Fintech Business Model

What Is A Fintech?

A fintech company is any business that uses tech to change, improve, or streamline a financial service for businesses or consumers. It includes mobile banking, online payment services, automated portfolio managers, and cryptocurrency trading platforms. In other words, fintech companies use technology to offer you new and better ways to manage your money, pay for things, insure yourself, and invest money.

How Are Fintechs Different From Traditional Banks?

1. Purpose: Fintech companies aim to make the customer experience seamless and convenient, while banks are more concerned with security and managing risks.
2. Coverage: The fintech market has become much larger than the banking market.
3. Structure: The fintech companies have more flexibility in adapting to an ever-changing environment and are therefore more open to innovation. Banks have an inflexible organizational structure.
4. Collateral: FinTech offers flexible requirements, while banks tend to have stricter requirements and are less willing to accept high risk.
5. Target Customers: Fintech companies offer financial products to customers with a spotty credit history, while banks only provide loans to customers with strong credit ratings.
6. Technology Reliance: Fintech companies rely on tech to streamline their banking systems, whereas traditional banks do not use it as extensively.

Why Is Fintech Growing?

1. Their focus is on the Unbanked and underserved areas of banking: Along with serving the underserved, fintech is also equally providing platforms for the unbanked to get financial services cheaply.
2. Lack of trust in the traditional banking industry: this has created an open door for fintech companies, which make their money by offering technological tools that are more transparent in their operations and give ordinary people more control over their finances.
3. Niche focus: fintech companies have the advantage of focus and low operating costs that allow them to improve their techs far quicker and respond to customer trends better than banks.

Fintech Examples & Uses

Banking

Mobile banking is a valuable part of the fintech industry. It offers a full banking experience, including checking and savings accounts, payments, and loans.

Cryptocurrency & Blockchain

These two techs may seem distinct from fintech. Though they operate independently of fintech companies, many in the fintech space see both as important tools bolstering the financial tech sector. The techs are necessary and helpful in the creation of apps that move fintech forward.

Investment & Savings

Different apps take different approaches, with some using savings to automatically invest in the market via instant round-ups and others using a recurring deposit or match system, each offers consumers the chance to discover how investing & saving work – and the potential for financial freedom & success.

Machine Learning & Trading

ML gives businesses the ability to predict market behavior and make millions of dollars in risk-free profits. By processing large amounts of data with specialized algorithms, AI helps consumers, banks, businesses, and other organizations to better understand investment risks.

Payments

Payment companies like Venmo, Zelle, PayPal, and Stripe have changed the way we all do business – now you can send money digitally anywhere in the world.

Lending

Many fintech companies have started offering loans from mobile phones, which has helped underserved populations. Consumers can request reports multiple times a year without affecting their credit score – meaning that the lending world is more transparent.

Insurance

Insurtech is a branch of fintech, it helps modernize an industry that hasn’t been a faster adopter of new techs, but insurance companies are now partnering with fintech startups to reduce costs, increase their reach, and improve efficiency.

Different Types of Fintech

Stock Trading (Robinhood)

Robinhood is a platform that allows users to trade stocks online. They make it more affordable to invest in the stock market by eliminating fees charged by other brokerages. In addition to commission-free stock trading and exchange-traded funds, the company has begun offering cryptocurrency trading.

P2P Payments (Venmo)

Peer-to-peer is a popular service that allows users to perform transactions directly through digital file-sharing. People increasingly use their phones to make payments. Venmo gained popularity by capitalizing on that trend & offering an easy, social way to split payments between friends.

E-Commerce (Klarna)

Klarna offers shoppers a variety of payment options for everything from e-commerce to big-ticket items. The options are direct payments, pay-after-delivery options, payments from a storefront, or even plans where the customer can pay in installments over time.

Wealth Management (Wealthfront)

Wealthfront is a tech-driven investment company that uses data & automation to build investment portfolios and make financial recommendations. It helps users to set and achieve financial goals through an automated investment plan that continually adapts to changing market conditions.

Business Payments (Square)

With Square, businesses can accept payments from credit cards using only a terminal, a phone, or a tablet. Square gives small businesses an easy way to collect payments, print receipts, and offer their customers virtual gift cards.

How Does Fintech Make Money?

Crypto-Trading / Cryptocurrencies-Based

Due to the exploding cryptocurrency trade, if you can build a token-exchange platform and promote it well, you might be in for a big profit.

Crowdfunding

It is an innovative way to raise money to support a project or entity. It involves people making small contributions from diverse sources, thus providing financial backing for a person or product. Because of the social networking nature of crowdfunding, a creator can gather much more capital faster online/offline than by approaching investors one by one.

Digital Wallets (E-Wallets)

The introduction of e-wallet apps to the marketplace has fostered a very positive outlook for the future, where cash will play virtually no role in commerce. The e-wallet companies make money in two ways: by charging merchants a small fee for every transaction; and by charging service fees for 3rd party financial services provided to their customers.

Lending/P2P Lending

Peer-to-peer lending is a way that people can borrow and lend money by cutting out the middleman. Banks make money by charging interest, and cutting the banks out of the equation allows borrowers to get loans at lower rates. Fintechs that operate in the P2P lending sphere earn commissions whenever they connect two parties who want to borrow or lend money.

Robo-Advising

Robo-advisors are apps that use algorithms to manage your investments for you. They allow users to invest in stocks or funds without paying a hefty commission to a human broker. They can be customized based on an individual’s risk tolerance and savings goals.

Subscription-Based

Many fintech companies focus on the subscription model for monetization, letting clients pay for their service on a monthly/quarterly/yearly basis. Or they employ a freemium payment model in which the app is free to use, but some features are available only through a paid subscription.

Advertising

Banners ads: displayed mostly at the top/bottom of the screen, they come in different sizes & shapes. Multimedia ads: with various creative elements, text/images/videos/audios to mini-games.

APIs As A Revenue Stream

Companies are increasingly partnering to better serve customers with customized products in newly emerging markets thanks to the partner’s access to customers’ data via APIs.

How Do Fintech Cash Flows Work?

Three Key Players In Fintech Cash Flows

Capital providers are the institutions that provide debt capital to fintech and can be banks or private lenders. Fintechs are the tech companies that provide financial services to customers. And finally, fintech customers are the people who use those services.

Four Key Accounts in Fintech Cash Flows

Owl Financial relies on two accounts to operate: the Parent Operating Account and the Borrower SPV Account. The Borrower SPV Account is where customers pay down their credit card bill, that’s where payments will be deposited when customers make a payment. The Parent Operating Account is used for expenditures like paying bills and their employees.

Five Steps of Fintech Cash Flows

1. Disbursement: the Parent Operating Account is where money is transferred to make the initial disbursement to the customers.
2. Assignment: in this step, Owl Financial assigns the receivable to the SPVB.
3. Funding: The Capital Provider will size Owl’s advance rate based on the total amount of Owl’s receivables.
4. Collection: the money paid by Owl cardholders during repayment goes directly into the Borrower SPV Account to increase cash in the Borrower SPV Account.
5. Waterfall: at the end of each billing cycle, collections are automatically released to the lender and other parties for payment of interest and fees.

The Fintech Model Benefits

Financially Rewarding

The financial sector is a hotbed of investment ideas, not just because it’s so large, but also its impressive opportunities. Startups in the financial services field are among the best-funded and most valued, including Coinbase and Wise, ex-TransferWise.

Slow Incumbents

Many traditional banks use old tech that does not adapt well to new customer trends, which makes altering their offerings and business models a challenge.

Customer Base Loyalty

Banks provide trustworthy financial services, from safety deposit boxes to loans for buying houses. Banks can also help their customers to make the most of their money in the present and plan for the future. The customers are often quite loyal to their banks.

Economic Democratization

Because of improvements in technology, automation makes it possible to make products more reliable and less expensive. Individuals at all levels can now enjoy this benefit.

Why Is Fintech Important To The Business World?

The availability of financial tech has forever changed the way businesses do business. Today, people can set up their own businesses with little effort, thanks to crowdfunding and other alternatives, like mobile payments. Fintech firms offer many ways to lower costs and increase the ease with which businesses manage their finances. Because they are generally smaller than traditional banks, fintech companies can lower costs by working in innovative ways and can use technology to adapt to changing banking techs and make doing business easier.

How To Value A Fintech Startup

Company Valuation: Starting At The Top

1. Strategic/Competitive Value: the value of the company is determined by how much it costs its competitor to acquire it.
2. Discounted Cash Flow (DCF): The DCF model substrates a company’s estimated capital expenditures from its expected future cash flows to arrive at the present value of the enterprise.
3. Multiple of Revenue/Book Value: this model determines the value of a company on multiple factors, including its revenue or book value (assets value).
4. Replacement Cost: when the target firm has assets that are hard to replace, such as patents and trademarks, you can use their estimated replacement costs as a benchmark for valuing.
5. Price-To-Earnings: To examine the PE multiples of future earnings per share.

Valuation Of Financial Sector Companies: Traditional Approaches

1. Banks: modern global banks are typically made up of several different divisions, including commercial banking, investment banking, wealth management & advisory services.
2. Mutual Funds: asset management companies are usually valued according to a concept called “AUM”, which measures their ability to generate profits depending on how much money they have under their management.
3. Insurance Companies: an insurance company would typically be measured on how much profit it makes compared to the money invested in it by investors (Return on Equity). Another way to measure an insurance company’s valuation is to compare the price of those shares to the company’s assets (book value).
4. Wealth Management Firms (WMF): from the perspective of the investment community, WMF should be valued similarly to asset management firms. From a business perspective, the businesses operate under very different systems: fund managers are valuable, but their investment programs are more process-oriented to support large AUMs through standardized and regulated products targeted at a large market.

Understanding the Components of Fintech Valuation

1. Problems Solved: when it comes to tech companies, the primary distinction between one that achieves success and one that fails is the problem being solved.
2. TAM/SAM (Total Available Market/Serviceable Available Market): Fintech companies rely on tech-based solutions such as apps and the internet and are available in many more countries than larger banks. It helps them to reach a wider audience in less time than it typically would take a traditional bank to expand.
3. New Use Cases: innovative fintech companies are finding new ways to use tech to benefit their customers. In turn, fintech companies with these features are likely to accrue higher idle balances than traditional banks.
4. Lower Distribution & Setup Costs: FinTech startups have business models built on networks and often enjoy lower infrastructure and setup costs than other firms.
5. Lower Operational Costs: by using the internet and internet-related tech, businesses can avoid costly real estate and infrastructure requirements.
6. Revenue Models: Fintechs leverage network effects and revenue models to create sustainable businesses. A company that focuses purely on gaining users without a strategy for making money might not be successful in the long run.
7. Cross-Selling: Fintech startups can leverage AI-generated insights about consumer behavior, which helps them easily find out what additional offerings they should offer. This is great for customers because it means the creators of the app are always listening to the customers and their needs.

The Stages of Fintech Development & Investor Profiles

1. Starting Out: once a founding team has been assembled, the next step is to create a prototype version of the new product. After funding the startup, the founders use the money they’ve raised to build a minimally viable product that works and is available for customers to try out. This is the 1st step in making their product better by getting customer feedback.
2. Gaining Traction: after the startup has completed its initial product launch and marketing activities with the seed capital provided by the investors, it’s able to attract seed funds and the attention of VC and angel investors, who will likely provide additional funding to enable further growth.
3. Full Steam Ahead: once a company has adapted its product to meet customer needs the product shows signs of scaling up, it’s time to put together a more formal business plan, hire experienced managers, and build a scalable system.

How To Value A Fintech Startup: Valuation Methods

1. Scorecard Valuation Model: This starts by estimating the average valuation for similar companies. Then, a target company is evaluated according to parameters such as debt to equity.
2. Berkus Method: when evaluating a startup’s value based on at least $20M, consider five factors: a sound business concept, solid management experience, an actual product prototype, previous interaction with potential customers, and sales revenue.
3. Risk Factor Summation Method: The following factors should be considered: management, stage of the business, legislation/political risk, manufacturing risk, sales and marketing risk, funding/capital raising risk, competition risk, tech risk, litigation risk, international risk, reputation risk, and potential lucrative exit.
4. Cost to Duplicate Method: one method for estimating the business’s worth is to consider how much it would cost to reproduce its tech and team, instead of looking at the business’s physical assets.
5. VC Method: investors typically create financial formulas to project the future success of their startup investments.

Challenges of the Fintech Industry

Security problems & user privacy, Keeping up with modern technologies, Quality of software, Industry regulations, etc.

Solutions For The Challenges

Implementing innovative authentication processes, Outsourcing application development to experts, and Hiring a legal consultant.