaged, frequent users.
- The pandemic will accelerate the digitization of underlying tech infrastructure and consumer habits, causing long-lasting behavioral shifts.
A global perspective on fintech helps Broadhaven Ventures cross-pollinate customer experience best practices from the U.S., Europe, Latin America and Asia.
Today’s guest is Michael Sidgmore, who is a partner at Broadhaven Ventures, a venture capital fund affiliated with Broadhaven Capital Partners, an independent fintech investment bank. Broadhaven Ventures has investments in known fintechs like Credijusto, Kyash, MoneyLion, Starship, Liveoak (recently acquired by DocuSign), BioCatch, Harvest Wealth, Kovi and Nowports. Michael is also a venture partner at Goodwater Capital, a consumer tech venture capital firm that’s invested in Toss, Monzo, Stash, Kyash and Tide, among others.
Michael joins us to discuss the diversity of pain points fintech companies are solving for globally and the evolution of the embedded finance paradigms among its portfolio companies and beyond.
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The following excerpts were edited for clarity.
The road toward fintech investing
I've been in fintech my entire career from starting at Goldman Sachs in London in 2012 to 2013, right as fintech was starting to become a thing, and then I moved to the startup world. I was an early employee at Mosaic solar finance business and then iCapital, a tech-enabled alternative investment platform. I was an early employee at both of those places on the sales side and then met my partner from Broadhaven Capital Partners. We started Broadhaven Ventures at the end of 2016.
The state of the industry
One [trend] is the rebundling of a bank by new fintech players. You could imagine a world where Square ends up becoming one of the biggest digital banks in the U.S. and possibly abroad, because they have both the consumer side with Cash App, which has done extremely well and are acquiring customers at much lower acquisition costs than then some of the digital challenger banks are, and they have the merchant side and then have created a closed loop payments ecosystem from that. So you can imagine a world where those types of businesses end up actually becoming big financial services brands, as with some other challenger banks.
Non-financial companies moving into financial services
The other really interesting piece is non-fintechs becoming fintechs due to the creation of the infrastructure layer ushered in by Plaid, and companies like Marqeta which do card issuing, and other banking-as-a-service or payments-as-a-service platforms. You're now seeing the ability for marketplaces, consumer tech businesses, and SMB platforms like Shopify, enabling people to stay on the platforms where they do business, transact, or buy things. And they can offer financial services products to their constituents.
We're investors in non-fintech companies that have the ability to, in our view, offer financial services and financial products to their customers, like Kovi, which is a car leasing platform in Brazil and Nowports, which is a digital freight forwarder in Mexico and across Latin America that's enabling SMEs and freight forwarders, shippers, exporters and importers to track their shipments digitally.
The thesis there is that these companies can be the ones to provide financial services offerings to their customers, because they're already engaging with them every day or quite often. Latin American companies may not start out in financial services, but are creating embedded finance platforms. There's a lot for U.S. fintech companies -- or non-fintech companies -- to learn from.
Consumer pain points
There's different ways to answer that question based on geography. We can split that up into the U.S., Europe, Latin America and Asia, where there's very different levels of incumbent-bank competition or penetration from those incumbents to consumers.
In the US or Europe, you're really going after a customer experience problem. And I think digital challengers actually have a chance to build very big businesses as a result of creating a decidedly better experience. In Latin America and Asia, what you have is a highly underpenetrated banking ecosystem where digital challengers can actually serve a whole population that is underbanked and underserved, and then expand horizontally and build really big businesses. Nubank is an example of that in Brazil -- they have 20 million customers. With Toss in Korea, about a fourth of Korea uses Toss, which started out as a P2P payments business and is now a digital bank.
The impact of COVID-19
I'll answer that question in three areas: digital transformation of the enterprise; digital financial services and how that impacts the consumer; and changing consumer behavior. On the consumer side, I think that people are going to adopt digital payments and digital banking over the medium- to long-term, and the reason why is they're going to realize how frictionless of an experience it is, and it may even change cultural behavior.
Running a venture capital business during the pandemic
Although you can't meet in person, you can have more conversations over Zoom in a quicker period of time because you don't have to deal with people's travel schedules. You can actually accelerate conversations a lot quicker. I don't think it can replace in-person conversations and meeting and spending time either with the team and the founders, or in the ecosystem ... but I think it certainly can be done.