The fastest industrial segment that is wiping out traditional methods and adopting new innovative technologies is Fintech. There are incalculable changes that have been brought by the new frontier technology named Blockchain in the Fintech industry. Customers are going to GaGa about the new changes that have immensely escalated the way fintech behaves.
Having said that, the changes seem to have benefited customers only. Then, how does fintech make money? This write-up will discuss the innovative fintech business models which can easily be adopted by Fintech companies.
Fintech startups are here to disrupt the ways financial services are offered to customers. The switching has highly inspired traditional financial institutions to adapt to the change, but it will be a gradual process.
The three primary fintech businesses are
- One which provides financial services directly to the customers;
- One that extends infrastructure solutions & technology to the financial service providers;
- One that develops data and analytical solutions for fintech;
Whichever segment the financial institutions fall into, they need to make money too.
Fintech companies have constantly evolved and have started providing faster payments, lower transaction costs, improved access to financial services, and a lot more.
Powerful fintech players like Paytm, PhonePe, and Mobikwik have matured over time by growing with the trends. If we specifically talk about India, in the year 2005-2006, 97% of Indian transactions were done in cash. While only 3 percent were done digitally.
Since then, the growth curve is going upwards with all the digital payment methods adoption. Tuning into 2015 and 2016, a lot many digital payment methods like debit cards, credit cards, NEFT, RTGS, etc started coming into the picture.
Speaking globally, there are nearly 26,000 active fintech startups, each one giving tough competition to another. Government institutions have also started taking an interest in fintech development. These institutions are gradually encouraging startups to take the industry to literally another level.
Some of the very popular fintech services include
Mobile payment methods:
Payment methods like Apple Pay and Android Pay facilitate users to make payments using smartphones.
Peer-to-Peer payment means the method where users can directly send money to friends & families. E.g. Venmo and Square Cash.
Personal finance management;
Applications like Mint and Clarity Money help customers in keeping an eye on their spending and other finances.
We all have used any one of these apps, Acorns, and Robinhood. These applications help users to invest in stocks, ETFs, and other securities without any transaction fees.
To survive in this thriving competition, there have to be new innovative ways of making money. This survival is backed by the business model the company adopts.
What is a Fintech Business model?
A wholesome plan that consists of operational strategy, revenue sources, and targeted customer base. However, fintech companies are focused more on providing swift financial services and products.
The secondary focus is on the selection of a business model. How does a fintech business or startup select a business model?
Here is the table that will guide you through the same,
|Business goal||Why are you starting the business? What is your primary goal/objective?|
|Audience||Do you know what audience you are targeting?|
|Consumer demand||Does the targeted location/geography in need of your services?|
|Business Processes||You should define the process of business offerings beforehand|
|Investment partners||Discuss all these strategies with your investors, co-investors, and alliances.|
All of these factors listed above play a major role in business model selection.
So, what are the business models available for the fintech industry?
The most innovative business models available in current times for the fintech industry are
Alternative credit scoring:
This system extends the credit scoring system. Many startups who are having a steady source of income refrain from passing through conventional bank loan screenings. The reason behind this is the stringent criteria of the traditional bank loan systems.
However, the given hurdle is zeroed down by the digital footprints methods. The borrowers can check the creditworthiness of the lender by going through the huge set of data available.
The data comprises payment history, bank balance, eCommerce shopping, spending patterns, etc.
Fintech companies like Nova Credit have adopted this new way of considering alternative data points & percentile scoring. The qualitative factors are based on self-learning algorithms that give precise and better results.
It can help fintech companies increase the number of borrowers and assist lenders in improving their credit score valuation.
Every single piece of personal information is shared over the platform.
Alternative insurance underwriting:
Do we make justice by giving the same insurance premium to a gym freak and a couch potato? No, isn’t it? The above injustice was because of the fact that the traditional methods use averaging out methods. This means we did consider the factors that are not even quantifiable.
How do we change that and make the insurance premium procedure more effective? It is by using alternative insurance underwriting. In this method, we utilize both quantifiable and non-quantifiable factors.
Fintech companies like Carpe Data make use of premium computing mechanisms, alternative data points, and self-learning algorithms to provide smarter policy systems.
The model is easy to access and makes a fair judgment between customers.
Consumers registering over this setup have a very small insurance value. This means a single strategy doesn’t hold true over various insurance types.
In this method, one individual borrows money from another individual directly. There is another method called Peer-to-business lending where a business borrows money from multiple individuals.
P2P is often a suitable method for companies that can not bear the overhead cost and wants services at cost-effective prices. Fintech companies such as Funding Circle, Faircent, and LenDen Club are a few names in this segment.
A Digital wallet system keeps a record of store payment information & passwords. Users can add a certain amount of money to the virtual wallet and use it as and when required. The preloaded amount helps in making easy transactions.
How do these digital wallets providing companies make money? Well, these companies can charge a small fee in the form of a Merchant Discount Rate or take a percentage share over every transaction.
Examples of this segment are:
Square Cash, Venmo, Google Wallet, etc.
Crowdfunding is a method where a large group of lenders come over the platform and market their business idea. Businesses can find potential lenders, talk with them and decide on common terms of funding.
Investors give a decided amount of funds to the selected business from the pool of funding available.
Small Ticket Loans:
Small-sized ticket loans are likely to get rejected because of their low margin cost & high setup costs. Banks and traditional lenders may find it difficult to recover the amount.
However, fintech lending startups are finding out ways to cater to these needs. Fintech companies such as Affirm have adopted an impulse buy mechanism (referred to as buy now pay later) and one-click buy buttons on their eCommerce sites. Here the customers can quickly press the buy now button without entering any authentication or credit card details.
These loans function with 0% interest and the borrower can have money in installments. The fintech companies make money by distributing customer data to the original equipment manufacturer. The algorithms will help these companies know the location and other useful details & market their offers/services.
Fintech companies get hold of consumers at the point of purchase and thereby provide useful services.
Consumer data is at risk of fraudulent activities.
Asset Management/Investment Management:
Consumers have a data cluster to select the best stock for investment. The challenge to find the right stock & keep track of the same is real. Fintech companies have resolved this issue by developing a platform that takes care of the assets. One such popular platform is Robinhood, where customers trade without paying any commission fee. However, the platform has the right to keep customers’ data with itself.
The process of functioning of a trading application is like this:
The interest signals are highlighted to high-frequency traders which further impacts the price of the assets. The entire transaction is carried out within a short duration.
Fintech companies will make a profit by charging over the executed trades.
It is a highly attractive business model that works at low to minimum interest.
Stock investment is often at risk because of market manipulation.
What Next? Your Growth depends on the business model you choose:
The constant influx of new customers and their expectations has pushed the fintech industry to a new level. If you fail to address the expectations, you might just not make up to the market. This means that there will be a constant urge for fintech companies to adapt new innovative business models & provide class-apart services to their customers.
Anirban Bose, CEO of Capgemini’s Financial Services Strategic Business Unit stated,
“Banks that identify their top capabilities and then seek partnerships with Fintechs and other business sectors to enhance their offerings in other areas will be the most successful”
We hope this write-up has given you satisfactory insights into the types of Fintech and business models. You can connect with us for the implementation of any of them. Let’s join hands to transform the fintech industry together.
Read also – 8 Best Fintech App Ideas