Led by “Work Brothers,” RiskRecon Struck Gold in Third-Party Cyber Risk

In his role as Chief Information Security Officer at Salt Lake City-based Zions Bank, Kelly White was a typical enterprise software customer — and he had a problem. Every time his team tried to onboard a new vendor, they had to embark on a slow and increasingly antiquated security assessment process built on questionnaires, documentation reviews, and on-site visits. Methods for vetting potential vendors had not kept pace with business data’s accelerating migration to third-party environments, or the increased business risks that accompanied it.

Frustrated by his inability to find a method that would identify and monitor third-party cybersecurity risk for his enterprise, Kelly set out to build a product that could. He started spending nights and weekends working in his basement, coding a solution capable of automatically discovering and assessing any vendor’s security posture from the outside looking in. To scale up his basement creation and bring it to market, Kelly teamed up with Co-founder Eric Blatte, who brought a wealth of go-to-market leadership experience at several high-growth security startups. Together, they raised RiskRecon’s $3 million Seed Round in late 2015.

The Security Problem With Third-Party Software

As SaaS and third-party software usage exploded among enterprises in the early-to-mid 2010s, so did their cyber risk exposure. Data assets moved en-masse to third-party environments, drawing heightened scrutiny from boards, management, and regulators.

Everyone had the same problem Kelly had experienced at Zions Bank: enterprises’ methods for managing third-party risk lagged behind the increased need. A typical enterprise customer might send out a questionnaire with hundreds of questions to a new vendor, kicking off a lengthy research process complete with follow-up emails, conference calls, and on-site visits. The only objective or tech-based method of assessment available was penetration testing, which was extremely costly and, in any case, rarely allowed by vendors.

During F-Prime’s research in the space, we found that third-party vendors caused almost half of all enterprise data breaches — and the rate of third-party breach events was growing at more than 30 percent each year, even while the vendor security assessment process remained subjective and highly manual. Such breach events were hitting the headlines at an increasing rate, impacting healthcare, mega retailers, financial service providers, and even national governments and militaries.

Tech and Team Advantages

While cybersecurity was already crowded with startups in the mid-2010s, RiskRecon was one of the few startups with a former CISO at the helm. We suspected that Kelly’s experience in his customers’ shoes would be an incredible secret weapon in such a noisy market — and it was.

Informed by Kelly’s first-hand experience as an enterprise security leader, the product also stood out from the crowd. Instead of aggregating noisy threat intelligence data, the team used machine learning to generate a high-quality, risk-prioritized dataset for enterprises — a competitive differentiation that built enormous trust with its customers. When RiskRecon’s data indicated security weakness in a vendor, users learned to pay attention.

Early on, the company sold its product to a handful of large financial services customers, and by maintaining close connections at those firms RiskRecon was able to rapidly incorporate customer feedback to the point where it was automating work on their behalf. As a result, the company gradually took a lead over better-funded competitors who merely delivered risk ratings and reports.

The nature of the product also meant it was easy to sell — the team could quickly deliver self-assessments for a prospect’s cybersecurity posture and show up to demos with immediately actionable insights. It was a simple next step for RiskRecon to give prospects the same insights into the cybersecurity risk hygiene of their entire supply chain.

Aware of the outdated nature of third-party security assessment processes, F-Prime recognized the superiority of RiskRecon’s solution and the uniquely successful dynamic between its founders. When Kelly and Eric set out to raise a Series A, we committed early and partnered with Dell Technologies Capital to lead the $12M round. With some early success under their belt, Accel Partners led RiskRecon’s Series B only a year later, and F-Prime doubled-down.

“Building a startup with the early success of RiskRecon required a focus on rapidly building the right team and ensuring the team is heading in the right direction at breakneck speed, while serving existing customers and winning new ones,” Kelly told us. “It was wonderful to have F-Prime, who were a calm and steady hand by our side, for the best days and the worst days.”

“My Work Brother”

Kelly’s expertise as a security leader at an enterprise organization — RiskRecon’s exact customer profile — was one ingredient for the company’s success. A second ingredient was his co-founder Eric’s experience at several cybersecurity startups, including Imprivata (acquired by Thoma Bravo) and Trusteer (acquired by IBM Security).

At RiskRecon, Eric reportedly referred to himself as “Chief Bottle Washer,” referencing the way a “chief cook and bottle washer” would take responsibility for the most important and menial tasks alike in a 19th-century naval kitchen. He was always responsible for sales and field marketing, and at various points covered everything from negotiating legal contracts and coordinating billing to winning renewals.

The third ingredient was the unique relationship between the two founders.

“I came into RiskRecon knowing loads about cybersecurity and risk management, but I knew virtually nothing about business,” Kelly said. “Eric had far more business experience and wisdom, and he patiently helped build RiskRecon through every stage.”

Acquisition

In 2019, Mastercard approached RiskRecon with an acquisition offer that the team couldn’t refuse. While the company wasn’t for sale, the deal offered an opportunity to accelerate RiskRecon’s distribution to thousands of customers with the backing of a global brand.

“Through a powerful combination of automation and data-driven advanced technology, RiskRecon offers an exciting opportunity to complement our existing strategy and technology to secure the cyberspace,” Mastercard President of Cyber and Intelligence Ajay Bhalla said at the time.

“Mastercard has been one of those brands that has stood out as a true innovator, focusing on the real problems of real businesses,” Kelly added. “By becoming part of their team, we have an opportunity to scale our solution and help companies in new industries and geographies take steps to better manage their cybersecurity risk.”

Kelly remains CEO of RiskRecon within the Mastercard organization. Meanwhile, Eric stayed with MasterCard until 2021, when he joined F-Prime and Eight Roads Ventures as a Venture Partner.

“I have seen the F-Prime team at work from the perspective of a founder and as a venture partner,” Eric told us. “They have a massive wealth of knowledge and supportive resources at their disposal. If they aren’t able to help portfolio companies with a problem, they almost certainly know someone who can — and they’re always happy to make the introduction.”


“Building a startup with the early success of RiskRecon required a focus on rapidly building the right team and ensuring the team is heading in the right direction at breakneck speed, while serving existing customers and winning new ones.”

— Kelly White, Co-Founder & CEO

Video Interview: M&A Deal Activity

Rocio Wu, Principal at F-Prime and Adam Reilly, National Managing Partner, Mergers, Acquisitions, and Restructuring Services at Deloitte Consulting LLP, join Jill Malandrino on Nasdaq TradeTalks to discuss M&A deal activity and why leaders are increasingly recognizing the path to success requires the strong foundation of a well-defined strategy.

Video Interview: The State of Robotics report

Audrow Nash interviewed F-Prime’s Sanjay Aggarwal about the State of Robotics report for his podcast. Over almost two hours of conversation, they covered Sanjay’s background as a robotics engineer, the role of venture capitalists in the robotics ecosystem, and how that involvement has changed over the last five years.

Originally published by the Audrow Nash Podcast

 

 

State of Robotics in 2024: The Rise of Vertical Robotics

Venture capital investments in the robotics industry fell for the second straight year in 2023, down to $10.6B from $18.5B in 2022. However, within the downturn we find a number of indicators suggesting that the industry is, in fact, in an exceptionally strong position heading into the next five years.

That’s the headline for our second annual State of Robotics report. You can dive into the full report and its data here, and read on for our own analysis.

robotics funding 2019-2023

 

A Period of Transition

While the funding drop mirrors trends in the broader tech startup and venture capital ecosystem, it is more pronounced in the robotics industry as the torrent of capital investors once poured into the autonomous vehicle sector has dried up. AV companies raised $9.7B in 2021 — in 2023, they raised just $2.2B.

rise of vertical robotics

As the AV sector falls victim to an over-emphasis on technological ambition and under-emphasis on commercial viability, Vertical Robotics companies are attracting a new wave of talented founders, investment capital, and corporate interest. AV companies raised around 70 percent of venture capital invested in robotics in 2019, but by 2023 that figure had fallen to less than 30 percent — much of which is now focused on trucking. Meanwhile, Vertical Robotics companies’ share of investment in the industry has grown over the same time period. While the Vertical Robotics sector also experienced an overall decline in investment in 2023, it has experienced net growth over the last five years, from $2.4B in 2019 to $4.1B last year. In 2023, logistics and medical robots saw the most activity.

Vertical Robotics companies target industrial use cases with end-to-end solutions, typically augmenting tasks performed by humans and thereby enhancing the productivity of existing labor. Examples include pick-and-place robots in fulfillment centers, or autonomous vehicles moving crops on a farm or in a nursery.

robotics exits ipos M&A 2013-2023

Exits also slowed in 2023. Deal volume and deal value both dropped to a five-year low in the robotics industry. The drop in deal value was especially tough — as a whole, robotics deals in 2023 were worth less than 10 percent of the exits in 2022. Of the 46 companies that went public via IPO or SPAC (remember those?) since 2019, as of the end of 2023 only eight trade as independent companies with market caps above $250M.

early stage robotics funding

 

Signs of Endurance

Despite the overall decline in funding for tech startups, investing in robotics at the early Seed and Series A stages held up better than late-stage investing over the last three years. This is reflective of investor excitement about the tailwinds creating opportunities in the sector, including rapid advancements in AI, falling hardware costs, and labor shortages. In turn, these trends are driving more experienced and talented founders to create robotics businesses. Startup accelerator Y Combinator, a longstanding bellwether of early stage investment activity, included robotics as one of the focus areas of its 2024 cohort. The last few years’ robust early stage activity will drive increased later-stage investment as companies mature and achieve commercial milestones.

value in private robotics companies

Meanwhile, given the challenging exit market of the last 12+ months, there is still a significant amount of value locked in private robotics companies. There are currently 20 private companies which have raised at valuations north of $1B, with an aggregate last-round valuation of $118B. While much of the value is in AV companies, where valuations are likely to reset, there is still an attractive backlog of robotics startups capable of driving significant exit value going forward.

That exit backlog will create a massive tailwind for the industry in the coming years. The IPO window will reopen and established businesses will seek to reinvent their product offerings through the acquisition of Vertical Robotics players, sharpening the opportunity in the eyes of many investors. Over time, the virtuous cycle of company creation and exit will accelerate.

The past year has been a wake-up call to the entire venture ecosystem — and particularly robotics. Hype-driven investment cycles inevitably come to an end, while those focused on business fundamentals endure. Investors today are looking for differentiated solutions which transform massive addressable markets, but they must also deliver superior financial results. The industry’s tailwinds have positioned it to be one of the driving sectors for venture returns in the coming years — though plenty of work remains to deliver on the financial promise of robotics.

Fintech Is Operating at Scale, With Huge Growth Potential

Over the last 10 years, investors poured more than $370B into fintech startups across the globe. As a result, we now have a sector comprised of many companies operating at scale — and with plenty of room to grow. In our recent State of Fintech report, my colleagues and I took stock of the sector’s progress over the last decade, identifying the companies that have reached (or are about to reach) enterprise scale.

 

As a Sector, Fintech Is Now Operating at Scale

scaled fintechs

A decade ago, Coinbase did not exist; now, it generates $2.8B in revenue a year, and is one of 25 companies in the F-Prime Fintech Index whose revenue exceeded $1B in 2023. That’s more than half of the companies in the index.

Having achieved scale, the larger companies in the F-Prime Fintech Index are still growing rapidly. Public companies like Oscar Health, Nubank, Wise, and Bill.com are posting LTM revenue growth in excess of 50 percent. Toast brought in $3.6B in revenue in 2023 — 45 percent more than in 2022. Meanwhile, a contingent of privately listed companies like Circle (102 percent) and Chime (95 percent) are nonetheless operating at a similar scale to their public counterparts with $1.6B and $1.9B, respectively. The 10 fastest-growing companies in the F-Prime Fintech Index are growing at 54.1 percent, whereas their counterparts in the Emerging Cloud Index are growing at 33.3 percent.

 

Plenty of Scaled Fintechs Remain Private

Outside of the public markets, we find a cohort of scaled fintech companies that have reached a high level of maturity, but continue to operate privately. Stripe is a great example. The company has raised more than $9.1B from private investors, with the latest coming in around $6.9B. However, it earmarked a sizeable portion of the round to pay employees’ personal tax liabilities for expired shares, due to Stripe’s long tenure as a privately held startup. The company is subject to endless speculation about when it will finally go public. Others in this category include Klarna, which brought in $2.1B and is reportedly considering a public listing, and Revolut, which has $1.9B in revenue.

Overall, startups are staying private longer. According to Nasdaq, the median age of a company at its IPO in 1980 was six years. In 2021, the median age was 11, thanks in part to the increasing volumes of capital flooding into the private markets. However, companies like Stripe, Binance, Klarna, Chime, and Circle represent a crop of scaled fintechs that are reaching the limits of the private markets, and will soon find themselves with no option but to go public. The fintech floodgates are about to open even further.

 

Scaling Fast

Beyond the largest players, the F-Prime Fintech Index also lists a group of companies that are poised to join the billion dollar revenue club. Remitly, for instance, posted 46 percent revenue growth, ending Q3 with LTM revenue at $871M. Payoneer grew 36 percent to reach $790M LTM revenue by Q3, and Xero grew 27 percent to $982M. These companies could post even slower growth in 2024 and still reach $1B in revenue.

It is worth noting how quickly these companies reached this milestone. Block (fka Square) went from zero to more than $1B in revenue in a matter of five years. It took Nubank, Stripe, and Adyen seven, eight and 11 years, respectively. As early stage investors, we often ask ourselves whether a company can bring in more than $1B in revenue someday, and it is re-affirming for the sector to see private startups scaling so rapidly. The speed and scale of their growth validates our conviction about the size of the markets they’re chasing. Many of these startups are still operating in their local markets or in just a handful of countries. Like many older multinationals, they will be able to continue scaling as publicly listed companies selling internationally and would benefit from the prestige and resources that come with public listing.

fintech ipos

Overall, the number and size of companies poised to go public or cross the billion-dollar revenue threshold heralds further growth for the fintech industry. Over the next five years, we believe the F-Prime Fintech Index’s market capitalization will grow significantly from new public listings.

We encourage you to tinker with the F-Prime Fintech Index, which now includes head-to-head comparisons; dynamic charts comparing company performance (by market cap, revenue, growth, margins, multiples, and more); and multiples benchmarks to help explore the connections between valuation multiples and performance metrics like margins and growth rates.

 

Originally published in Financial Revolutionist.

Behind the Build: Q&A with Meena Mallipeddi, AmplifyMD

Raised in families immersed in the healthcare field, Anand Nathan and Meena Mallipeddi, husband and wife Co-founders of AmplifyMD, are no strangers to the limitations faced by many doctors today. “Coming from families of doctors, we’ve watched frustrations grow when physicians are not able to practice medicine and deliver patient care in the way they had hoped,” said Mallipeddi. She noted one key shortcoming is a lack of timely access to specialist expertise, which prevents patients from obtaining the care they need when they need it.

Access to specialist physicians in the U.S. now largely depends upon a person’s zip code, Mallipeddi pointed out, and this access disparity impacts hospitals, patients, and their communities.  As a result, most hospitals in the US experience unnecessary transfers, prolonged hospital stays, excessive utilization of tests and diagnostics, and increased healthcare costs. Outpatient services also struggle with issues like patient leakage, avoidable readmissions, and delays in care, which all exacerbate the clinical and financial burdens on the healthcare system.

Determined to solve the glaring supply and demand gaps they consistently observed, Mallipeddi and Nathan set out to redefine how hospitals, clinics, and patients access specialty care. Mallipeddi explained, “Hospitals and health systems have been trying to solve the specialty shortage issue with telemedicine for years, but they haven’t been successful in their current piecemeal approach. Until recently, virtual care has been a glorified video call. But it must be so much more if we want a seamless experience with broad adoption and impact. The technology must integrate bi-directionally with the EMR (electronic medical record) and the health system’s existing clinical workflows. Just as important, it’s got to be incredibly functional and efficient for a remote provider to see patients across multiple systems without a million different logins and applications for them to wade through. Anand and I knew we had to offer something smoother, better, and faster so medical facilities and providers could use the technology to its full potential.”

And so Mallipeddi and Nathan created AmplifyMD, a next-level virtual care platform that took into account the pain points above and gave hospitals a built-in multi-specialty physician group to simplify access to specialist services. “By developing a network of providers alongside our fully integrated virtual care platform, we can support hospitals, health systems, and clients of all sizes in a way that hasn’t been done before.”

What motivated you to start AmplifyMD?

My husband, Anand, and I have backgrounds in healthcare and technology, and were constantly exposed to the firsthand frustrations of our family members who are medical professionals.

The recurring narrative we encountered was the limitations caused by their lack of access to specialists. This often led to unnecessary patient transfers, excessive testing, and, at times, suboptimal care, all because a clinician lacked a piece of critical information or a consultation from a specialist. Recognizing that knowledge in medicine is highly shareable with the right technological infrastructure led us to the founding of AmplifyMD.

What have you learned along the way from “peers” in the field, and how is AmplifyMD different?

Most of our learnings were around the need to develop a comprehensive solution versus a narrow focus on only the clinical or technological aspects of virtual care. Hospitals are seeking a holistic solution, and the fact that we offer 15 different specialties through one platform, across any device, use case, or clinical care setting is so key to them. Our approach also minimizes their need for the myriad point solutions they struggle to manage today, helping our clients achieve operational efficiencies they otherwise would never have managed. It’s one training, one integration, and you’re done. That has been huge for us.

What makes you most hopeful about AmplifyMD’s future?

It’s hearing the impact we are making on patients, providers, and hospitals each day. I was just visiting one of our clients the other week, and the CEO was raving about our doctors and how much she loves having them on staff. And it wasn’t only because of the impact they were making directly on patients by seeing, treating, and discharging them efficiently. It was also because they’d simultaneously lowered the burden on her in-house hospitalist team. Her staff is keeping and treating more complex patients on-site with more confidence, and we’re helping the hospital as a whole run at a higher level of performance.

That’s just one story, and it might seem minor compared to the more dramatic tales of life-saving consults we do every day, but it’s precisely these everyday successes that illustrate the profound effect we’re having on healthcare in America. Our ability to efficiently address common health issues, which traditionally might have led to prolonged hospital stays and escalating costs, showcases the potential of AmplifyMD and “virtual care done right” to streamline and improve patient care and healthcare outcomes.

F-Prime has played a pivotal role in our journey, particularly through the support of Carl, who has been instrumental in expanding our network and enhancing our credibility. Carl’s willingness to share his extensive contacts has opened doors for us, connecting us with key figures in the healthcare industry, fellow founders, and potential investors. These introductions have been invaluable in fostering relationships and building a solid foundation for future collaborations.

What’s been the most rewarding part of your tenure with AmplifyMD to date?

Witnessing our remarkable growth and the impactful milestones we’ve achieved. Our team has more than tripled in size over the past year, which just blows my mind.

Equally exciting is our leap in patient care, from serving 10,000 to over 50,000 patients annually. Currently, we collaborate with over 150 clinical sites and offer services in more than 15 specialties, supported by a robust medical group nearing 300 doctors. And we recently launched tele-stroke in our suite of specialties, with 100 activations in a mere two weeks, which marks another significant achievement. This exponential increase underscores our expanding capacity to make a real difference in patients’ lives daily.

From the foundational days of brainstorming ideas to reaching these milestones, the journey has been a testament to our collective effort and dedication. Witnessing these achievements unfold has been profoundly rewarding, and our team’s ongoing shared commitment to our mission continues to make AmplifyMD incredibly fulfilling.

How would you describe your leadership style?

Fundamentally, I am driven by results, and hold a firm belief in setting ambitious targets. The essence of my leadership involves not just setting ambitious goals, however, but also ensuring that the team believes in their ability to meet them. I see a crucial part of my role as inspiring and instilling confidence in my team, convincing them of what we can achieve together. Otherwise, I’d never have gone into the start-up world!

I’m also always very direct and transparent, a firm believer in giving credit where credit is due, but also in calling out areas for improvement as soon as they become apparent. Celebrating a job well done is just as critical to our team’s continued success and morale as making sure everyone knows we are all being held to the same high standards. We’re all in this together, everyone is giving it their all, and I think the more our employees see this in action, the tighter it makes us as a team.

Who is the one person who’s had the most professional impact on your career, and why?

That one’s easy: my co-founder and husband, Anand. As a husband-and-wife team, our dynamic is unique. Anand not only conceived the initial idea and vision for our company, but he also brings a level of empathy to our partnership that complements my more results-driven approach.

His extensive experience as a people leader has been instrumental in shaping our company’s internal culture. Anand excels in managing our team, effectively communicating our vision, and fostering a collaborative environment. His ability to provide unwavering direction and product guidance for the company and our platform has kept us at the forefront of the industry and helped us build a clear defensive moat around our offering. The balance between our skill sets allows him to focus on the internal operations of our company while I take on the external challenges.

Anand’s impact extends beyond professional guidance. He provides unwavering support during challenging times, and we rely on each other for strength. This mutual support system has been a cornerstone of not just our personal relationship but our professional success as well. Moreover, his ability to offer candid feedback whenever necessary has been invaluable in maintaining our focus and integrity throughout our journey.


‘By developing a network of providers alongside our fully integrated virtual care platform, we can support hospitals, health systems, and clients of all sizes in a way that hasn’t been done before.”

— Meena Mallipeddi, Co-founder & CEO of AmplifyMD

How Fintech Is Disrupting Traditional Banks in 2024

In sectors like mobile banking and commission-free trading, fintech companies have had a profound on financial incumbents. In other areas, the future of banking and fintech is still being developed.

Fintech is growing up.

Over the last few decades, a generation of startups have surfed a wave of new technology spanning digital payments, roboadvisors, blockchain, and more, staking out a share in new and existing financial markets. Meanwhile, many incumbent financial service providers have sunk or swum based on their ability to anticipate, react to, or adopt new technology.

For the last three years, we at F-Prime Capital have produced our annual State of Fintech report to track the sector’s road into adolescence. 2024 marks a decade since fintech started to attract meaningful venture investment (that is, more than $10B annually), so in this year’s report we looked back on fintech’s impact on the broader finance industry.

Where did startups truly innovate and disrupt incumbents? Which sectors owe their technological innovation to startups and incumbents alike? Where did incumbents prove difficult to disrupt, or simply outmaneuvered the disruptors? And are there any sectors where these questions have yet to be decided?

 

True Startup Disruption

In the race against incumbents, startups have had the most disruptive impact in two sectors: embedded payments and commission-free trading models.

Software-based payments startups have been enormously successful. Riding on the creation of the PayFac model in the 1990s and the API-ification of payments in the 2010s, payments have been increasingly embedded into software vendors and are often the first of many adjacent fintech products offered.

In 2017, software-based payment companies Toast, Flywire, and the still-private Stripe processed just shy of $60 billion in payments, but by 2022 their total payment volume jumped to $927 billion — rising from 3 to 42% of incumbent FIS’s volume.

In the wealth management world, Robinhood won a generation of new and active investors with a mobile, gamified mobile experience and, most importantly, a commission-free trading model.

Though not the first company to rely on payment for order flow (PFOF) as a major revenue source, Robinhood’s dramatic rise in 2019 spurred incumbents including Interactive Brokers, Charles Schwab, TD Ameritrade, and E-Trade to forgo commissions. Schwab and Ameritrade (which later merged) estimated that nixing trading fees eliminated $1.4 billion in annual revenue, although much of that was ultimately recovered through PFOF.

 

Startups and Incumbents Both Disrupted

Broadly speaking, incumbent banks have adapted well to the past decade’s wave of fintech innovation, while startups have also managed to carve out meaningful market share.

Both were able to drive and adapt to changing technology in the consumer banking space. Neobanks like Chime, SoFi and Varo found success providing “new front doors” for consumers — between them, the three companies’ apps were downloaded over 8 million times in 2023 alone. Meanwhile, incumbents were able to quickly adopt neobanks’ more attractive features like zero overdraft fees and continue to see substantial user base growth. Mobile app download data suggests incumbents and disruptors are both winning the race to be consumers’ primary financial relationship.

On the business banking side, startup neobanks like Mercury and Brex benefited from early 2023 bank instability — receiving an estimated 29% of Silicon Valley Bank (SVB) deposit outflows. However, most companies were drawn to the security of J.P. Morgan, an incumbent that has recently acquired innovative fundraising and cap table businesses to bolster its startup product offering. In the wake of the SVB collapse, it secured an estimated 50% of the stricken bank’s deposit outflows.

 

Where Incumbents Remain Entrenched

By facilitating “hands-off” investment and trading, the rise of roboadvisors opened the door to millions of consumers who were otherwise unreachable to wealth and asset management companies. Early innovators like Betterment and Wealthfront created and owned a $200 million assets under management market in 2012, but weren’t able to secure distribution before incumbents innovated. Within a few years of launch, Vanguard and Charles Schwab developed and launched competitive products that swiftly gobbled up a growing market: by 2021, total roboadvised assets under management had reached $415 billion — and more than 85% owned by incumbents.

Peer-to-peer (P2P) lenders emerged in the 2000s with the ambition to disrupt traditional banking by eliminating the middleman, offering borrowers lower interest rates and retail lenders an attractive return on their investment.

This worked until it did not: in 2014, more than 84% of P2P lender LendingClub’s originations were funded by retail investors, but by 2020 retail sources of funding dried up to only 20%. Both LendingClub and Funding Circle have sunsetted their P2P lending products and instead grew to rely on institutional sources of capital — the very model which they had set out to disrupt. LendingClub went full circle and acquired a bank (Radius Bank) to secure a stable source of bank deposits.

 

Where Disruptors’ Impact Remains to be Seen

We identify three areas where the dynamic of startup disruption and incumbent innovation remains to be seen: crypto, real-time payments in the US, and generative AI.

Crypto has had a volatile history and its use cases are still dominated by investment and speculative trading. However, stablecoins show promise in both their ability to act as a store of value (in markets where the local currency is volatile or inflation is rampant) and as a new transaction method. In 2022, stablecoin transaction volume reached $6.9 trillion, surpassing that of PayPal at $1.4 trillion — suggesting crypto’s real value may lie in payments, after all.

Last year’s launch of FedNow, the U.S.’s late-arriving real-time payments system, generated a lot of speculation about whether real-time payments (RTP) could rival other payment methods in this country. For now, the effect of RTP in the U.S. remains to be seen. While RTP’s volume share of non-paper-based transactions dominates in India and Brazil (83% and 49%, respectively), the figure is just 1.8% in the United States.

Similarly, we are still in the very early days of a generative AI-driven innovation wave and its lasting effects in financial services. For now, fintech disruptors and incumbents are mentioning AI in company earnings calls at a similar rate, suggesting equal levels of focus on the technology across the industry.

The last decade of financial innovation brought remarkable change to the ways consumers earn, save, borrow, build wealth, and move money — and we look forward to seeing how our list of genuine fintech disruption changes over the next decade.


Originally published in The Financial Brand.

In Fintech, 2023 Was the Year of “Regulation On, Risk Off”

Throughout its history, finance follows a predictable pattern. Waves of excessive risk-taking are followed by the three common corrections: a flight to safety, regulatory scrutiny, and jail time for the worst offenders. The junk bond market imploded along those three familiar lines in the late 1980s. Ditto for the 2008 financial crisis. 

In 2021, a 10-year wave of fintech innovation and disruption culminated in a $1.3T market cap for public companies listed in the F-Prime Fintech Index. Then, in 2022, the market fell back to Earth and the usual corrective results followed in 2023. In their flight to safety, investors abruptly demanded capital efficient growth and cut fintech valuation multiples. By now we could fill a school bus with the fintech executives who are either under indictment, awaiting charges, or already in jail, including leaders at FTX, Bitwise, Frank, Wirecard, Terraform, and Binance. And in the last 12 months, regulators have finally started to throw their weight around the fintech sector. In our most recent State of Fintech report, my partners and I refer to 2023 as the year of “reg on, risk off.” 

For now, we wanted to take a look at the more enduring element of any corrective cycle: regulatory action. The fintech industry experienced a meaningful shift in regulator scrutiny, rule-making, and enforcement in 2023, which will have a lasting impact on the sector. 

Banking
The Office of the Comptroller of the Currency (OCC) has is scrutinizing the relationships between fintech startups, banking-as-a-service providers (BaaS), and chartered banks. This triad has been incredible valuable to the fintech ecosystem, but banks like Blue Ridge Bank, Cross River Bank, and First Fed Bank have recently found themselves in the regulatory crosshairs. Many banks are responding by suspending fintech startup programs, re-asserting stricter compliance controls, or exiting the space altogether. It’s clear to us that regulators would prefer chartered banks bypass BaaS providers and manage fintech programs directly. We think BaaS and embedded banking is here to stay, but it will become more expensive and everyone is moving more slowly until the regulatory guardrails solidify. 

The Consumer Financial Protection Bureau (CFPB) has been busy making headlines with proposals to cap overdraft and not-sufficient-funds fees. While in aggregate these will not make a big impact on the banking industry, we think it’s a fascinating culmination of neobank disruption which taught consumers (and apparently regulators) that banking could function without the fees. 

In the realm of open finance, the CFPB proposed Section 1033 of the Dodd-Frank Act enshrining consumer access to their financial data with banks (though notably not yet with brokerages). Thanks to aggregators like Plaid, Quovo, and Yodlee, the US has had de facto open access for years, but it is good to see it protected, though we’re watching for unintended consequences if new limits are placed on secondary use of the data.

Payments
FedNow, and the renewed push for real-time payments (RTP) in the US, is a big story, though the lack of deadlines or forced bank support ensures we will see much slower adoption in the US than in countries like Brazil and India. Of course, there are many other reasons the US would have adopted more slowly, like credit card rewards and already high-performing alternative payments rails. 

We are focused on how risk and fraud will be addressed with RTP, and see increased scrutiny of other digital wallet transactions as a preview. Fed Reg E does not require banks to reimburse consumers who mistakenly send funds through error or fraud, yet the CFPB is understandably looking at the $1 trillion of digital wallet transactions and asking if they should. Bowing to pressure, last year Zelle voluntarily began reimbursing some affected consumers, and we believe we will eventually get to a greater harmonization of consumer protections regardless of the payment rails.

Finally, it wouldn’t be a year without someone complaining about interchange, though last year the Federal Reserve actually proposed a debit card interchange fee reduction that would be the first since 2011. As before, fintech companies could side-step the lower fees by working with exempt banks under the Durbin Amendment to the Dodd-Frank Act (banks with less than $10B in assets.)

Lending
Seems like everyone is asking how to regulate By Now Pay Later (BNPL). In the OCC’s December bulletin, the regulator issued new requirements for banks that support BNPL transactions around risk management, disclosure guidelines, and borrower safeguards. The CFPB issued its own report focused on similar issues. And following Callifornia’s lead that formally incorporated BNPL under state lending laws in 2020, many states are addressing BNPL this year. We expect BNPL to gradually align with other consumer lending regulations, but this will not materially slow its rapid growth.

Across the country, states are passing or considering legislation dealing with early wage access (EWA), where hourly workers can smooth out pay cycles by accessing their wages without waiting for weekly or monthly pay cycles. Nevada and Missouri adopted laws that protect users from large fees when using EWA, while a law in Connecticut (and another pending approval in California) would designate EWA as a “loan.” 

Wealth and Asset Management
In March, the Department of Labor urged retirement fund providers to “exercise extreme care” when considering an investment in cryptocurrency, opting for statements over regulation for now. 

More regulation is coming for the private funds industry (aka Alternatives) with a notable step in that direction in 2023. At $16T in assets and an expanding base of retail investors, the Securities and Exchange Commission (SEC) began requiring registered advisors to make quarterly disclosures about their fees, as well as performance and potential conflicts of interest.  

Proptech
While more litigation than regulation, in October, a federal jury found that the National Association of Realtors had colluded with some of the largest real estate brokers in the US to inflate commissions. The ruling had immediate implications for property tech companies like Redfin, Zillow, and Opendoor, which all saw their stock price sink in the aftermath. It is remarkable that US consumers continue to pay such high commissions for selling a home, but it remains to be seen whether this ruling can do what Redfin and a decade of digitization has not.  

Crypto
Several jurisdictions, including the European Union, released detailed crypto regulatory frameworks seeking to prevent fraud, money laundering, and other forms of illegal financing via cryptocurrency. Here in the US, the SEC is continuing its policy of “regulation via litigation,” filing roughly 55 enforcement lawsuits during Chairman Gensler’s term at the agency’s helm. And in a huge milestone for the crypto sector, the SEC also approved the listing of 11 bitcoin ETFs. 

Conclusion
Heightened regulation follows waves of innovation and increased risk-taking, and that’s generally a good thing. The lag permitted a decade of new startups to innovate, expand consumer options, and further digitize the financial industry. 2023 marked the beginning of the “reg on, risk off” era, and while regulation may go too far as well, we think the increased regulatory scrutiny will prove beneficial. We must all work with regulators to develop regulation that protects consumers while permitting innovation, gives businesses clear rules to comply with, and if not too much to ask, harmonizes disparate regulatory frameworks across analogous products (e.g., payment rails) and across federal and state regimes.

 

Check out our full State of Fintech report here.

The Four Ds of Digital Health

In the dynamic landscape of healthcare’s digital transformation, where data access, timeliness, and quality are paramount, a fresh framework emerges: the Four Ds of Digital Health

Unlike conventional stakeholder-centric models, the Four Ds zero in on the essential functions individuals seek from healthcare: accessing the right mix of professionals, medications, and tests. However, a glaring obstacle obstructs progress: the sorry state of healthcare data

A student of mine in my side hustle as an adjunct lecturer once created “Four Gs” related to her academic project; humorously, she called it “a business school approach to remembering things.” In that spirit, I’ve been thinking about how best to encapsulate and frame the role of data access, timeliness, and quality as we collectively reshape healthcare as a digital-first industry.

Hence, I’d like to propose the Four Ds of Digital Health.

Before diving in, it is worth reflecting on the services we all enjoy daily that are only possible with accurate, up-to-date data. Like many frequent travelers, I often use the Uber, Starbucks, Orbitz, and HotelTonight apps. None of these services could function without accurate information about the “state” of location (Uber), inventory (Starbucks*), pricing (Orbitz) or quality (Hotel Tonight). Most of these apps and many others we use in our daily lives need real-time, accurate data about all of those elements. Some, such as Starbucks, are closed systems that will not let you know that another coffee shop is closer to you, while others are more like the more open marketplaces (e.g. Amazon) we have come to love: but at least they all are predicted on accurate, realtime data.

In healthcare by contrast, there is not reliable, up-to-date information about basic things like the address of a medical group, the status of a hospital or its on-staff doctors with respect to a provider network, the medical history of a patient, or the status of a health plan deductible. This is even true in closed systems like Epic where some health systems can’t seem to get out of their own way. Simply put, we cannot build services that improve the quality and cost of healthcare — thereby expanding access — without solving the sorry state of healthcare data.

Getting to the 4 Ds, I was tempted by other alliterative quartets. Often used is the four Ps of healthcare: patient, provider, plan, and pharma. That works, but it speaks more to the stakeholders than to the “jobs to be done”. I flirted with four As: access, automation, artificial intelligence, and accountability, but it felt too abstract.

Hence, I offer 4 Ds that are mutually exclusive and collectively exhaustive, while also upgrading DATA to the central role it deserves:

Doctors (by which I include all care providers overseen by doctors, with everyone “at the top of their license” or the hospitals in which doctors do procedures)

– Drugs (including both the benefit from PBMs and the delivery from pharmacies)

– Diagnostics (labs, imaging, etc.)

– Data (which you could argue is orthogonal to the others, but as mentioned above needs to be treated as a key pillar, so I’m bending the framework accordingly)

By the way, you may say these also are not “jobs to be done”. That is true, but they are closer to that framing because what people really want to “get done” in healthcare is to stay well and address problems; this means they need the right mix of doctors, drugs, and diagnostics. What stands in their way are the myriad process breakdowns we all have come to accept driven by health plan bureaucracy, provider ineptitude, and related technology breakdowns; as well as the (criminal) conspiracy that is our incumbent PBM model. If you are sick, if you are managing a chronic condition, or if you merely seek to access preventative care, you are in the market for a doctor, a drug, or a diagnostic.

What makes all of this so frustrating is that our data model (our 4th D) is broken. Our data is siloed and often inaccurate; and few of the participants in the industry are interested in changing that. Remember when the Cures act opened up health data access and Epic took out a full page ad to explain to Congress why this would undermine quality? Ever notice how payers and providers treat “price” like a national security secret? Some have openly speculated that payers want provider data to be opaque, so that they can field “ghost networks” that meet network adequacy requirements in a phony fashion (I don’t share this view, but I empathize with those who wonder how we can easily access the hours of the deli down the street on our phones and yet major payers seem unable to provide accurate street addresses of the providers in their networks).

Innovation comes from clinicians, technologists, and business people working together to improve the processes by which people access the 4 Ds. With the advent of AI, it is now every more clear that the promise of value based care models, patient-centric care management platforms, and improvements to administrative cost all hinge on data quality improving dramatically. And, fittingly, the data we need improved relates directly to the other three Ds and deserves a full seat at the table.

– Doctors: We have “hacks” to access doctor’s (or some of doctor’s) schedules from early innovators like ZocDoc, but few solutions actually expose the inventory of provider time to the world for use and scrutiny, and the availability of “cash pricing” is scarce. New companies offering provider data APIs hold promise, but solutions also need to be adopted within the enterprise to ensure that provider data is accessible, actionable, and accurate. We need more than just online booking; we also need to know details about provider services and quality. Even more importantly, we need to know the PRICE of services, so patients (or doctors who navigate their care) can see what things actually cost. In short, we need a HotelTonight for medical care. We need doctors to simply explain what they need to be paid per hour (or, if you want to be fancy, per RVU). We should just cut to the chase: 15 minutes with an internist should cost about $100; a specialist should cost about twice that; NPs should be at least 25% less. If we just cut through the morass of “visit leveling” and modifiers, we can acknowledge that what we have is a broken marketplace for provider time. We should be able to expose the schedules and the prices, a la HotelTonight. Providers take home about half of the top-line today due to administrative bloat; with innovation those costs can come down, potentially reduction actual costs.

– Drugs: Anyone who has stood in front of the CVS counter with a doctor on one phone line and the PBM on the other knows how maddening it is to sync up the various parties who control the distribution of drugs. Again, there are “hacks” such as drug discount cards and related services like GoodRx, but what we need is a fundamental redesign. PBMs who talk about “average wholesale price” are disingenuous at best. Platforms like CapitalRx represent infrastructure to change the game and link prices to proper reference data. Some disrupters also are promoting the potential of biosimilars, which also would reduce cost if they didn’t eat into the profits of the PBM rebate game. PBMs also make a killing on generics where market forces should permit patients to pay the real costs of those medications. In short, by exposing data about what these medications really cost, we can begin to present tradeoffs to providers and patients who increasingly need to focus on budgets for care.

– Diagnostics: In some areas, we have achieved scaled low-cost tests, as with bloodwork at the national chains. In other ways, the data monopolies of health systems inhibit a real market from developing for services like imaging. Most people know of times when the big health system implies or states outright that they can’t look at images created outside their four walls. Similarly, patients often need to resort to “sneaker net” to carry images on CDs or as films. This is nuts and it’s wrong that health systems we are supposed to trust will not enable use of imaging that would cost dramatically less if done in a place that doesn’t have primates in the basement. What is missing here is a data network that can disentangle the imaging from the radiology reads. It is illegal to require patients to use only your own services and with data liberation we should be able to put an end to such misuses of market power. With a surge in new diagnostic possibilities, from genetic tests to cancer biomarkers, diagnostics also will need to yield to the power of platforms and markets to reveal price and other tradeoffs so the health fiduciaries out there can make better decisions in the interest of patients.

Which brings us back to data. If our health data was plentiful and portable, we could simplify the way we pay providers, rationalize the drug payment model, and open-up a marketplace of diagnostic solutions that would cost much less than what we pay to oligopoly health systems. Yes, data runs orthogonally to the other three Ds, but by giving it its own space as another “D” we can begin to rationalize and push the other three Ds to move forward. Providers, payers, pharma and diagnosticians would love to sit on the data and mete it out if and when it suits their interests; but we all would benefit dramatically more if data were open so the innovators can do their thing.

So, how will we get there? A hopeful data roadmap would include regulation to require data sharing with patients and providers (and crack down on market power abuses), development of data utilities and related APIs, and enterprise solutions to bring payers, providers, and pharmacies kicking and screaming into a modern data model. We also need marketplaces that make the cost and quality of doctors, drugs, and diagnostics crystal clear to those who control health budgets and to patients who increasingly have their own funds to allocate. As with the innovation we have seen in other areas of our lives, if we can focus on and fix the last D, data, we can unlock a new era of enhanced services at lower costs across the other three Ds.

And what does this have to do with digital health? Everything. We already have the ability to care for people across state lines via telemedicine, route patients to lower cost care settings, and leverage AI to find insights and solutions at a dramatically lower cost, IF the regulators permit it and the data is at hand. Innovators and their investors are ready to go and already are making a dent in these problems. And/but, if those sources of creative destruction had better data that was more fluid, more accurate, and more actionable, the innovation and improvement in our health system would be dramatic and profound.

So, let’s embrace technology and clean-up our data act.

Our health depends on it.