Innovation Toolkit for Fintech Start ups
Simplified -Business Plan and Innovation Toolbox for Fintech Start ups
This detailed article sketch out innovative Business plan for Fintech firm using various tools , models and analysis
Youtube Video : https://youtu.be/VYl_LF0ihzk
The difference between fintech and financial innovation
innovative tool at the bottom of the pyramid
Understanding Consumer challenges & pains
Value proposition canvas and Solutions
Products and Underlying Tech (Blockchain, AI , ML , Big Data )
PESTLE Analysis
Market Analysis using Porter’s Five Forces Framework
How Innovative idea fits into the competitive market
Market Opportunity and Sizing ( TAM , SAM , SOM )
Unit Economics ( CAC LTV Analysis )
Business Model Canvas
Revenue streams and Key Partners
The difference between fintech and financial innovation
Fintech stands for Financial technology. Fintech can be defined as the innovative use of technology in the design and delivery of traditional financial services to consumers and end users. Fintech is all about doing things differently to improve existing traditional financial services by using technology.
Fintech involves the integration and application of latest technologies like — Big Data, Block Chain, IOT , Cloud etc in the core financial segments (i.e Retail Banking, Commercial Banking, Investment Banking, Capital Markets, Insurance, etc)
Fintech is transforming how the financial services are being packaged and delivered to consumer from experience, access and cost saving perspective.
Financial innovation means any innovative change in finance field which can be used for advancement in the finance industry. This change can be about anything i.e. new methods, tools, ideas, products, end user experience and doesn’t necessarily have to be technology driven.
Thus, Fintech itself is one of the major financial innovations which gives an opportunity to do the things in Finance industry differently than before. Technology evolution has created a new financial eco system model where consumer facing front end is controlled by tech firms and traditional banks work as utility providers to these tech firms
innovative tool at the bottom of the pyramid
Most of the innovations (expensive electronic gadgets, watches, cars etc) happen to serve the people at the top of the pyramid. To me the most exciting thing about fintech is that it has the potential to become an innovative tool to serve the unserved and most fundamentally, make financial services more inclusive; with people better connected, informed and empowered
This is achievable by utilizing FinTech’s potential to unbundle banking into its core functions, it can significantly disrupt the lending market by making use of new sources of data , using data more effectively and building more agile credit models to provide access to credit for underbanked,
In developing countries, Farmers and Agriculture industry are still cash driven, largely unorganized and fragmented. most of the farmers have little to no access to mainstream financial services. There is a huge gap when it comes to borrowing money for farm and farm-related activities and fundamental problem remains unsolved — instant finance.
FinTech can help to tackle the challenges that farmers face in accessing mainstream financial services products and getting access to low-cost digital loans
Fintech can use alternative credit rating model which uses new sources of data such as social and mobile data for individuals, payments or accounting data, Income diversification, asset profiling to determine the creditworthiness of a farmer. It doesn’t only solve the credit problem for farmers but can also solve Non-performing asset problem for banking ecosystem who completely relies on self-reporting of the consumer to track or report usage of loans
aim here is to find problem solution fit and product market fit for digital tech solutions to integrate technology ( AI , Bigdata , Blockchain ) with different finance activities like Voice based assistance , risk assessment, lending, record keeping , payment .
innovative approach is to have a viable business model with sustainable growth and scalability . we are trying to build CAPEX light but data heavy software cloud based model so distribution channel will be via internet and hence our reach is by default global
Understanding Consumer challenges & pains
Now,Let’s try to have a look at and understand consumer challenges and pains
*Consumer Segment 1: Overseas Diaspora from developing countries working in developed countries
Challenge they face: high cost of transaction and longer time for cross border payment while sending money back home (i.e. from UK to India)
Idea: peer to peer cross border payment platform to remove intermediaries and make fast, low cost financial transaction
*Consumer Segment 2: unbanked /underbanked farmers in developing countries
Challenge they face: no credit history and hence traditional banking system excluded them. No Access to mainstream financial services
Idea: Alternate credit rating model & Immutable land Record building to provide Access of mainstream financial services to unbanked /underbanked farmers , this is one of the innovative ways to
● Bring Financial inclusion
● Removing social inequality and making society prosperous
*Consumer Segment 3: women in Developing countries working in unorganized and fragmented sector
Challenge they face: Don’t get equal opportunity to grow, struggle to get loans to set up Small scale industries
Idea: Making Micro loans available to women in developing countries working in unorganized sector and support women Empowerment to give them equal opportunity
*Consumer Segment 4: young students and millennials
Challenge they face: don’t like traditional tedious cumbersome banking experience. more tech-savvy and hence prefer cashless and instant transaction from mobile.
Idea: Create ‘always on’ millennial friendly banking eco system. millennials grew up with the internet and used to relying on technology and engineering to do almost everything
*Consumer Segment 5: consumers using trading services and capital markets while driving a car
Challenge they face: safety issue and distraction when trying to access stock market while driving a car in congested area
Idea: Virtual voice-based Finance assistant which can provide stock updates to user without having to distract from driving
Value proposition canvas and Solutions
1. Fintech (integration with Big Data) can use alternative credit rating model which uses new sources of data such as social and mobile data for individuals, payments or accounting data, Income diversification, asset profiling to determine the creditworthiness of a farmer
2. Current identity systems used in banks are cost ineffective and time consuming. digital land and identity solution based on Blockchain can Save time and cost by reducing the KYC process to one platform.
3. Digitized Land records can’t be tempered with and they are easily traceable.
4. Trust is core to business and fundamental currency of commerce. Blockchain which is like universal ledger considers payment and settlement as a change in ledger and hence using blockchain for peer to peer cross border international transaction eliminates Big intermediaries and Middleman (banks, big social media company, government, credit card companies) to establish trust in economies . this can help to create internet of assets
5. Amount of time spend on driving can be used more productively by using voice-controlled assistants employing artificial intelligence (somewhat similar to google assistant and Alexa) — tailor made for accessing finance, trading platforms.
PESTLE Analysis
Political
Finance industry is going through the wave of innovations which are expected to make world more connected
Most of the Political leaders across the globe are supporting and have been trying to promote innovation in Fintech industry. However ideological driven political climate complicates the thing sometimes and hence Fintech industry need to keep track of some political developments and have balanced approach while trying to sell fintech product originated in developed countries to huge consumer base of developing countries.
Approach of UK and US politics towards migration has become negative to favour domestic development, this can slow globalism and may adversely impact Fintech ability to bring international talent to manage operations in the country. Moreover, this is not going down well with the policy makers and government of important markets such as India and China.
India and china both require local presence to offer domestic services. in fact India’s policymakers came up with requirement for local data storage positioned as security measure which is actually designed to help local companies grow in payment market
India government and political leaders does not consider cryptocurrencies as legal tender however supports blockchain to add muscle to the digital economy. PM of India has started ‘Digital India’ scheme — this is the its indirect move to push India into a cashless economy and create Fintech eco system , demonetization announced also proved the same. This is great opportunity for fintech start ups to enter the market and get maximum consumers
Economic
Fintech and technologies used in Fintech products like AI , Blockchain and Machine learning has the potential to disrupt many industries and with automation can phase out many jobs in banking industry
There is a possibility that it will also create million of new technology driven banking jobs . India produce large number of highly skilled ICT engineers and hence can leverage good skill level of engineers in the fintech space to not only offer employment but also leverage those skills to create global opportunities and create New Dynamic low cost Fintech service industry model with the Hub based in india ( like how Bangalore has been created as Software industry hub)
India has large consumer base and is one of the fastest growing economy in the world and Per capita income has been increasing rapidly
With the launch of Pan India 4G by telecom operator Reliance Jio ,mobile and internet penetration is growing and data rates are getting more cheaper resulting in high number of internet users this led to the emergence of fintech in India
Social
Building trust among Indian consumers is biggest challenge a company can face in Fintech industry However , Fintech firms need to use this as a platform to design and develop digital products and integrate them to existing banking system and try to find a way to be a cultural fit for Indian consumers .
There is a fundamental difference between Indian consumer and westerner and the way how they trust businesses and banks . Indian consumers don’t fully trust wallet or credit cards as they feel it unsecure . Most of the Indians don’t feel confident in entering details such as credit card numbers or passwords and rely more on the brand name , as big brand is perceived to ensure data safety.
India has one of world’s largest young population ( and hence also called ‘Youngistan’ ) , 65–70 % India’s total population is under 35 and this young generation has easy access to internet and has different preferences and different approaches towards banking . young Indian instead of visiting bank prefers to not stand in the queue and use the mobile app or wallet to transfer the money.
There is an Increase in literacy rate and number of children going to school
Technological
AI and Big Data can be applied for risk assessment activities
Blockchain can be applied for payment and lending activities
Cloud computing and smart contracts can be applied for market provisioning activities
Robo advisors and Machine learning are likely to be applied for trading and investment management
Most of the Finance companies and banks face two problems while trying to use Technology
1. buy or build in house dilemma
2. Technology Integration with legacy system
· Solution of buy or build dilemma can be to go with buy and build strategy and then customize it to meet specific needs .
· Technology integration with Legacy system is the key to to improve customer service experience so Finance industry should create partnership models with technology developers to build solid integration plan
Fintech should keep close eye on latest technology trends like 5G and IoT to improve customer experience . Internet of things has potential to create New opportunities for innovative new e commerce model integrated with Fintech applications
Legal
Both traditional banks and fintech companies face legal challenges in capital requirements, anti-money laundering, privacy and data security
The Government of India and regulators SEBI and RBI are supporting the ambition of the Indian economy to become a digital economy and emerge as a strong fintech ecosystem by providing funding , Infrastructure support ,promotional initiatives and Tax relief . Regulators -SEBI and RBI have been trying to promote and enable the development of fintech sector but have cautious approach to ensure consumer protection and law enforcement
UK has been actively exploring and re defining their regulatory framework for fintech so that it could co exist within their current standards . US regulations are more cautious with the technology
Environmental
Crypto currency mining consumes so much energy . as per the latest report ,bitcoin currently consumes 66.7 terawatt-hours per year. That’s comparable to the total energy consumption of the Czech Republic,
Fintech companies using crypto currencies and bitcoin mining should focus on use of clean renewable sources, like wind, solar, and hydropower
Fintech is also well positioned to accelerate the development of green financial markets, and help to change traditional finance industry to support sustainable development
Market Analysis using Porter’s Five Forces Framework
Competition in the market (Medium force)
we are planning to enter into the Fintech market by creating a firm which design and develop customized blockchain, Big Data and AI based Fintech solutions on AWS/Azure and Google cloud Networks majorly for BFSI and government clients. Company will be based in India/UK with the client base in the US and Europe.
Blockchain , AI and Big Data Market are growing rapidly .The blockchain market is expected to grow to USD 2,312.5 million by 2021 and AI systems market is expected to achieve an impressive 37.3% compound annual growth rate (CAGR) from 2017–2022 to Reach $77.6 Billion in 2022
There are many firms who have developed AI based applications for Personal Finance Some examples are Chatbots used in banking to focus on search tasks , credit risk assessment and automated claim process .
However — there are very few — platform independent & open source platforms which can be integrated into the banks’ mobile banking applications, acting as “a voice-activated intelligent personal finance assistant while driving . The number of competitors are very few.
We would be facing strong competition in the market for blockchain, AI and Big Data implementation projects so we need to have PoCs as fast as possible to reduce time to market. Competition is tough on rates as well.
We are aiming to Differentiate product and Build loyalty to reduce rivalry
Threats of new entrants (Medium force)
European IT market is growing rapidly and expected to be over USD 300bn in 2019 and as a result New entrant in Europe market
However — it is still Highly regulated & CAPEX heavy market dominated by traditional big banks and digital firms
Recently — Telecommunication firms with eyeballs reach , supermarket chains & large technology companies are also entering into this market .
We aim to form strategic partnership with new entrants and increase efficiency of operations to reduce the impact of threats of new entrants.
Supplier power ( Medium force )
Hardware and software to implement Blockchain, Big Data and AI are easily available in market at standard cost
Available on cloud networks also as a service. There are many options available for Hardware supply and services providers and hence are no longer costly . product that these suppliers provide are fairly standardized, less differentiated and have low switching costs which makes it easier for Fintech start up like us to switch suppliers.
However cloud service providers (AWS, Microsoft ) provide a credible threat for forward integration into the industry
Consumer power (Very High force )
We aim to sell AI , Blockchain and Big Data products and consulting services predominantly in the BFSI domain
And negotiating power of the customer is relatively high because of a large number of competitors in the industry. switching cost is also when changing provider
We aim to form strategic Partnership. and also Increase loyalty, incentives and value-addition .
We also aim to create product differentiation to avoid consumer switching
Threat of substitution (Medium force )
Consumers always want to buy the best service at cheapest possible cost
For BFSI industry consumers, finding a substitute is easy and may be For the first time, the power seems to be shifting from a handful of centralized financial institutions to the hands of the customer
However, platform independent & open source platforms for AI, Big data and Blockchain market is still at a nascent stage , various segments such as consumer lending, micro financing and etc can still be convinced and sold upon to end customers and BFSI clients .
SOURCES & REFERENCES:
2. https://www.businesswire.com/news/home/20170425005753/en/Blockchain-Market-Grow-CAGR-61.5-2021--
Key Differentiators-How Innovative idea fits into the competitive market
focus is on creating easy to use always on self-service model with required tools and differentiating products and services to provide unique benefits to consumers by understanding their needs better and providing them with what they want .
Amount of time spend on driving can be used more productively by using voice-controlled assistants employing artificial intelligence (somewhat similar to google assistant and Alexa) — tailor made for accessing finance, trading platforms , this Virtual voice-based Finance assistant can provide stock updates to user without having to distract from driving. This can emulates human intelligence and should be able to interpret meaning of user queries beyond semantics . it is platform independent and opensource application so can be installed on any phone and integrated with any online banking platform.
Blockchain as a service available on cloud platform can be used to create cross border payments platform which can Eliminate Big intermediaries (Middleman) and make the transaction fast with low cost .
Finance industry always face a complex problem when it comes to providing micro loans to farmers and unbanked people — right and profitable customer group ,proper credit assessment and collection of loan .We aim to create one shop stop solution to solve this by
1. Creating Alternate credit rating model to prove credit worthiness of un banked people /farmers and track it using blockchain based immutable land records to solve NPA problem
2. Creating uber like model to share resources among different users using blockchain technology
Market Opportunity and Sizing ( TAM , SAM , SOM )
- we have CAPEX light but data heavy software cloud based model and hence distribution channel will be via internet and hence our reach is by default it global
- The global blockchain market size is expected to grow from USD 1.2 billion in 2018 to USD 23.3 billion by 2023, at a Compound Annual Growth Rate (CAGR) of 80.2% during 2018–2023
- The AI in Fintech market size is expected to grow to USD 7,305.6 Million by 2022, at a Compound Annual Growth Rate (CAGR) of 40.4%.
- global loan portfolio for microlending is expected to reach $113.6 billion,
- Cross-border payments is a US$22 trillion market. The size of this market will continue to grow
Unit Economics ( CAC LTV Analysis )
We already analyzed how fintech firm can be a problem solution fit and now focus is on sustainable growth and scalability .Aim here is to build software based , CAPEX light and scalable model and keep our unit economics low so that we can keep costs to the client down as Having a good LTV/CAC ratio is quite instrumental for the success of any fintech start up
Please see table underneath for our CAC: LTV estimate to determine effectivity of new business model .
As we can see it is viable business model and depends on balancing two variables:
1) Cost to Acquire Customers (CAC)
2) The ability to monetize those customers aka LTV ( Lifetime Value of a Customer)
As can be seen from table we are able to achieve,
· LTV > CAC ( >3X for all products )
· We will be aiming to recover CAC in < 4 months (for all products )
·We are planning to use Next technique to reduce CAC
- use of the internet to drive leads
- Public and private Peering with Telecoms, ISPs and Cloud providers AWS , Microsft Azure and Google cloud
- Strategic Partnership with banks and Social media companies to extend reach
- Use of a free product and free trial for a viral spread as they tell their friends. .
- Leveraging the power of client’s social networks
- Automation of Ops processes and inventory management to keep OPEX down
- Try to maximise touchless lead conversion and Minimize dependency on human touch to convert leads
Business Model Canvas , Key Partners & Revenue Streams
