Fintechs are about to change
Fintech is a vertical which has seriously been affected by Covid-19.
According to McKinsey research, after almost six months (July 2020) of Covid-19 precaution actions and lockdowns, we observe Fintech’s investment drop of 44% in Europe and 18% globally.
If we compare those numbers with a previous growing rate of 25% (since 2014) then we can easily understand that something big is happening.
Profitability remains a major challenge for Fintechs, especially for those who are still not profitable and thirsty for new money. Innovation iterations are focusing primarily on new markets, new customers, new products, with loose monetization and profit taking. This proved to be inefficient, mainly from investment point of view and may be a critical factor for Fintech existence & evolution.
“Incumbents” like Revolut, Monzo, N26 are following the funds consuming business model guide for “first scale up and then monetize”. Their profitability is weak (if exists) and for sure they need fresh money to continue their business. At this Covid-19 environment, we cannot see where these funds will come from. Traditional banking cannot help, as most of those organizations are not able to present adequate credit scores and consequently does not allow for loan schemes.
Additionally, Governmental Covid-19 support packages are too small to support Fintech high skilled talent remunerations, or other fixed costs.
Eventually, fragile financials and big operational costs may result to a major resize of the biggest of them and possible elimination of the smaller ones.
Following the above, we can say with confidence that business models resulting positive unit economics (i.e. CAC, LTV) are crucial for Fintechs existence and prosperity at this new Covid-19 normal.
What is coming on Fintech Arena
Covid-19 side effects have a severe impact on Institutions, Governmental processes and Consumer behaviors as well. It’s a positive sign and a trends indicator that we see Fintech’s sub-verticals such as online payments, banking techs (BaaS) and regulation platforms, benefits from funding and adoption growth perspective.
Next generation of Fintechs and some of the existed, will be positioned themselves to a different business model, trying to focus more on early profitability. “Low cost flexible products” with insightful “contextual go to market strategies” seems to replace the “massive products & global scale up” motto.
Newcomers in Fintech arena are striving to achieve sustainability through economically healthy organizations with controlled growth, by paying attention in particular niche markets. Global expansion and economically weak results are not their primary concern anymore. They avoid building general purpose products, such as retail payments and prefer to structure their services around their niche market, like sharing payments for students, or payments for on-boarded sailors.
Fintech shift their business model
In order to better understand the Fintech’s business models changes, we will try to deep dive on their new proposals for product structures and go to market strategies.
Initially, Fintech tried to unbundle banking services and focus on specific jobs to be done (i.e. Venmo with social, share payments).
Later they tried to disrupt banking and compete with banks by cross-selling other banking services (i.e. Revolut with account, card services) focusing on innovative and user friendly operations (paperless, instant fulfillment, web, mobile).
The new wave of Fintech players are trying to review their business, by providing core propositions with a more contextual and economically healthy approach. Additionally, as far as their relations with traditional banking system are concerned, there is a clear shift from “disrupt & destroy” to “collaborate & support” strategies.
Studies on successful cases show that their business models avoid the mass market and goes with a core niche. The new fashion is to go beyond purchasing transaction itself and focus more on purchasing “circumstances”. To do so they use socioeconomic, demographics, lifestyle or event based data, shape their segments and finally support their needs by using best fit touch points and transactions channels.
For Instance MarTrust build a mobile wallet to support a payday process and certain payments for a segment with specific socioeconomic, demographics and lifestyle characteristics of the shipping industry (on boarded sailors).
Another example is that of Germany’s neo-bank Tomorrow. The niche market in this case is about consumers focusing on climate protection. The “go to market” mandra here is that “your money is only ever used to fund green & sustainable projects”. “Tomorrow” offers go beyond an “ethical” current account and include a bunch of “green & sustainable” adds- on services.
An interesting Fintech deployment with a really innovative addressable market is this of 220 neo-bank. 220 claims that will be the first banking institution designed for YouTubers, high-net-worth youngsters and child stars. Their criteria for joining the private banking community are based on candidate’s total value of assets (i.e. reputation, followers, likes) and ongoing value as interpreted by the bank internal algorithms. In parallel, once the neobank is up and running, a referral model will boost its customer baseline.
From the examples above we can dare say that the new wave of Fintechs prefer to build contextual products for particular segments and avoid to Cross –sell traditional banking products by using more efficient and user friendly operational channels.
An additional major concern of new generation Fintechs is that of unit economics and profitability health.
According to McKinsey 2018 survey, customers at Fintech/digital banks own on average 1.5 products/services, as compared to 5 for traditional banks. Fintech/digital banks monetization model usually is based on transaction fees and commissions for their revenues. Only the most successful of them manage to deploy a subscription/account fee monetization model.
This is strong evidence to allow us to say that fintechs should focus more on contextual offers for niche markets, existed or new ones. By this approach they may overcome the “volume” and “monetization” advantage of traditional banking.
Stash is an interesting example of Fintech that has already proven its ability to get users to pay upfront, and become profitable at its early stage, mainly because of its contextual offer.
Stash is a US based Fintech pursuit to bring together bank account, financial advices and investments. Stash charges $ 1 to $ 9 subscription fee per month from its early days (2015). Today it claims for 5M active customers and a profitable business model.
The Tech part of the Fin-Tech
Technology is obviously a key contributor of Fintech evolvement.
Plaid APIs libraries are many years in the market supporting Fintech organizations like Monzo, Tranferwise.
The new concept of Banking as a Service (BaaS) is already in the market, supporting many neo/digital banks. There is no need any more to build an entire banking stack from scratch, with minor, uncertain customer base to bet on, and an expensive with limited lifespan technological path.
Instead, Fintech players can easily rent core banking infrastructure services from the so-called BaaS enablers. Organizations like Germany’s Solarisbank and the UK’s ClearBank are good examples of such enablers.
All those new players created an opportunity to rethink and accelerate Fintech progress, as technology flexibility and affordability are on the table.
We are convinced that the Tech part of the Fin-Tech equations should be placed in the background. Fin part is the new frontier. Innovation iterations for Fintech organizations should pay attention on Market and Implementation areas as Technology is in many cases “commodity”. Technology seems to be not a competitive advantage anymore. Technology inventions driving to innovations are the exception and not the rule, in the long evolution path of Fintech.
Finally we should not forget that Fintech will also soon have to fiercely cross swords with an invisible and for many of us unexpected “intruder”. Big technology companies like Google, Amazon, Apple have already “embedded” in their technology platforms, particular Fintech services. They own the technology, control a huge customer base and have strong partnerships in many verticals. We believe that in the near future and after their successful “tests outcomes” technology organizations will launch full blown finance services for many different verticals.
First six months 0f 2020
The acquisition of Plaid by Visa (Jan 2020) for $5.3Bn, the merge of Strands and CRIF (March 2020) and the most recent acquisition of Verse from Square (June 20202) is a strong indication of what is coming in the Fintech battlefield. We dare to say that this is a signal of a new wave of M&A. Incumbents are looking to enrich their capabilities in areas such as accounts aggregation, online payments, personal finance management and newcomers focus on their organic growth. Consolidations which combine technology infrastructure with innovative use cases, supporting a respectable number of customers, are for sure in the lenses of investors.
Last year there were a lot of discussions around the impact, benefits of Machine Learning (ML) and Artificial Intelligence (AI) in Fintech. It’s our belief that ML and AI can seriously boost efficiency for processes like customers on-boarding, KYC/AML, fraud management, credit scoring. Additionally, if we focus on the innovative “jobs to be done” approach where the “circumstances” are more important from the product/service features itself, then we can see ML/AI as “killer features” for fintechs. Obviously organizations which have innovative propositions in ML/AI are prospect targets for acquisitions (i.e. Onfido, Aire, Responsive)
Closure
We’d like to conclude by saying that Fintech, in order to survive the fierce competition and new Covid-19 markets normal, is looking to shift its business model by following five main pillars:
a. Contextual product structures proposals
b. Attention to niche markets (existed or new)
c. Unit economics metrics health (profitability curves)
d. Organic growth through digitalization (and NOT digitization)
e. M&A is always an option
George Spanos
Digital Strategy & Technology Executive
Platforms Designer / Ecosystems Nurturing
