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A conversation with Božidar Pavlović: In order to survive, FinTechs need to become more sustainable with their P&L and the user problems they are solving

How well are the financial incumbents and FinTech collaborating, which major challenges and changes can we expect on the financial and tech market next year, what BNPL and stablecoins are really about

A conversation with Božidar Pavlović: In order to survive, FinTechs need to become more sustainable with their P&L and the user problems they are solving

FinTech funding is going through its lowest drop in years. Analyses of trends all over the world are showing an increasing hesitation of investors and funds in supporting FinTech startups without substantial business merit and demonstrated market self-sufficiency.

In more than 25 years of business experience, Božidar Pavlović, CEO of Jackie agency, has stayed consistent in juggling both finance and technology. Banking IT systems and payment solutions were the stepping stones of his career which only led to high management positions in the financial services industry. Today, he is at the same time an entrepreneur, a board member of an aspiring tech company in Croatia, a business consultant, a VC baker, and a friendly face in numerous conferences around the world. So we asked Božidar to explain what is actually going on with FinTech funding and on the market more generally.

How well are the financial incumbents and FinTech collaborating, which major challenges and changes can we expect on the financial and tech market next year, what BNPL and stablecoins are really about, are the major topics we discussed.

1. What would you highlight as the greatest leaps of change that have happened during your career in this industry?

Every couple of years there’s a new hype, so during my tenure there were really many leaps of change. When I started my career in tech, the internet itself was not as ubiquitous as today, so as you can imagine, there were lots of challenges. Starting from introducing emails as a means of communication – hard to imagine, I know – all the way to today: how to introduce AI as a tool to increase efficiency. In between those cornerstones, we had to migrate from mag stripe to chip cards and then to contactless payments, mobile phones became omnipresent. The sheer beauty of being able to read emails on your phone quickly became a curse. So, the tech and financial industry started building ecosystems around them. Then the cloud entered the scene, followed by software as a service, blockchain was born soon after that, and here we are, almost quarter of a 21st century gone.

2. If you had to give a score to the adaptation and collaboration of legacy institutions and newcomers to the scene of the industry – what would it be? Can you elaborate on what you had expected and experienced so far and what you see happening today?

It started with a solid zero – established institutions, the incumbents, didn’t want to collaborate with ‘young ones’ simply because they didn’t have to. Their internal teams and their development pace were self-sufficient. Then things started to speed up: with the nascent of internet-based technologies the chances of technology breakthroughs became more or less equal in most places in the western world, the bureaucracy and hierarchical organization took its toll in the big corporations, and slowly yet surely small players started becoming systemically important because they were quicker, leaner, swifter, and more cost-effective. That lead us to today’s situation when established companies simply need to cooperate with tech startups, because it’s the only way for incumbents to innovate. 

3. The latest analysis of S&P Global Market revealed that the FinTech funding has hit a new low in Q3 2023. In general funding in FinTech this year has been lower when compared to the last five years which used to be described as a FinTech boom on the market. At the same time, the mentioned analysis highlights that the late-stage investments have made a comeback compared to the beginning of the year and show more resilience on the market. What exactly is going on? To what extent can we attribute this change in investment to economic insecurity, trends in the industry, or lifecycles in investments of this sort?

Nothing unexpected is happening really. Investment cycles always had their ups and downs, and they don’t affect just FinTech. The world events just took their toll. I reckon it all started with Covid-19 and financial injections to revive the economies, which caused inflation, and then recession, war in Ukraine has its effect too etc. However, we see first signs of recovery, and I am sure we will see many more investments in the near future. Yet, as compared to pre-crisis time, solid product market-fit and ability to show traction will be more important than ever.

4. Let’s put this pain point in the context of Europe where FinTech funding in Q3 this year was halved in comparison to the same period last year. What is the state of the industry in Europe? What are the biggest challenges of moving forward?

Europe is overly regulated, highly fragmented and split between various interests that are often only in service of the national states, without the wider vision for ‘United States of Europe’. It’s getting older and slower day by day and doesn’t show any intent to accelerate the accession process for the eastern countries from Balkans and wider. This obviously hinders innovation and is making Europe way less competitive, especially when compared with US, China and recently with Southeast Asia as well.

5. A recent report by McKinsey from October under the name FinTech: A new paradigm of growth, suggests that this fall in FinTech funding might as well be one of the first signs of fintech market maturation. At the same time the report suggests that it might be a great opportunity for FinTech companies to take a more sustainable business turn as the fall in investments also implies that growth is not expected at any cost, but at a smaller cost. Would you agree? Is there or should the future of FinTech be more sustainable?

Although I don’t particularly appreciate the insights from consultancies such as McKinsey, I have to admit this report is fairly correct. FinTech needs to become more sustainable not only with their P&L, but also by addressing problems of the wider population, not only tech-savvy workers. Sometimes it seems techies are building fintech solutions just for their own sake. As an example, there’s still a huge part of humanity not being able to access the basic financial services. FinTech needs to find innovative ways for financial inclusion, especially in South America, Southeast Asia and Africa.

There are also important challenges in the so-called “modern” world where FinTech should put its focus such as enabling the financial inclusion of refugees and migrants. In other, more suitable words, borrowed from Ravi Menon, MD of Singapore Monetary Authority of Singapore, “FinTech must have a larger purpose. It must solve real world problems, help off people’s lives and promote a more inclusive society”. 

6. There are numerous trends being predicted for 2024 in FinTech, but an interesting one is BNPL which many expect to grow, some even for it to double. Low barriers to entry and high demand for such services have led to a surge of new BNPL startups, with more than 200 service providers just last year. However, a recent report by Moody’s predicts that 2024 will either be a make it or break it year for this type of service. Namely, the report claims that the difficulties in their business as it is now have resulted in at least five years of industry losses, paid for by venture capitalists backing the businesses. What is your stance on this type of service and what would you expect of it in the future? Do you think there is a scenario in which the largest BNPL providers on the market remain on the forefront of such services, not being outrun by tech or legacy payment companies?

In my humble opinion, BNPL is just another hype. I’m not too impressed by its appeal, because I feel this is just a mutton dressed as a lamb. Even in Croatia, financially underdeveloped as we were, we had a hugely popular and successful phenomenon of Amex and Diners charge cards. This trend started in the late 80s and was at its prime from 1996 to 2016. Their business model was, in essence, BNPL.

It needs to be properly regulated because its appeal to young generation of inexperienced customers, combined with the overall consumerism, can quickly result in serious indebtedness. There are actual reports showing the serious financial illiteracy of Gen Z and millennials, so the appeal for stronger regulation and better education of consumers is of outmost importance. BNPL companies are famous for ubiquitous marketing, which partially led to them not being profitable, but they don’t care too much for educating their customer base, on the contrary. So – no, I’m not a huge fan of BNPL, but I have to appreciate their evident ability to effectively eliminate friction from the purchasing process.   

7.Another interesting remark of that same report is that regulators are increasingly seeking to protect consumers and ensure all BNPL financing abides by the same standards and that, therefore, profits may shrink, and compliance costs will likely rise. What exactly is it at the moment in the way BNPL works that should be better regulated and how do you see it unfolding in the near future?

When we unwrap the BNPL process, we can see that their interest rates are quite high, when applied on an annual level. There needs to be a regulated ceiling for interest rates, because leaving it to the open market might be dangerous for customers. In other words, you’re right – compliance costs will grow and BNPL will see shrinking profits, which is quite normal and expected to happen with every new technology or business model over the years. 

8. A hot topic already, and especially next year, will be the question of blockchain technology in the industry. Blockchain has been introduced to the masses primarily through recurring rises and falls of cryptocurrencies, which do not necessarily build certainty, much less trust in public. However, at the same time we are on a path to introducing stablecoins in the EU. Do you think the potentially negative associations with cryptocurrencies might affect the public trust and make it difficult to successfully launch stablecoins in Europe?

Let’s make a clear distinction between cryptocurrencies, aka altcoins, and stablecoins. Besides a few exemptions, cryptocurrencies didn’t really live up to our expectations, mostly due to many scams and weak compliance. At the same time, stablecoins do have a clear logic behind them. Mostly they are digitalised currency tokens connected and fully backed up 1:1 with hard currencies like USD or EUR. So, for every issued stablecoin unit there must be a proper 1 USD somewhere, or at least a 3rd party control must confirm that this statement is true. That’s why I believe stablecoins do have a certain future, at least until central banks start issuing CBDCs, which would be a digitalised version of standard hard currencies and we will use them in our wallets just like we use standard banknotes and coins. 

9. It is usually not the knowledge of the technology or the common understanding of how things work that makes us accept and use something, but the accessibility and benefits of it to our everyday lives. What will be the main advantages of introducing stablecoins to our market? How would you explain it to a random citizen in a street?

Well, a random citizen today will most probably have no reason to use stablecoins really, unless this person is very tech-savvy. But, as said earlier, I am very fond of digital euro, in the form of CBDC, where I believe every citizen in the future will have their own wallet where this digital euro will be stored and spent, just like we do today with our physical wallets. This is the inevitable digitalization of paper money, but the average citizen will need to be properly educated – the due care should be paid to vulnerable groups like older population, those economically challenged or not digitally advanced.

10. Finally, what do you expect to see in 2024 – what do you think will be the major issues, or which hurdles do you expect to be overcome by the end of 2024? What personally excites you the most?

I expect to see more investments in Croatian ecosystem, some new VC funds emerging with the focus on this region, and last but not least – I expect MoMo 2024 to be much bigger and better than last year’s!