Selling to financial advisors was the best way to distribute savings programs both in and out of the workplace — but only Vestwell knew it

As Co-Founder and Chief Customer Officer at wealth advisory startup FolioDynamix, Aaron Schumm wanted to do right by his employees and help set them up with retirement savings accounts. But he was underwhelmed by his options: fees were too high, service was terrible, and the technology powering it all did not work well.

Later, after FolioDynamix was acquired by Envestnet, Aaron delved into the world of workplace savings, and started the journey focused on 401(k) plans for small and emerging businesses. At the time, 72 percent of workers at companies with less than 100 employees did not have access to a company-sponsored retirement plan. Meanwhile, the industry’s low margins and historically sticky products meant that recordkeepers were consistently underinvesting in technology. The average small-market 401(k) plan customer was losing more than two percent of their retirement savings in plan admin fees, fund and annuity fees, and advisory fees. Spotting an opportunity, Schumm founded Vestwell in 2016 to build a cloud-based recordkeeping platform that would form the underlying infrastructure for workplace savings programs — starting with the 401(k).

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“Vestwell was founded to provide advisors and employers with an affordable, compliant, and easy-to-use workplace savings platform to help close the savings gap in America, and F-Prime has supported that mission since our inception.”

Aaron Schumm, Vestwell Founder

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The so-called “American savings crisis” goes further than retirement — for example, around 61 percent of Americans cannot afford to pay for a $1,000 emergency. The 401(k) landscape was indicative of the broader savings industry, operating on technology that has largely gone unchanged for 40 years. Retirement savings was just the beginning.

Other players had spotted the same opportunity to focus on the 401(k) market. Vestwell was one of several startups that emerged between 2015 and 2017 to build a new support platform for businesses’ 401(k) plans, and some had already delivered products to market and raised sizable warchests from big-name investors.

However, Aaron’s team possessed a unique insight: the majority of workplace savings programs, including retirement programs, were sold via financial advisors, and not directly to businesses. Vestwell built its platform incorporating the financial advisor as a core stakeholder, giving it the ability to offer far more flexibility in terms of funds, operational and reporting capabilities, and other retirement planning services.

 

Industry Experience Goes A Long Way

Aside from his experience at FolioDynamix, Aaron had also led or worked on product teams at Citi and Fiserv before starting Vestwell. By the time F-Prime met Aaron, we had been involved in the fintech industry long enough to recognize his strength as an industry veteran who genuinely understood the market better than his competitors.

In the mid-2010s, financial advisors served more than 70 percent of small market 401(k) plans. By building relationships with home offices and trust with individual advisors, Vestwell could efficiently sell to a large number of 401(k) plans — and this was the only viable path to revolutionize the SMB 401(k) market. When Aaron set out to raise his first round of funding, we teamed up with like-minded investors at Primary Venture Partners, FinTech Collective, and Commerce Ventures to help him execute that vision. The following year, we doubled down to lead Vestwell’s Series A.

“Vestwell was founded to provide advisors and employers with an affordable, compliant, and easy-to-use workplace savings platform to help close the savings gap in America, and F-Prime has supported that mission since our inception,” Aaron said at the time.

History has proved Vestwell’s thesis correct. Aaron has successfully led the company to become an award-winning record keeping platform that is far more efficient than any traditional platform today. Vestwell has also gone beyond just 401(k)s, creating the only single platform architecture to power other tax-preferred savings vehicles in and out of the workplace, such as emergency savings, 529 Education Savings, student loan matching payments, and ABLE disability savings programs.

Anticipating the value of public-private partnerships in driving innovation within the savings industry, Aaron has also established key partnerships with state governments. They have overwhelmingly turned to Vestwell for its ability to deliver a personalized savings experience on a state-of-the-art platform that spans all savings vehicle verticals. Vestwell now powers more than 80 percent of the live state auto-IRA savings program in the country.

As the company has rapidly expanded into a leading savings and investment platform, it has over $30B in assets saved and well over a million users employed across 350,000 businesses. In December 2023, Lightspeed Venture Partners led Vestwell’s latest funding round: a $125 million Series D — one of the largest rounds of its type for the year.

To mark FedNow’s first birthday, Rocio Wu sat down with real-time payment experts and the Wharton Fintech Podcast to discuss the system’s latest updates, lessons learned from other international instant payment networks, and exciting innovations in the space.

It’s been one year since the U.S. government launched FedNow, its long-awaited real-time payments (RTP) system.

More than 70 other countries already had national RTP rails at the time and some, like Brazil, India, and China have seen huge adoption in the years since they rolled out their own infrastructure. At the time, I compared their experience with the uniquely fragmented banking landscape and entrenched card payment infrastructure in the United States to make 10 predictions for FedNow.

Those predictions were:

1. FedNow would start a domino effect of RTP adoption, led by consumer use cases
2. Mass network connectivity would take close to a decade
3. FedNow would replace cash and checks, but not credit cards
4. Person-to-business (P2B) account-to-account use cases would grow slowly, but steadily
5. FedNow would offer an incremental improvement on payment infrastructure, not a paradigm shift
6. Interoperability would be a prerequisite for any QR code renaissance
7. Digital wallets would become the next battlefield in e-commerce and at the point of sale
8. Authorized push payment fraud would rise
9. Attracted by high speeds and low costs, consumers and small businesses would be quicker to adopt RTP
10. FedNow would fuel cross-border money movement

A year on from FedNow’s launch, it’s time to check in on those predictions — some of which require more explanation than others. Let’s check through the quick ones first:

• FedNow early in a long process of replacing cash and checks — but not credit cards.
• FedNow is offering an incremental improvement on payment infrastructure, but not a paradigm shift.
• For now, we are still waiting for the mass domestic adoption of FedNow that would help it fuel increased international money movement.

Okay, let’s take a look at what we learned:

Mass connectivity will take a long time…

…But hopefully not too long. I recently participated in a Wharton FinTech Podcast interview with Nick Stanescu, who serves as Chief FedNow Executive at the Federal Reserve Bank of Boston. During our discussion, he shared that there are now close to 900 financial institutions live on FedNow, including banks and credit unions of all sizes across all 50 states. A year ago, that number was 35. However, remember America’s uniquely fragmented banking system: the country has almost 8,000 banks and credit unions. So while mass connectivity is still a long way away, hopefully this encouraging early adoption rate means we’re closer to five years away, instead of ten.

FedNow will start a domino effect of RTP adoption

As Stanescu pointed out in our interview, the majority of FedNow transactions fall under consumer use cases. Most of those have been account-to-account payments, the funding of digital wallets, and even earned wage access, where workers can access their wages the same day they earn them. Other exciting use cases include insurance payouts and emergency relief payments, typically lengthy processes which would happen instantaneously on FedNow rails.

Merchant incentives: Cost savings alone aren’t enough

Brazil’s Pix system has one of the most impressive RTP adoption rates in the world, and is predicted to account for 40 percent of the country’s online shopping transactions by 2026. There are a number of structural reasons for RTP’s success in Brazil relative to the United States, including differences in card payments infrastructure and the aforementioned banking fragmentation (or lack thereof — in Brazil, the top five banks account for 80 percent of total commercial assets, compared with 49 percent in the US). But there’s another structural difference we hadn’t initially accounted for: merchant incentives.

In Brazil, card settlement typically takes 30 days, while higher merchant discount rates lead to higher interchange take rates for card transactions — 2.9 percent for credit and 1.6 percent for debit. In the US, those rates hover around 1-3 percent and 0.25-1 percent respectively. An incentive therefore exists to push Brazilian merchants towards Pix, while their American counterparts have no such incentive. Boleto, a printed cash voucher, is another popular Brazilian payment method, and costs less to accept but takes a lot longer to process, and is inconvenient for users to pay.

Compared to those two options, Pix offers drastic improvements on all fronts: higher conversion, cost reductions, and faster settlements. Cost alone is not a strong enough incentive for American merchants to adopt FedNow. Looking forward, RTP providers will have to rethink the overall merchant and customer experience including conversion, loyalty, and customer satisfaction.

Bank incentives: Hopping the revenue hurdle

Real incentives already exist for banks to participate in RTP networks. There are cost savings from a reduction in the handling of checks and cash, including ATM usage. However, some banks harbor concerns that FedNow will cannibalize revenue from other payment methods, such as wire and credit card interchange fees, because the RTP option will tend to be cheaper. It is true that in countries with high RTP adoption rates, like Brazil, high interest rates and the ubiquity of installment payments (the original BNPL) mean fewer consumers carry credit card balances. This means that the loss of credit card revenue is not as high for Brazilian issuers as it might be in the US.

However, businesses and consumers have a strong preference for speed. “Pseudo-RTP” players like Venmo, Cash App, and Zelle are useful early indicators of demand for the real thing — and Zelle is on pace to reach $1T in run-rate volume by the end of this year. Meanwhile, as FedNow adoption grows among financial institutions, there are big opportunities for fintech startups to help FIs with hurdles like authorized push payments (APP) fraud, instant reconciliation, and ERP integration.

Security is a moving target

Wherever RTP systems gain traction, crimes like social engineering fraud, scams, and even physical robbery associated with APP fraud rise as a result. In 2023, the Brazilian Public Security Yearbook counted around 1M phone robberies, with thieves tending to act on Fridays, giving them more time to drain accounts while banks are closed over the weekend. Once they’re in a victim’s phone, a thief can do everything from place an order via MercadoLibre’s one-click checkout to access bank accounts — the average Brazilian has 5.8 accounts per person — and Pix rails, along with the 800 or so fintechs connected to them.

Combatting APP fraud is a team effort. Google recently launched a new anti-theft feature for Android devices that locks Brazilian phone screens when its AI detects a theft. The Federal Reserve has developed a tool called ScamClassifier to help the payments industry improve scam reporting, detection, and mitigation. And startups are emerging to tackle fraud on a global scale, with TunicPay, Archer Protect, and SOS Golpe as just a few notable examples.

Tap-to-Pay could level the playing field for offline PoS payments

One of my predictions last year was that digital wallets would become the next battlefield in e-commerce and at the point of sale, and that has become more and more true over the last year. At last count, digital wallets were the leading e-commerce payment method in the US, accounting for 37 percent of all e-commerce transactions (Asia Pacific at 70 percent and China at 82 percent), while credit card came second at 32 percent, and debit card a distant third at 19 percent.

However, digital wallets lag at physical points of sale (15 percent of total transaction value) because of the lack of interoperable QR codes, and other sources of friction. After all, it’s a laborious process to open your banking app, enter credentials, and scan a QR code while a cashier waits. Tap-to-pay technology would level the playing field for real-time payments, reducing the whole process to a single step — just like swiping your credit card. For now, though, issues like dispute management, instant refunds, and reconciliation still need to be solved.

Tap-to-pay has some big tailwinds at its back right now. Earlier this month, as part of the anti-competition settlement, the EU just accepted Apple’s offer to enable near-field communication (NFC) features for non-Apple wallet systems on Apple devices, including tap-to-pay. It also includes Face ID biometric authentication, defaulting for preferred payment apps, and a dispute settlement mechanism. And in the same month, NFC Forum announced a new functionality called multi-purpose tap. With it, a customer in a store could tap their phone on a terminal that simultaneously pays for their goods, checks their ID if they’re buying age-restricted goods like alcohol, adds points to their loyalty account, and provides a digital receipt.

Overall, infrastructure is emerging to help merchants manage a customer’s whole shopping journey, generate more sales, and ultimately boost customer loyalty. Because remember: improved costs and settlement times alone are not enough to entice merchants or consumers to adopt the real-time payments enabled by FedNow.

Looking ahead, opportunities abound for fintech startups to build and partner with financial institutions to fight APP fraud, enable instant reconciliation, integrate ERPs, and build interoperability between payment systems. Wherever startups are helping FIs orchestrate a smooth implementation and onboarding of FedNow, we are eager to partner up.

 

Originally published on Forbes.

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.

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

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.

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.

F-Prime’s David Jegen joins Judy Shaw of NYSE Floor Talk to discuss the F-Prime Fintech Index and the state of fintech 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.

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Originally published in The Financial Brand.