Cross-Border Fintech: Welcome To The Era Of Global Economic Friction
Last week, Donald Trump was inaugurated into office.
Don’t worry, this is not a post about Trump himself. Instead, this is a post about something bigger. Trump’s ascent to power is merely a symptom of a larger narrative. One about globalization, and how it appears to be falling out of favor. It is a story about a global order in flux, where (geo-)political forces are just one of many factors driving a shift towards a fragmented world.
It is a story that we, at CommerzVentures, have been contemplating deeply. We invest across three continents, and many of our startups operate across borders. Some of them build products specifically for multinationals. Thus, we are both directly and indirectly affected by this shift. Over the past weeks, we have explored how the global economy is changing. We have sought to identify the forces driving this shift. Our aim has been to determine whether this shift is all doom and gloom or if there are opportunities arising out of these developments.
As venture investors, we are eternal optimists. We see tailwinds where others see headwinds. And while the global economy is undoubtedly facing increasing challenges, we see plenty of opportunities for smart entrepreneurs to turn these into tailwinds. So many opportunities, in fact, that we have developed a new investment thesis from it.
Over the next few weeks, we will further elucidate our thesis. We will explain in detail the macroeconomic backdrop, the headwinds, the opportunities. We will highlight the companies already pursuing these opportunities, and much more. Let us begin by setting the scene and uncovering an uncomfortable dichotomy in the process.
Is globalization dead?
That is a fair question. Given today’s headlines, one might get that impression. Politicians around the world speak of economic decoupling, tariffs, export controls, sanctions, of re-industrializing their economies. The rhetoric of today is distinctly protectionist and confrontational.
Once upon a time, international supply chains were celebrated as a hallmark of a globalized economy. Today, they are viewed as liabilities highlighting dependencies on foreign and potentially hostile nations, which should be curbed. Globalization is out; trade wars are in. Lawmakers are not afraid to politicize and weaponize their economies to gain an upper hand in geopolitical conflicts. It seems that globalization is no longer understood as a positive-sum game benefiting all, but as a zero-sum game where your gain is my loss.
Public sentiment on globalization is increasingly negative. Additionally, the effects of climate change, armed conflicts, local and global pandemics, and complex regulations are leaving their marks. In this context, it is not a big leap to conclude that globalization may indeed be dead.
Is that the whole picture, though?
While the challenges described above are very real, globalization is, in fact, anything but dead.
More people, goods and money than ever are crossing borders every year. Over the past 50 years, the number of migrants living abroad has tripled to approximately 300 million in 2020. Over the same period, the share of cross-border trade as a proportion of global GDP has increased from around 20% to over 60%. And the value of (non-wholesale) cross-border payments has grown by roughly 5% annually for years, reaching $44 trillion in 2023.
People will continue to migrate. Some choose to settle down in another country (the author included), while others will be forced to flee from poverty, conflict, and climate change. Trade will also continue to globalize as the benefits of sourcing, manufacturing and selling abroad are too significant to ignore. This is further bolstered by the rapid emergence of B2B eCommerce. Cross-border payments, being a derivative of migration and trade, are thus expected to grow even faster in the future than they have in the past.
All of these effects follow long-term trends which are difficult to reverse. The DHL Global Connectedness Tracker (a proxy for globalization) reached new heights in 2022, and has stayed around that level since. Globalization is too entrenched in the way the world operates, and too inert to be easily dismantled by legislators.
But how is globalization changing then?
Globalization is undergoing a profound shift. And we are observing two specific phenomena unfolding.
First, we are entering a multipolar world order where the global economy will fragment and realign around allied trading blocs. Concepts such as near- / friend-shoring and “connector economies” (like Vietnam, which sits between China and the US and facilitates trade between them) will gain increasing significance. The potential implications of this are enormous and still unforeseeable, as the allies of the past might not be the allies of the future.
Second, and more foreseeable, is that operating across borders is becoming significantly more complex for companies. Geopolitical conflicts, trade wars, tariffs, export controls, and similar factors will heavily impact operations. In addition, companies face far-reaching regulations like the EU Supply Chain Act, CBAM or CSRD. Old and new armed conflicts across the Middle East, Ukraine, and Yemen make navigating certain territories challenging. Climate change impacts the planet daily with increasing intensity. Pandemics, even local ones, can choke supply chains. In short, a great deal more friction is coming the way of multinational companies, which they will need to manage.
And this is where we see an uncomfortable dichotomy. Figuratively speaking, the borders between countries are rising again. This will increase friction and complexity for companies engaged in cross-border business, which desire nothing more than a “borderless” economy.
And herein lies the opportunity.
Clearly not all of the friction in cross-border business can be mitigated by technology. However, some of it can only be mitigated by technology.
There is an existing, yet unnamed, category of companies already aiding businesses in maintaining their global footprint or expanding abroad. Think of Deel, Airwallex or Prewave as prime examples of this. They work to “make borders matter less” as Dare Okoudjou, the founder of our portfolio company Onafriq, describes his mission.
For simplicity, we call this category “Cross-Border Fintech”. It includes all companies that use financial technology to reduce the friction faced by people, goods, or money crossing borders. We believe that this category is becoming increasingly important, and that there are significant tailwinds for these companies to capitalize on.
Over the coming weeks we will delve deeper into the various facets of our thesis. Follow us in our journey to discover where we see concrete opportunities in The Era Of Global Economic Friction.
