At the FinovateFall 2022 conference in New York, FinTech Futures sat down with Sarah Hinkfuss, partner at Bain Capital, to discuss where the smart money is being invested in fintech.

Read the full transcript below.

Paul: This is Fintech Futures at FinovateFall and I’m joined by Sarah Hinkfuss at Bain Capital. How are you?

Sarah: I’m good, thank you. How are you doing?

Paul: Very well, thank you, very well. How are you enjoying the conference so far?

Sarah: It’s been wonderful. I live in San Francisco, so it’s always nice to be in fintech in New York. It just feels like there’s so much buzz here in the space. It’s great because here we have fintech companies, we have financial institutions, we have a lot of partners, and so it feels like the whole ecosystem comes together at this event.

Paul: Excellent, to get started then, would you like to give a quick introduction to yourself and then your role?

Sarah: Sure, so I’m a partner at Bain Capital Ventures and I lead our growth investments across fintech and application software. Bain Cap Ventures is the venture arm of Bain Capital. We do everything from pre-seed all the way through pre-IPO investments. What I find really exciting is that we have the opportunity to work across stages with companies, and then also at the intersections of domains, such as fintech and application software.

Paul: Excellent. You’re here talking on a panel about what smart money is being invested in fintech. So what funding trends are you seeing at the moment and what’s in the biggest levels of investment?

Sarah: So fintech investing today, the funding has huge headlines about it really declining, and so I think it’s important to first set the stage and really understand why the lede is often buried in that headline. In total, public markets have gone down, everyone knows that. And a lot of people say fintech companies have done worse, so therefore fintech has underperformed. But if you look like-to-like and compare companies based on their growth rates and their profitability, fintech companies have performed similar to their counterparts, it’s just that more fintech companies that are public were of the archetype that public markets have shied away from going forward.

Then if we look to the private markets (we actually just did a full analysis using Pitchbook data of understanding this), and if you compare this summer to last summer, across all sectors, funding deal count is down 24 percent, deal dollars are down 31 percent. But what is really interesting is that within fintech it is even more. And so, we are seeing what’s happening in public markets, even though if you control like-for-like, it is the same, it is impacting what we’re seeing in the private markets. In fincount land, we actually have deal volume in terms of dollars invested down 60 percent this summer, prior to last summer.

When I think about that as an investor, it obviously means that there are fewer deals that are coming. The average valuations are going down and that’s important given what we saw last year, which was astronomical in terms of the valuations. We are now seeing that comeback to Earth because I think cost of capital has gone up, which we’ve seen obviously with interest rates. What that means is that the investments that companies are making in growth are no longer profitable in the way that they were before, so we’re seeing a lot of adjustments in terms of growth scaling back now. It’s not impacting one sector of fintech more than another.

Maybe the only asterisk I would say is on balance sheet companies–companies like financing companies, or insurance companies, or real estate companies, proptech. They have large balance sheets and need to raise capital from the capital markets. Those may be more punished, but otherwise, the opportunity has never been bigger for fintech.

We’re really in the early innings of the financial services revolution and bringing together technology and software with financial services. While the market may have come down, and that has created pessimism among many people, it’s actually no better time than now. Because we’ve seen this reset, you have the best people going into the space, and you still have huge markets that are left to capture.

Paul: Excellent. Do you feel there are any areas particularly underfunded at the moment that may deserve more attention?

Sarah: Two answers to this. One area that’s underfunded is insuretech. Because even before the slowdown in the markets this past summer, the public insuretechs were underperforming and I would classify that as Insuretech 1.0. In true Tech 1.0, these were companies where the key thing that they were doing to differentiate from the incumbents was on distribution. They were going direct to consumers and establishing relationships. What happened though is that incumbents were also able to do that, to very successfully create direct-to-consumer mechanisms, and so the CAC war has been really hard. Plus, there’s been more complexity in underwriting and loss ratios as well.

What I’m excited about now in Insuretech 2.0, is that we have more innovation in underwriting. These are insuretechs, for example, that are partnering with software companies–through embedded insuretech–to gather information about their customers that come from that platform themselves, in order to create a better risk profile of that customer, and create better underwriting, in order to find the best customers. We’re seeing this blossoming both in the consumer space, but we’re in particular spending a lot of time in the commercial insuretech space. Because it’s been longer where the market has reset, there’s also realistic expectations about valuations.

Paul: Excellent. What can you tell us then about Bain Capital’s fintech partnership and investment strategy? Is there any technologies that you’re particularly kind of like [inaudible]?

Sarah: Across the board, we are focused on a number of different themes from the early stage all the way through to the growth stage. I’m one of many people spending time on this.

In terms of some of the places where we’re focused, one of them I would say is the office of the CFO. B2B payments is one of the largest spaces within financial services that has yet to be digitalized. If you think about the percentage of transactions that are embedded or digital, it is the lowest within B2B versus in consumer, for example. And so the office of the CFO, and in particular accounts payable and accounts receivable solutions, are really the nerve center for companies to think about digitalizing their payments, and by doing that, their reconciliation and process become much better.

So office of CFO is one. Embedded fintech is another one–another core theme that we’re looking at. We’ve invested in a number of enablers within embedded fintech. These are the players that are helping platforms to embed financial services. Finix, Moov are a few of our portfolio companies there. We’re also looking at the companies that are helping the incumbent financial institutions respond to the challenge posed by the fintechs as well. Some of the software, for example, that banks are using to become more customer-receptive and offer the best solutions to that customer at the point of purchase.

A third area I would say is wealthtech. There’s a huge transformation in terms of the way that we’re participating in our wealth. There’s a transfer of wealth that’s going on. Again, it’s both a direct-to-consumer, but also enabling the incumbent solution, the wealth advisors, with stronger and more powerful tools, and investing in new asset classes.

A fourth area I would offer is insurance. So we talked a little bit about this as well, but there is whole different new ways of thinking about risk. The entire insurance value chain is actually being remodeled and reimagined which is a really exciting moment.

I would also mention as well two more, (a lot of things we’re working on). One more is issuing communities. Card issuing is the practice of offering credit or debit and I think we’re going to see more challenge to companies that are going wide at first, because the CAC is so expensive. Really starting with a smaller niche market or niche community and creating a go to market proposition that gathers those people on, so you can actually create top of wallet preference as well. I think there’s a lot of interesting work in that. Our early stage team is thinking about the unbundling of MasterCard and Visa as well. So even earlier, how can you influence issuing?

The final piece I would say is the intersection of climate and fintech is an area that I’ve been spending time. It’s a lens to think about a lot of financial solutions. How do insurers need to be smarter about incorporating climate risk into their models and covering climate risk? Be it, wildfires in California where I am, or flooding in Florida, whatever it may be. It also is financing: solar panels on roofs, heat pumps and houses. These are all consumption goods where you can think about the forward stream of payments or savings and then think about financing solutions. So we’re seeing a lot of really innovative work now in this space.

Paul: I mean you mentioned at the start how the current economic landscape is, has that changed how your strategies look this year?

Sarah: From our perspective we have a ton of dry powder, and we are ready and eager to support the best founders. Our perspective is that there’s no better time than now, honestly. What I will say is that my observation of the market–I talked about some of these stats at the beginning–there are so fewer deals that are happening (in particular in fintech) because there’s been a separation between the expectations of management teams, set by last year’s valuations, and the expectations of investors, required by what the public market is. So we have a fiduciary responsibility to our LPs to underwrite value, to exit. As time has gone on, I think that gap has closed and that will then grease the wheels for investing to start again. But from our perspective, we’re ready, we’re here, we just need to see the opportunity to come back to the table.

Paul: Excellent, excellent. So moving forward then, how do you expect the market to evolve? What does the next year look like for Bain Capital?

Sarah: I talked to those on the panel too and I think we all agreed we’re not at the bottom of the market yet. Inflation is still raging, interest rates are going to keep going up, and so I do think there’s still going to continue to be some fallout. Already, in the early stage we’re seeing deals comeback at lower valuations. I think it will continue to be a little bit longer for growth, but we are seeing valuations come back down. I think it’s going to be probably a slower September, but by October and through the end of the year it will ramp up (which I guess means my Christmas may not be the quiet Christmas), but that’s okay!

We don’t always get to choose what happens when we get to choose how we adjust to that, so we’re spending a lot of time with our existing portfolio really thinking about that, and being thoughtful on where they’re investing in their companies, and how they’re setting themselves up for when the market returns. In the same way we are thinking about supporting new companies that we’re bringing into our portfolio.

Paul: Excellent. Well thank you so much for talking to us, Sarah. It’s been great to see you.

Sarah: Thank you, I appreciate it.