You too can be a Fintech
How any start-up can take advantage of the unbundling of the Financial Services Stack to improve value, increase margins and drive retention
The Rise and Rise of Platform Tech
Just 15 years ago, building a Minimum Viable Product (MVP) for a tech product was a costly and time-consuming affair. Founders would have to provision their own servers, code applications from scratch, and would have to spend a lot of money before finding out if their product was on the money or not. Much of that was revolutionized with the emergence of platform services like Amazon Web Services and Google Cloud Platform which offered plug and play provisioning of hardware and bundled software that allowed a founder to go from idea to product in a matter of days.
A similar change in the business landscape is happening in the Financial Services industry. Fintech has led to unbundling and startups are focusing on a core offering in the financial services stack instead of the complete stack (see below for details). This is revolutionizing the way in which financial products are built, experimented and delivered just like platform services like AWS revolutionized tech startups
We know that traditional banks find it hard to innovate and offer new services to their customers due to mounting costs to maintain legacy infrastructure. Though large banks have access to billions of dollars in IT budgets, around 75% of that goes into recurrent costs (Reference).
Headwinds in the Financial Landscape
The lack of innovation and the after-effects of the financial crisis has led to an erosion of trust amongst users. Only 28% of millennials said that they trust their banks, as per a survey by the World Economic Forum (Reference). Additionally, those who use the service, aren’t too happy either.
On the other hand, startups and founders, who are perceived more favorably by users find it difficult to break into the financial services industry due to heavy regulation and complexity that exist as barriers in the industry.
To counter this, Fintech startups have started to unbundle the Financial Stack and build platforms that focus on offering stand-alone services instead of the entire stack. This allows other startups to build services that use their offering. This can be imagined as an Information as a service (IAAS) offerings, that startups can access and use to build their products. This approach reduces time to market, less initial investment and scope for iterations as founders don’t have to build products from scratch and have multiple services to choose from.
A Traditional Banking Stack
A traditional Banking Stack involves the following services:
- Data — User (Bureau), Transactional, etc.
- Core Banking Systems (Account Management)
- Payments (ACH)
- Fraud Prevention (LexisNexis)
- Regulation (FDIC)
- Licensing (Federal Agencies)
- Front End, User Interface (Shopify)
Startups have started to offer these as stand-alone services instead of the entire stack. The delivery model is usually an always-on, consumption-based pricing model. They can also be called Financial services as a service or FAAS microservices. This approach enables standardization and ease of use once the industry matures. An example would be standardized credit bureaus like TransUnion and Equifax, which come close to the description of an unbundled financial service offered as a stand-alone offering to other companies.
How this plays out in a traditional P2P Lending Startup
To see this in action, let’s take the example of a marketplace lending startup whose business model is to match borrowers and lenders for loans through an online mechanism. The firm would require these core financial systems to function.:
- Verifying creditworthiness of borrowers
- Checking against Fraud prevention databases
- A system to enable and track monetary transaction
- Regulatory Compliance Verification
- Alternative Data Sources
- Loan Servicing and Collection
If the start-up decides to build every technology listed above in-house, it would end up in a situation similar to the entrepreneurs 10–15 years ago who built things from scratch by provisioning hardware before AWS came to their rescue.
Instead, the lender for the example can purchase these services from providers who offer these as standalone services (Eg. Transunion to check Credit Worthiness and so on) and focus on building their core product on top of it. The lender is better positioned to customize, experiment, and also discover better ways while building a solution using this approach. This allows founders to focus on the business value of their product instead of getting lost in the nuances of tech implementations
Non-Fintech Companies and Foretellings of Shifts to come
This change in the landscapes and the resulting ease of use has also allowed non-Fintech companies to also think of ways to benefit from adding financial services to their offerings. Companies like Shopify, Apple, and Uber have made such moves with varying amounts of success. What is the rationale behind such a move?
Let’s look at the example of Lyft, the popular ride-hailing platform. Lyft and Uber both have ride-hailing as their core services and find it a major challenge to retain drivers on the platform who have high Customer Acquisition costs (CACs).
Lyft decided to position its financial services offerings to drivers as a way of increasing driver stickiness and an additional source of revenue for itself. By being the bank for drivers, Lyft got access to the margin on banking services as well as increased driver retention. As a result, drivers with a Lyft bank account now have a higher switching cost to shift to a competitor compared to someone who has only signed up as a driver. Uber also introduced a Debit card exclusively for its drivers keeping similar goals in mind.
There are multiple other examples like Shopify which allow merchants to manage their online stores by putting together a slew of financial services from the Fintech Stack as well as streamlining the user interface for its traditionally non-tech savvy customer base. Shopify has managed to show blazing growth in revenues as a result of this business model.
This should compel every non-fintech company out there to think of ways in which financial services can both complement their existing business as well as increase margins, increase customer retention. With the rapid pace in which financial services are being unbundled, you can definitely benefit if you give some thought about how your business can benefit from offering financial service. Making the move early enough would help beat the competition and build a differentiated positioning well ahead of the market.
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