Photo courtesy of Burst

5 Areas of Fintech That Are Ripe For Innovation

Fintech is an unusually broad category. Business models can be B2B, B2C, or B2B2C; the sub-categories are even broader spanning consumer banking, infrastructure & tooling, and insurance, just to name a few. Given this, there are several companies in seemingly unrelated segments within fintech that I believe could be hugely successful if only they existed.

Below are my top 5. In some cases, there are those going after the opportunity but I believe that it is so big that there is room for several breakout companies with slightly different business models, target customers, or go-to-market (GTM) strategies.

1. Omnichannel point of sale (POS) financing

POS financing is offering credit options to the customer at the point of transaction (i.e. checkout). There are several POS financing solutions that exist today. Synchrony Financial (powering retailer credit cards like Gap and Sam’s Club), GreenSky, Affirm, and Bread are a few that come to mind. Though there is some crossover, the first two are primarily offline in physical retail while the latter are focused online.

Given how multi-channel consumer behavior is today I believe there is an opportunity to create a integrated physical + digital POS financing product that provides a high quality consumer experience and is easily integrated for the non Fortune 1000 retailer. The market is big and only getting bigger as consumers grow to expect these types of options at checkout. Filene Research Institute estimated the annual size of the POS financing market at $391 billion — approximately 3.5% of annual consumer spending — with healthcare, electronics, and home goods as the leading categories. Interestingly according to a Klarna survey, nearly half of consumers would like to be presented with the option to get instant financing when shopping online. Given larger purchases usually occur offline, would anticipate these rates to be even higher in physical or in person transactions.

Key features include near immediate approval and funding, simple process, and high approval rates. The consumer experience would improve because they would have a uniform experience regardless of channel and likely one that was more personalized given a more holistic view of their behavior. Retailers benefit because they can simplify their vendor and data matrix while also increasing consumer conversion and retention.

2. Enhanced compliance and risk capabilities

Compliance and risk are broad competencies within financial institutions and fintech companies —they include KYC, AML, and fraud, among others. What they do have in common is that for the vast majority of companies both big and small, these teams (and therefore costs) scale proportionally with growth. The most sophisticated fintech companies like Stripe*, Square, and Affirm are creating custom software to streamline these operations internally while improving KPIs. But the average company today deals with these concerns largely with humans manually reviewing information looking for anomalies. This is the opportunity that innovative start-ups like Unit 21, Sentilink, Alloy, and Merlon Intelligence are attacking.

A large reason why this status quo has persisted is that the high cost of a mistake. According to Fenergo over the last 10 years the United States accounts for 91% of all global regulatory KYC/AML fines ($23.5B). In fact the US Department of Justice is the most punitive regulator in the world for non-compliance, responsible for half of global AML fines.

Fraud is rampant and expensive as well. According to The Association of Financial Professionals fraud levels reached a record high in 2017, affecting 78% of surveyed organizations. The same survey estimated that fraud attacks collectively cost 0.5% of an organization’s annual revenue!

Given the large cost of a mistake, companies’ willingness to spend to avoid any issues is extremely high. The cost of a solution is not a factor in the decision. However the quality expectation of any product that would even be considered and the approval + implementation process is equally high given decision makers’ inertia to stick with whatever seems to work today. Given these hurdles a new product has to be extremely effective as does the GTM but once implemented is highly valuable and likely almost unchangeable.

3. New underwriting models

Traditional lenders and insurers have used the same underwriting criteria and models for decades. They are excellent at pricing risk within the categories and risk pools as they define them. Given how long they have been amassing data to hone their models I would argue that it is near impossible for new entrants to beat incumbents at their own game by underwriting better using the same metrics.

However, I do believe that there is opportunity to win by changing the underwriting paradigm across categories and verticals. I’d like to meet with companies breaking out from the traditional model and using innovative criteria to assess risk. It takes time and data to hone these new models and to reach profitability but the resulting structure is highly defensible and differentiated.

At the same time, just data is not enough. Acquisition is competitive so the true breakout companies need novel distribution strategies to acquire customers as well. Some highly innovative companies with this approach include Next* and Root* in insurance and SoFi and Square Capital in lending.

4. Innovative consumer credit building products

According to a 2016 Consumer Financial Protection Bureau (CFPB) report, 45 million American adults are credit invisible or unscorable. That is 20% of the adult population. These consumers either have no file or one that is so thin or out of date that they cannot be scored. These consumers have a more difficult time accessing traditional financial services, obtaining employment, renting an apartment, obtaining a cell phone, and accessing utilities without a deposit.

I would argue that this is only getting worse. Millennials have less credit than other groups in the past. According to Bankrate, 63% of millennials don’t have a single credit card open. Having seen how hard it has been to climb out of debt many have shunned it without realizing that they will need credit profiles for large purchases down the road.

Agencies do not have the traditional data on these consumers to rate their credit worthiness despite the fact that often they are transacting and fulfilling financial obligations every day. Given this reality I believe there is a large opportunity for companies to leverage “non-traditional” data to help these consumers build credit or to even underwrite them more effectively. These companies can provide them products and services they otherwise would not have access to that simultaneously allow them to build their traditional credit files over time. Nova Credit (immigrants) and Divvy Homes (housing) are two exciting examples of companies leveraging this opportunity.

5. Comprehensive corporate spend visibility

The finance department of any company, big or small, will tell you how difficult it is to reconcile outflows with budgets, predict financial statements, or to complete their work without needing to constantly interface with other departments to track down information. However, their ability to do their work effectively is essential for smooth operations and planning at the highest level in the organization.

A system that that could create visibility and tracking across departments and payment types (e.g. ACH, credit cards, contracts, etc.) would unlock this vision making not only finance, but the the entire company, more efficient and effective. Expensify, Brex, Divvy, Coupa, and others are doing parts of this but there is significant opportunity to create a modern, comprehensive solution that is a one stop shop so that finance and decision makers can have a single view of spend across their organization.

If you’re building a disruptive company addressing any of these segments specifically or fintech more broadly and my perspective above resonates, I would love to hear from you at medha at redpoint dot com or on social media.

*Redpoint portfolio company

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