Fintech & Beyond: Insights from Singapore Fintech Festival 2023

The Singapore Fintech Festival last week not only provided an immense opportunity to learn but also a small glimpse into the future. The punchline, as quoted by the President of Singapore himself, was “AI is disrupting the disruptors!”. Within the melting pot of innovators, thinkers & visionaries, the significance of AI echoed. The tone of the event was introspecting & thoughtful and highlighted several recurring themes such as AI, Payments, Insurance, and Embedded Finance. It was also interesting to hear from VCs across the globe about areas in Fintech where they see deep value creation in years to come.

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Below we highlight some of our key takeaways from over 25 sessions that we attended across the three most intense & enlightening days last week.

The Transformative Role of AI in Fintech and Beyond

1. Advancements in AI’s Capabilities

  • Human-Like AI: AI is advancing towards acquiring more human-like characteristics, indicating a future where AI could achieve singularity in specific tasks, such as personalized customer service or complex problem-solving.
  • AI in Healthcare and National Security: The use of AI in sensitive sectors like healthcare for diagnostic and treatment purposes, and in national security for surveillance and threat detection, necessitates stringent regulations to manage its profound implications.
  • Diagnosis and Treatment Enhancement: AI’s role in healthcare, particularly in speeding up diagnoses and improving treatment quality, is set to be highly beneficial, especially for aging populations who require more medical attention.

2. AI’s Impact on the Workforce

  • Job Replacement Potential: AI has the potential to quickly replace about 10% of tasks in 80% of jobs and as much as 50% of tasks in 25% of jobs, signaling a significant shift in workforce dynamics.
  • Workforce Transformation: AI’s influence extends to reshaping the workforce, particularly in replacing tasks that require cognitive skills, thereby disrupting traditional job hierarchies and necessitating new skill sets.
  • Shifting Skill Valuations: As AI takes over tasks requiring cognitive abilities, the emphasis might shift from IQ to EQ, recognizing the importance of emotional intelligence in areas AI cannot easily replicate.
  • Impact on Programming and Medium-Skilled Jobs: AI’s advancement is likely to replace many programming jobs and impact medium-skilled job markets in developing countries, potentially leading to a shift in the global job market landscape.
  • AI Co-pilot vs. Auto-pilot: Future developers will become better system thinkers and will be able to solve problems faster but they will not be replaced by AI. The problem statements will become bigger [think of industrial revolution and what it did to the evolution of the agrarian society]. Co-pilots will also help in faster diagnosis of system issues, reduce outages & increase reliability.
  • English is the new programming language: Any natural language will become the new programming language. The logic will prevail, and productivity of engineers will see significant improvement. Will enhance collaboration and augmentation of code as inference of the code will become easier.

3. Ethical and Social Implications of AI

  • Misinformation and Deepfakes: The use of AI in generating misinformation and deepfakes poses a substantial threat to the integrity of information, impacting democracy and social harmony, and requires measures to combat such misuse.
  • Financial Inclusion and Ethics: While AI offers significant opportunities for financial inclusion by providing access to financial services to underserved populations, it also poses challenges in ensuring these outcomes are fair and based on accurate, unbiased data.

4. AI in Financial Services

  • AI as Financial Advisor: AI’s role as a financial advisor is particularly effective, but its use in advising retail investors, especially regarding life savings, calls for careful regulation to protect consumer interests.
  • Operational Streamlining: AI is being leveraged to simplify and enhance various operational aspects in financial services, such as automating customer service interactions and optimizing the client onboarding process.
  • The Bionic Workforce: The concept of a ‘bionic workforce’ in banking, which combines human talents with AI tools, emphasizes the need for a balanced approach to service personalization and efficiency.

5. AI in Financial Crime and Compliance

  • Fraud Detection and Compliance: AI is increasingly being used in the financial sector to enhance capabilities in detecting fraud and ensuring compliance with regulatory requirements, thus safeguarding against financial crimes and ensuring adherence to legal standards.

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Revolutionizing Transactions: Insights into the future of payments

1. Advancements in Payment Technologies

  • Embedding Payments in SaaS: SaaS platforms are evolving to integrate payment solutions directly into their services, turning them into one-stop shops offering full-stack products and services. This trend is particularly noticeable in platforms like Shopify, Squarespace, and Lightspeed, which are transforming the way marketplaces operate​​.
  • Breakthroughs in P2P and B2B Transfers: There has been a significant increase in transaction volume due to mobile number-based peer-to-peer and business-to-business transfers. This innovation indicates a shift towards faster and more efficient real-time transfer systems, enhancing both convenience and scalability in payments​​.
  • B2B Opportunities: The next decade is poised to see significant growth in cross-border B2B payments. With AI expected to play a major role, there is a potential revenue opportunity exceeding $200 billion. This space is seeing increasing interest from venture capitalists and startups, indicating a robust future for cross-border payment solutions.

2. The Rise of Instant Payments

  • Closing the Gap: The focus on instant payments is geared towards making money transfers more accessible and user-friendly. Efforts are being made to address real-time refunds, QR-based payments, and recurring payments, all aimed at creating a more customer-centric payment experience​​.
  • UPI’s Impact in India: The Unified Payments Interface (UPI) in India has significantly reduced cash usage (from 97% pre-UPI to 83% currently), showcasing the potential of digital payment systems to transform financial transactions in large economies. The rise of UPI transactions exemplifies a successful shift toward digital payments​​.

3. Challenges in Payment Systems

  • Interoperability in Cross-border Payments: A key area of focus is making instant payment systems interoperable across different countries, especially for cross-border transactions. This interoperability is crucial for businesses like Amazon that need to collect payments globally​​.
  • Recurring Payments: Currently, instant payment systems face challenges with recurring payments, which is a crucial feature for unlocking new merchant segments and enhancing the payment experience for subscription-based services​​.

4. Digital Public Infrastructure and Its Impact

  • Three-Layer Infrastructure: India’s approach to digital public infrastructure, including Aadhar (identity layer), the payments layer, and the ONDC (data exchange layer), is a key example of how such systems can democratize access to digital payments. These platforms are non-profit and aim to provide core infrastructure while allowing private players to innovate on top of them​​.
  • Reducing Cash Dependency: The economic model highlights the cost savings in digital payments over cash. For merchants, the cost of accepting cash can be significant, and the economy bears a substantial cost in printing and maintaining cash. The government’s subsidization of small transactions and support for small merchants is an essential factor in driving digital payment adoption​​.

5. Inclusivity in Payment Systems

  • Elderly and Digital Payments: The increasing comfort of seniors in Singapore with e-payments reflects a broader trend of digital financial services becoming more inclusive and accessible to older populations. This demographic shift is crucial for ensuring that digital payment solutions cater to all segments of society.

Transforming Protection: Key Trends in Insurance

1. Evolution of Embedded Insurance

  • Dynamic vs. Static Products: The shift from static to dynamic insurance products is marked by a transition to ‘smart’ embedded models. These smart models utilize over 1000s of parameters in customer profiles to offer customized insurance and communication, which is particularly significant in China where banking is almost entirely digital​​.
  • Customization and Personalization: Insurers are leveraging detailed customer data to offer personalized products. This approach is crucial for success in digital markets, exemplified by China’s lead in embedding services into financial products, like offering long-term accommodation for the elderly with full medical care​​.

2. Challenges and Opportunities in Embedded Insurance

  • New Distribution Models: The concept of embedded insurance, though old, has gained new traction with companies like Amazon, which bundles health coverage with its services in the U.S. This model helps reach the underinsured and links micro-insurance products with other financial services​​.
  • Scalability and Monetization: The scalability of embedded insurance models and monetization remains a challenge. The margins for reinsurers in digital embedded micro insurance get squeezed by manufacturers and distributors, making it a tough market for venture capitalists​​.

3. Global Insurance Gap and Insurtech Investments

  • Insurance Accessibility: The global insurance gap is around $1.8 trillion, underscoring a vast market for insurtech solutions. Companies like Bolttech are addressing this by offering tailored, affordable insurance products across 35 markets in four continents, using a B2B2C model to widen access​​.
  • Insurtech Deals: Tokio Marine, for example, has made 60-70 investments in insurtech and is actively seeking more deals worldwide. This reflects a growing trend among major insurers to invest in innovative insurance technologies for financial inclusion​​.

4. Impact of Regulatory Changes and Digital Trends

  • Gig Economy and Insurance: The gig economy, which makes up about 10% of the workforce, lacks traditional employee benefits, highlighting a market need for adaptable insurance solutions. This gap represents a significant opportunity for insurtech companies to innovate​​.
  • Digital Transformation in Insurance: In China, for instance, the digital shift in insurance has led to empty branches, with Ping An becoming the world’s largest car insurer through digital means. This trend challenges traditional models and underscores the importance of digital insurance solutions.

Embedded Finance: Integrating finance and tech

1. Trend and Future of Embedded Finance

  • The last decade’s trend was about digitizing offline businesses.
  • The upcoming decade is anticipated to witness a comprehensive merger of finance and technology.
  • An example is the transformation of vertical SaaS businesses (like those offering restaurant management software) into comprehensive fintech businesses, incorporating financial services as a core part of their offerings​​. 

2. Infrastructure Development for Embedded Finance

  • This transformation requires extensive infrastructure development.
  • Essential components include integrating payment processing, payroll management, accounting systems, and creating a complete financial services stack within the business model​​. Examples: Unit, Layer, Salsa.

High conviction areas for investments from Global VCs

1. Supply Chain Finance (MSME Credit)

  • Buyer-led working capital (WC) finance. Provide WC loans to small mom & pop shops through FMCG relationships. Ensure that loans are used for productive purposes.
  • Key issues: Second highest #frauds in this space (Example: Greensill Capital).

2. Trade Anything Anywhere 

  • Tokenize RWAs and bring them to decentralized exchanges.
  • Build on-ramps & off-ramps for fiat to crypto and vice-versa.
  • Key issues: Regulations. Control on money laundering. Political need to regulate cross border flow of capital.

3. Financial Products for GIG Workers

  • 15% of Singapore’s population is in GIG economy with no employee benefits. 500M GIG workers globally will need benefits in next 10 years.
  • Companies enabling platforms to provide benefits to GIG employees are likely to be the next big thing. Solutions will be localized & specific to markets.
  • Strong regulatory tailwind likely. Singapore & certain areas in India are making it mandatory for platforms to provide benefits to GIG workers.
  • Key issues: Lack of incentives for platforms to do this. Monetization. Scalability.

4. Climate Accounting (ESG + Carbon)

  • International Society of Sustainability Professionals (ISSP) is likely to bring regulations around report % of revenue & profit that carries climate related risks including emissions related to supply chain. Lenders, shareholders & exchanges related to these companies need to report as well.
  • Significant opportunities for fintech companies to create products & solutions that enable measurement, mitigation and compliance with these risks. Example: Accounting, hedging, trading, reporting, etc.
  • Key issues: Regulation led; hence timing & value capture uncertain.

5. Cross Border Payments

  • Transformation in B2B cross border payments in next decade = better automation, monetization. $200B revenue opportunity. AI likely to turbo charge this.
  • Key issues: Old problem. Requires international coordination.

6. Focus on Specific Demographics

  • In 2050, there are c2.1B people who will be more than 60 years old. In next 20 years, richest cohort of consumers = Seniors (likely to withdraw $14T from retirement plan in next 20 years). Baby Boomers in US own c$80T of assets.
  • Opportunity 1: Elder friendly wealth management platform (opposite of Robinhood).
  • Opportunity 2: Disrupt AARP (American Association of Retired Persons) which makes $1.6B in revenue.
  • Opportunity 3: Products & Solutions that protect elderly from online scams.
  • Key Issues: Elderly struggle with tech adoption. Hard to compete with non-profits.

7. Building on Digital Public Infrastructure (DPI)

  • Best DPI example: India Stack.
  • Huge opportunity to build along the stack: fraud prevention, dispute resolutions, products, solutions, risk, cyber security, payment gateways, etc.
  • The need for services analogous to traditional financial systems like Mastercard and VISA, but designed for the digital infrastructure like India Stack.
  • Key issues: Monetization.

8. Embedded Finance

  • Last decade = bringing offline things online. Next decade = real merger of finance and technology. Example: vertical SAAS businesses (restaurant software) becomes a fintech businesses. 
  • Opportunity to create platform & products that enable journey of SAAS business to full-stack Fintech companies [first layer with payments, then payroll, then accounting, then full stack finance solution].
  • Example = Unit (banking as a service), Layer (Embedded accounting), Salsa (Embedded payroll company).

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VC Insights: Navigating the new investment landscape

1. Market and Investment Focus:

  • There’s a zero-tolerance attitude toward companies merely focused on growing revenue or market share. The emphasis is now on unit economics, cash flow, and a clear path to profitability.
  • Startups need to concretely articulate how they will generate profit in the next 2-3 years.
  • The recent trend of startups achieving easy and free money is over. Aspiring entrepreneurs need realistic expectations about the challenges of building a business.
  • The new investment environment will adversely impact innovation in capital-intensive Sectors.

2. Entrepreneurship Outlook:

  • Many young graduates aspire to be entrepreneurs, but their perception, shaped by the last 13 years, is often skewed.
  • Good entrepreneurs are characterized by their commitment and willingness to work extensively. In contrast, bad entrepreneurs are driven by the superficial ‘cool’ factor of being a founder.

3. Industry Cleanup and Talent Repurposing:

  • Poor quality companies should exit the market, allowing their talent to be redirected to more significant problem statements and higher quality products.
  • The period from 2019-2021 is likely to be the trickiest vintage for VCs, especially for growth funds. With over 2200 unicorns globally at the peak, the market is seeing significant adjustments through down rounds, forced M&As, and many startups going bust.
  • The number of venture capital firms has also decreased from 11,000 at its peak to around 8,000 currently and is expected to drop to a steady state of around 3,000 globally.
  • The influx of tourist funds (mutual funds, hedge funds, private equities) in growth stages is receding, impacting growth valuations.
  • Early-stage funds are less susceptible to high valuations due to their smaller exposure per company. Quality venture capitalists add significant value beyond capital.

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As we neared the end of the Singapore Fintech Festival, one thing was clear, that the industry is at a pivotal juncture. AI’s potential to revolutionize not just fintech but multiple sectors underscore a transformative era where technology meets human ingenuity. However, this revolution brings its own set of challenges – ethical concerns, workforce impact, and the need for stringent regulation. The festival emphasized the criticality of embedding financial services in various business models, highlighting the seamless integration of technology and finance as the way forward. It also spotlighted the significant focus on sustainable and profitable growth, marking a departure from the era of unfettered expansion. As we forge ahead, the key takeaway is a balanced approach – where innovation is coupled with responsibility, and growth is aligned with sustainability. The fintech landscape is evolving rapidly, and staying ahead means embracing these changes with agility and foresight.

Investing in Kintsugi

In a landmark case related to taxation, on June 21, 2018, the United States Supreme Court ruled in favour of the state in South Dakota v. Wayfair Inc., overruling a longstanding physical presence rule (local nexus) and creating what came to be known as economic nexus which allowed states to require remote sellers to collect and remit sales tax. 

While this led to the widespread & rapid adoption of economic nexus laws by tax-dependent states, for sales taxpayers, it significantly amplified the complexity of an already complicated sales tax regime due to the lack of uniformity in economic nexus thresholds.

To put this in perspective, sales tax collection in the US in 2022 was north of $570B and a failure to comply with sales tax laws can attract penalties ranging from 10-25% of the tax amount depending on the State. That is a $100B problem statement to solve in the US alone & this is where Kintsugi comes in. They are leveraging advancements in AI to build a full-stack sales tax automation platform which can effectively track nexus, accurately predict sales tax liabilities across states, and fully automate the process of sales tax registration, filing & remittance. 

Sales tax compliance in the US can only be solved by automation

Sales tax is a critical source of revenue for state and local governments in the United States, funding essential services and infrastructure. However, the web of sales tax regulations can be intricate, causing confusion and challenges for businesses operating across state lines. The challenges in sales tax compliance are:

Large Volume of rules/regulations

US Sales Tax is levied by US State, County, City and within each city by each jurisdiction. Thus, Sales tax rates vary between streets and are determined by the exact street address. The US has 50 states, 3,100 counties and ~110k cities, each with the authority to levy their own sales tax rate/regulations. For Example: If you purchase an iPhone and have shipping for Zip Code 94305 (Palo Alto) and 94205 (Menlo Park) – you will notice a different tax amount, even though they are just 3 miles apart.

Applicability and dynamicity of tax regulations

The taxability of goods and services also varies across states. E-commerce commissions are taxable in 46 out of 50 states, whereas software sales are taxable in 22 out of 50 states. Some states exempt groceries, and some don’t. Additionally, sales tax laws are always changing. A Senate bill can go in tomorrow, and people could vote, and the law could change, making it impossible for companies to track all the changes. Tracking in a few jurisdictions is fine, but imagine tracking 110k regulations across 10k jurisdictions. Phew!

Tracking local nexus

Businesses must file sales tax returns in every state where they have a physical presence. Post-COVID, with remote working, local nexus also gets established unintentionally in all places where team members work remotely. This increases sales tax compliance even though no business activity/transaction exists.

Tracking economic nexus is very complex

On June 21, 2018, the United States Supreme Court ruled in favour of the state in South Dakota v. Wayfair, Inc., which overruled a longstanding physical presence rule, allowing states to require remote sellers to collect and remit sales tax. This meant if a seller had a physical presence in New York and sold to a consumer in San Francisco (where there is no physical presence of the seller), the seller would still have to collect taxes in both New York and San Francisco and remit to respective governments. With the economic nexus, the complexity increases exponentially – businesses need to track new jurisdictions where they might have sales tax compliance, ensure appropriate tax rates are levied on invoicing in each jurisdiction of the economic nexus and file returns in each of those states.

Cumbersome filing procedure & high cost of non-compliance

Sales tax portals are confusing and outdated. Most don’t have two-factor authentication or single sign-on (SSO). For a business to keep track of all the portals’ credentials, the sales tax deadlines and the changing laws is very cumbersome. The cost of non-compliance is high. 10% of tax due + 1% for each month’s delay, capped at 30% of the tax due.

Kintsugi aims to solve compliance by building a full stack ‘predictive’ sales tax platform

Kintsugi is building a global sales tax compliance tool that enables businesses to automate US sales tax compliance. Kintsugi sits at the origination/source of the transaction (like billing systems):

  • verifies each transaction through its real-time database of rules from 110k+ jurisdictions, 
  • tracks local nexus / economic nexus on a real-time basis, 
  • identifies appropriate tax rates for invoicing and 
  • during month-end helps with one-click remittance and filing of sales tax returns in each applicable state.

In addition, Kintsugi has also built an LLM which is trained across all Sales Tax regulations across 110k+ jurisdictions. This acts as a 24/7 support tool for tax professionals and finance teams.

With its 10-minute onboarding, seamless workflows and real-time support via LLM, Kintsugi is already becoming a go-to product for sales tax compliance for companies of all sizes in the US.

We believe this is an exceptional team solving a large global problem at an inflection point

We are proud to partner with Pujun, Barkin and Jeff at Kintsugi as we believe this is an exceptional team in terms of talent, experience & purpose. 

  • Pujun brings strong AI/ML experience, having worked on indexing/ranking of Facebook stories and many ML research projects for Google/Meta. He also worked at Stanford AI Labs alongside Andrej Karpathy. Pujun completed his undergrad from Georgia, MS from Stanford and dropped out of the MBA at Harvard. 
  • Barkin brings product manager skills and domain knowledge, having built similar products previously at Earnest Research. He also brings a strong finance background, having spent over 5 years at Credit Suisse & Goldman Sachs, and is currently pursuing the CPA program in the US. Barkin is a graduate of Elec & Comp Science from Yale and is an MBA from MIT Sloan.
  • Jeff has spent over a decade working in technology, software engineering & data engineering. He brings a wealth of experience as an Engineering Manager at Atlassian and ex Co-founder/CTO at MonetizeNow. Jeff holds a BS in computer science from the University of Montana. 

What we really like about this team is that they strongly complement each other and bring significant talent/experience in all three aspects of tech, product and business development skills. We also believe that their energy is infectious, their vision is grand and their execution capabilities are exceptional. 

We also highlight some of the other areas that really excited us about this opportunity:

Complex & dynamic problem with a large addressable market 

The state-by-state variability, nexus determination, taxability of goods and services, economic nexus laws, filing and reporting requirements, and evolving legislation collectively create a maze that businesses must navigate to ensure compliance. 

We estimate a Serviceable Addressable Market (SAM) of c.$3-5B by 2028E, considering only the US E-commerce & SaaS businesses as ideal customers for Kintsugi. We also believe this is a truly horizontal product as the problem is sector-agnostic & global and has the potential to create a larger outcome.

Demonstrated success in the category & limited competition provide a large opportunity for a new player

There are few players in the category – long-standing tools like Avalara or more recently built tools like Anrok. This allows a new player an opportunity to reimagine sales tax compliance to make it more seamless, predictive and automated.

Avalara – Currently at ~$750M ARR. IPO’ed in 2018, reached a market cap of $19bn and was later acquired by Vista Equity Partners for $8.4 Bn in 2022. This demonstrates that the market opportunity is large.

TaxJar – Acquired by Stripe in Apr 2021. Currently available only for Stripe customers. Had raised $60M at $180M valuation from Insight Partners. They were at a scale of $40M approx during the fundraise.

Anrok – Raised $20M from Sequoia. Close competitor. Focused on SaaS. Need for new players to incorporate the new dynamism of economic nexus and other shortcomings of existing tools

Strong execution focus and high-quality early traction

In under 6 months, the founders have achieved strong outcomes: they have single-handedly built a robust, soon-to-be SOC2-compliant, product and have set in motion key GTM strategies/partnerships like marketplace listing, tax consultant partnerships, direct outreach and state partnerships.

In a short span of time, they have gained 25 paying customers, including a large enterprise client and have built a very strong sales pipeline driven largely by strong inbounds. 

If you are also dealing with the complexities of sales tax and are keen to simplify sales tax compliance so that you can focus on building & growing, try out Kintsugi or reach out to pujun@trykintsugi.com to learn more!

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