Fintech x Food: Hungry for Innovation
Bluestein’s Take
At Bluestein, our mission is to transform the food system to be better, healthier, and more sustainable. This is the north star that guides every investment decision we make and informs our thesis development. One area that we believe has the potential to transform the food system and deserves more attention is fintech in food. We believe fintech has the potential to make consumers’ and employees’ lives easier, and allow more innovative food businesses to launch and scale.
We’ve already seen fintech innovation over the past few years drastically change B2B, B2C, and peer-to-peer (P2P) interactions. These drivers make us excited about the potential for technology solutions to help solve the industry’s problems. What does this innovation mean for the food industry? Where do fintech and food intersect – and where does that create investment opportunities?
Technology advancements and shifts in consumer behavior have created a ripe market opportunity in fintech. Consumer acceptance of digital & alternative payment methods, the rise of Buy Now Pay Later (BNPL), and personalization have enabled companies in the food space to improve how they manage cash flow, incentivize stakeholders, and finance their day-to-day.
We’ve identified four areas in fintech that are particularly applicable to the food industry: food service payments, B2B financing, consumer incentives, and employee benefits. We see two areas as most exciting – consumer incentives and employee benefits – recognizing that consumers and employees in the food space have financial needs that aren’t fully met by fintechs. Innovation in these two areas can significantly improve how food brands and retailers deliver value to key stakeholders.
The Market
The combination of technological advancements and shifts in consumer behavior has created an opportunity to rethink financial services. Digitization of the financial industry, especially within the payment stack, has drastically changed consumer expectations. Consumers are increasingly comfortable with mobile, contactless, and other non-traditional payment methods, a trend that only accelerated during the pandemic. Consumers also expect more personalized and relevant offers based on payment data. In fact, 52% of consumers expect all chain restaurants to have a loyalty program, and 63% expect those programs to be on mobile apps.[i] At the same time, consumer wariness around data collection and use is becoming more and more prevalent, so companies must walk a fine line between personalization and data privacy.
Consumers: Monetary incentives are critical to acquiring and retaining consumers. This is especially true as inflation is straining consumer wallets, with 72% of Americans living paycheck to paycheck.[ii] Fintech has the power to enable consumers to seamlessly transact and incentivize purchases with the right offer at the right value. The rapid rise of BNPL is illustrative of this in that the technology enables consumers to seamlessly transact, with credit scores no longer the sole criterion to access financing.
Employees: Employees must be incentivized as well. The food industry is employed in large part by part-time and contract workers, those who typically lack access to financial benefits and are facing the most economic headwinds given the current macro-environment. Employee retention has always been a huge issue in the food industry but has ballooned in this tight labor market. A recent 7shifts article details how the average employee tenure is just 110 days for those that started in the restaurant industry within the past year.[iii] This has created a stronger motivation for employers to offer financial benefits, such as earned wage access & 401(k)s, as an effective strategy to retain employees.
Companies: Small businesses are also feeling the pinch. NFIB’s Small Business Optimism Index declined to 91.3 in October 2022, marking the 10th consecutive month below the 49-yr average. Additionally, 98.8% of small businesses expect credit conditions to worsen in the next three months, a 2% increase from September 2022.[iv] With the worsening outlook and higher difficulty in obtaining credit, flexible payment and financing options will continue to grow in popularity with SMBs. What does this mean for fintech in food? Those that are able to provide capital to low risk, but traditionally “poor credit” businesses could be uniquely positioned to service many players within the food industry.
As seen with BNPL, credit scores are no longer the only means to access financing. Companies have started leveraging proprietary algorithms to make informed financing decisions on SMBs, high-growth companies, and other businesses that have lacked access to traditional capital in the past. This is especially relevant for the food industry, as it encompasses a significant portion of small businesses in the US (e.g. the food and restaurant sector accounts for 12% of all US small businesses[v]). Companies like DoorDash, Square, and Toast now have financing arms that have emerged from their core businesses. This gives them the unique ability to assess a business’ propensity to repay using transaction data and other determinants of financial health outside of traditional credit scores.
Although fintech has been hot over the past few years, like many other industries recently, there has been a drop in venture funding, with a 46% decline YoY in 2022.[vi] That said, the food industry is massive and intersects with the entire economy, making it one of the few recession-proof sectors. This is why we’re still excited about the potential for massive innovation at the intersection of fintech and food.
The Opportunity
To better understand the fintech landscape, we created a market map of key players in the industry across four areas that have the most impact on the food industry: food service payments, B2B financing, consumer incentives, and employee benefits.
Food Service Payments: Food service payment solutions enable consumers to pay at bars, restaurants, cafes, etc. We’ve noticed a surge in mobile and touchless payment companies rethinking how consumers pay at the table, online, and point of sale.
B2B Financing: We define B2B financing as startups focused on lending between businesses. Innovation includes B2B BNPL, factoring, and alternative risk assessments.
Employee Benefits: Employee benefits are products that enable financial benefits for employees, including 401(k)s, earned wage access, budgeting tools, and other offerings.
Consumer Incentives: Consumer incentives touch any monetary reward intended to spur trial or repurchase. This covers everything from traditional paper coupons to points redeemable for gift cards and discounts.
The two areas that we’re most excited about are consumer incentives and employee benefits. Here’s a closer look at both and the opportunities we’re watching:
Consumer Incentives
What excites us: Consumer incentives have the power to convert interest into a purchase, which is key in an increasingly crowded and uncertain market. In this space, we’re looking for companies that can offer seamless delivery, personalized incentives, and are accessible to SMBs. We’re excited by the potential to target customers with relevant, delightful monetary incentives through an appropriate channel, whether that’s in-store or in a mobile wallet. Taking it one step further, we believe technologies enabling high-growth brands or small retailers to easily adopt and leverage new targeting capabilities are poised to succeed.
Evaluative criteria:
Seamless delivery: Gone are the days of clipping Sunday newspaper coupons. Does the product show up where consumers are, both online and offline? How does it uniquely leverage technology to get in front of users & provide them with a smooth monetary incentive?
Personalized incentives: Is the product able to deliver the right offer to the right consumers?
SMB accessibility: Are SMBs or high-growth companies realistically able to use the product? Is it cost-prohibitive or time-consuming to set up or manage for smaller clients?
Employee Benefits
What excites us: It’s clear that the food industry, which has been hampered by a severe labor shortage, must get creative with how it recruits, retains, and rewards employees. This is especially important given that employee retention improves the experience for the end consumer. The key to a better workforce? Employee benefits. Yet today many industry employees are either contract or part-time and therefore lack access to traditional financial benefits. In fact, a 2021 Pew Research Center survey found that 11% of Americans have earned money via making deliveries for a restaurant or a grocery store through an app, and 46% of these workers believe benefits are unfair.[vii] These shifts in labor have created a massive whitespace for new employee benefits solutions to address.
Opportunities that stand out in the space to us are those that have particular applicability to food, remove outsized costs to both employer and employee, and balance both short- and long-term financial health.
Evaluative criteria:
Focus on labor within the food industry: How does the product service food labor in particular? How is it uniquely poised to solve a financial pain-point for this segment?
Cost-bearer: How does the business model account for tight margins that employers in the food space may face? Conversely, does the company address the financial reality that many contract and part-time workers currently experience in the US? What is the optimal balance?
Financial wellbeing: Does the product promote or encourage long-term employee financial health?
As expected, we have seen many early startups focused on the earned wage access space, enabling employers to offer employees access to on-demand pay (both tips and base pay). What is surprising, though, is that not many companies deliver solutions focused on employees’ long-term financial health. In the age of BNPL and high levels of credit card debt, technology enabling workers to access pay immediately to cover short-term costs could be deemed predatory or encourage overspending. There’s a fine balance between covering short-term needs and building long-term wealth. Is there a way to help this critical population of part-time and contract workers find both short-term and long-term financial success?
What’s Next for Innovations in FinTech
Assessing Startups: Innovation Pillars
At Bluestein, when evaluating new investment opportunities within fintech, we’re ultimately looking for how the innovation better serves the end user: the consumer or the employee. This can be mapped to three pillars: service, technology, or business model.
Service: Does the company uniquely deliver value through service to customers? Is the company laser-focused on reimagining the end-customer experience?
Technology: This is all about how a company’s technology itself drives disruption.
Business Model: Does the product shake up the status quo by leveraging a new business model? For instance, a startup innovating through its business model could be effectively cutting out a middleman in the ecosystem and capturing cost savings.
Startups can hit on one or multiple pillars. What matters, though, is how they’re innovating, and how their technology stacks up against peers or incumbents in the industry. We’re excited by next-generation fintechs delivering powerful consumer incentives and employee benefits solutions, as that’s where we see the biggest opportunity to better serve the needs of end users. This is a dynamic space, and we’re looking forward to following the next wave of fintechs that will transform the food industry.
If you’re building something in the fintech space or want to discuss all things fintech in food, let’s chat! Please reach out to us at info@bluesteinventures.com.
[i] https://adage.com/article/segment/why-brands-must-embrace-personalization-its-too-late/2341376
[ii] https://www.paymentsjournal.com/sizing-up-the-market-for-earned-wage-access/
[iii] https://www.7shifts.com/blog/restaurant-staff-turnover-and-retention-playbook/#High-turnover
[iv] https://www.nfib.com/surveys/small-business-economic-trends/
[v] https://www.hiveage.com/blog/60-US-Small-Business-Statistics-2022/
[vi] https://www.cbinsights.com/research/report/venture-trends-2022/
[vii] https://www.pewresearch.org/internet/2021/12/08/how-gig-platform-workers-view-their-jobs/