Fintech Startups – Coopetition or Competition? Business Models Are Shifting.

Nov 30th, 2012 | Posted by

I spend a fair bit of time analyzing and following the fintech startup scene. I’ve met and interacted with numerous startups over the years, as well as through industry events like  Finovate and Innotribe. I frequently get very excited by their potential, and what they can bring to the industry. I admire the founders of these firms as they attempt to make their mark in an age old, highly regulated industry, that is slowly but surely adapting to the popularity of digital channels.

Is there a killer fintech startup business model? Here are a handful of models out there that I invite you to weigh in on:

  1. Should startups go after consumers/businesses directly? This is the most popular model, with most firms taking this type of approach. Examples include Square, Simple, PayPal, etc. It’s also one of the hardest models as it’s quite difficult for a newly minted organization to establish a brand and build critical mass on its own.
  2. Can startups be successful at enabling others in addition to going after their core market? This is becoming an increasingly popular model as startups seek out new streams of revenue. It’s particularly popular in the payment space as it allows for a potentially increasing stream of transactional revenue. This is done by offering something like an SDK that others can build on. Examples include card.io, Stripe, etc.
  3. Is the name of the game to simply use financial institutions as a distribution channel?  Some startups take this route right out of the gate (e.g. MineralTree, Cardlytics, etc.), while others pivot to this model (e.g. Social Money, Bill.com, etc.). Finally there are startups that simply fall back on this model once they realize that they have been unsuccessful in models 1 or 2. While it sounds great to use a bank as a distribution channel, it can be a frustrating experience given the very long sales cycles typically encountered with financial institutions. Burning cash while attempting to close a deal with a bank can be a tough pill to swallow.
  4. Can a startup have it all by tackling all three of of the models ? It’s possible but it can also spread a business, particularly a newer one, dangerously thin

Finally, what does all of this mean for financial institutions? How do they get involved in industry disruption? Celent firmly believes that banks should dedicate efforts towards not only innovation, but disruption. It’s a necessary part of competing, and has to be led and sponsored by senior management. Most banks need at least a handful of projects that  are disruptive – that’s no easy task since managing technology and culture change is never a quick fix.

What do you think? How should startups approach the market? How can banks play a meaningful role in the digital world?

 

  1. JP Nicols
    Dec 1st, 2012 at 01:40
    Reply | Quote | #1

    Great post, Jacob.

    I have been thinking about these things too, and for some of the firms and investors I have been working with I am starting to see a definite tilt towards enterprise solutions, either as a white-label solution or as add-on features. For the most part, I think this makes sense for a lot of FinTech startups, especially in light of the difficulties you correctly cite in option #1. It is already a fragmented and noisy business.

    That’s not to say that the enterprise route is easy either. As I wrote in a blog post recently, changing the world is hard. Bank IT departments take a little longer.

  2. Olivier Berthier
    Dec 3rd, 2012 at 02:30
    Reply | Quote | #2

    +1

    Acquisition and reach is always harder than one thinks and, in my book, very often a key factor totally underestimated by young startups focusing on a pure consumer-oriented functionality and go-to-market strategy. Winning crowds in financial services is even harder for fledging startups considering the need for trust, security, resilience and stability expected by consumers when it comes to their wallet. So yes, sales cycles are long and procurement departments are tough, but banks offer that reach and allow the startup to generally focus on what it generally excels (innovation, tech, new engagement models) while getting their small sales force to target a more manageable market in size.

    Oh and did I mention that “enterprise is the new sexy” anyway?

    Most of the activity we see out there looks at consumers and some form of personal finance play (whether the distribution channel ends up being direct or via a financial institution). There’s still so much to disrupt beyond consumers in the SME and corporate banking space, not to mention the banks’ internal information systems as well.
    Looking forward to that next wave of financial services startups focusing on the enterprise space.