Inside Wave’s bundled revenue model

If the Oxford Fintech Dictionary were searching for the 2016 Word of the Year, one of the frontrunners would definitely be bundle. True, as a word that predates fintech by at least four centuries, it has escaped the nearly compulsory fintech trends of misspelling words on purpose or the adding of rogue capital letters. Nevertheless, this unassuming, rather ordinary English word has played a major role in the epic Bank vs. Fintech battles of 2016. On the one hand, veteran fintech blogger Pascal Bouvier has written compellingly about the unbundling of incumbents as a result of emerging fintechs and about the different ways for banks to deal with the disbanding of their value chain. On the other hand, Bernard Lunn and Chris Skinner have argued that the prevalent trend is actually one of rebundling, of banks integrating fintech into their own technologies to form one-stop-shops for customers. Lunn approaches the issue from a UX perspective, while Skinner is more interested in banks’ ability to respond to real-time fintech developments, but they’re in agreement that banks are driving the rebundling movement. There is, however, a third hand: plain old bundling. Bundling is happening within the fintech ecosystem and without the banks, with payment companies like Square and PayPal launching their own lending services for SMBs. In a sense, if banks are becoming or are trying to become more like fintechs, some fintechs are also becoming more like banks. For Wave, a Canadian company offering cloud-based solutions for accounting, invoices, payments, and payroll, the decision to bundle up was largely based on the need to provide better customer experience. "It was tricky for these business owners even to get support, they would have to go to a third-party to get their answers," said Rob Maurin, vice president of communications at Wave. "Bringing it in-house creates a more seamless experience and [customers] can get their answers all in one place." Wave started offering credit card processing in the U.S. and parts of Canada in 2014, and is in the midst of rolling out an online lending product powered by OnDeck. The company’s bundling of services, however, isn’t just about customer satisfaction. While Wave’s core accounting software is free, the firm's paid services are a source of revenue that, when applied, can have a profound impact on their customers’ financial health and capabilities. "Wave holds all of your financial information. It knows your bank balances, we know who you have invoiced, how much, when they're due, we know how long we take to pay, all of these insights finance and cashflow," Maurin explained. "We can therefore do risk assessment and creditworthiness assessments far better than any other entity has been able to do before." Wave believes that while banks and fintechs may be engaged in a marketshare battle, the real action is happening offscreen, in the markets that are mostly untapped by banks and fintechs alike. The company’s target customers, the microbusinesses of nine employees or less, is such a market. According to Maurin, it costs more for a bank - or even a fintech company - to acquire new microbusinesses than they’re willing to pay. So they don’t. In 2013, a study by the Association for Enterprise Opportunity found that approximately $52 billion worth of business loans are declined annually. According to the AEO, microbusinesses constituted 92% of all U.S. businesses in 2013, which means that as a whole they aren't getting the capital they need to grow their businesses. This credit gap isn’t just a major moneymaking opportunity for companies like Wave - it’s a national disaster. The same AEO study found that microbusinesses employ 31% of the public sector and generate $4.87 trillion annually for the U.S. economy. The fact that Wave’s core accounting software is free has enabled Wave to overcome the costly microbusinesses acquisition process. In fact, all of their signups - between 50-55,000 new businesses each month - are organic. Bundling, however, is what helps microbusinesses get the cash they need and Wave make a profit. "Once upon a time the notion was reasonably straightforward software, and find ways of revenue that generally included advertising - our business has transformed radically," Maurin explained. "We still 100% believe in our approach of offering our software for free, but the revenue stream to our company comes much more from the services side of things, from connecting the services that the small business owner needs to financial services."