Partner

Can fintech’s mono-solution providers survive?

close

Email a Friend

by Mike Storiale, adjunct professor, Rabb School of Continuing Studies, Brandeis University When financial technology began its ascent, single-solution providers like Simple and Lending Club opened the door to expertise and simplicity rarely brought to the table by traditional banks. Solutions designed to meet unique needs created excitement from consumers and investors alike. Throughout the industry, experts discussed the need for banks and fintech providers to offer an open architecture that would empower customers to build a set of financial solutions that worked best for them. As the industry matured, however, it became apparent that a more rudimentary problem was holding fintech back – a balanced business model. Over the past 25 years, we’ve witnessed the rise and fall of innovative companies that created a single solution with little diversification. The dot-com crash in the early 2000’s was full of well-intentioned problem-solvers who built great organizations, but lacked the contingency plan a balanced product offering affords. They were flying high without a net. Customers are finicky The mono-solution business model that most fintech companies chose excited customers who could relate those products to specific problems they felt their banks were not solving. When early entrants offered a better way to send money and alternative lending options, as well as simpler checking accounts, they seemed attractive in an industry that traditionally ignored outcries from its customers for better products. Moreover, customers had often been plagued with the decision fatigue that came with traditional banks’ offerings –multiple variations of each product– few of which fit anyone perfectly.   But while consumers were willing to try new products that fintech startups brought to the table, they remained reluctant to leave the mainstream banking system for a new financial lifestyle. For banks, this gave them the opportunity to win customers back as they developed complementary products to compete with the innovators creeping in on their space. Even though research showed that few consumers ever felt “warm” with their bank, often ranking them just slightly less hated than airlines and cable companies, it was difficult to leave the one-stop-shop that was completely intertwined with their everyday lives. Though cobbling your perfect financial offering together sounds utopian, for most consumers it was simply more work than they were willing to take on. A risky model While the boon of the early years may make some think otherwise, fintech is not immune to typical business risks. One of the core rules of business is to diversify your product offering to protect yourself.  However, when we begin new technology ventures, we often believe that we will be able to succeed on a single solution. Fintech’s rise began during a time filled with historically low interest rates, massive changes in regulation, and a consumer base willing to try new things. While this opened the door for success, it also meant that it mattered less if a startup’s balance sheet was diversified enough to withstand market fluctuations, because fluctuations simply weren’t happening. Solutions that focused on lending to consumers outside of the traditional market didn’t have to experience the risks of a volatile rate environment. As the inevitable becomes reality, however, speculation circulates as to whether an unbalanced offering can withstand the storms the financial industry often faces. In addition to market risks, the gap is narrowing in the “tortoise and the hare” race between fintech startups  and Bank’s. Even the smallest banks have begun investing money into innovation, while the ones with significant capital have started entire technology hubs and enacted strategies to acquire their biggest tech challengers. Although big banks continue to face regulatory scrutiny of their core business model, they have evolved and learned how to innovate, catching up in the race to grab customers with products that differentiate themselves. At the same time, fintech companies are finding it difficult to maintain the minimal regulatory oversight that enabled the rapid growth seen in the early years of innovation. Last month, SoFi filed the paperwork to obtain an industrial bank charter, opening the door for the online lender to offer the same core banking services as its mega-bank counterparts. SoFi’s bold step is not the approach taken by all fintech companies, but many continue to look for partnerships with more full-service financial companies to ensure revenues continue to flow, even if their core business falls out of favor. The tipping point The outlook for the next five years in fintech growth may closely trend with the growth in new bank charters. While de novo bank growth stalled after 2008, the up-tick in 2015 and 2016 highlights startups that believe they can become successful hybrid organizations; part bank, part fintech. Still, taking the hybrid path isn’t without its own challenges. Stringent capital requirements, intense regulatory oversight, and the difficulty of growing a balanced product mix can make it unattractive for entrepreneurs and investors alike. Mono-solution providers should evaluate the future of their revenue stream to determine if diversification can help mitigate their risks in a changing market.  If they are able to take their innovation into new, multi-service arenas, we can expect to see unprecedented growth in the industry. Mike Storiale is an Adjunct Professor at Brandeis University’s Rabb School of Continuing Studies where he teaches a graduate course on the global economy and the emergence of fintech.  

0 comments on “Can fintech’s mono-solution providers survive?”

Partner, Podcasts

‘Getting the model right’: How Regional Finance balances customer-centricity and fraud prevention in digital lending

  • In this episode of the Tearsheet Podcast, Regional Finance explores credit modeling in the digital lending landscape, focusing on the balance between serving customers and preventing fraud.
  • We speak with Chris Martin, head of product management at the $1.5 billion consumer lender, and with Argyle's Matt Gomes, who leads the firm's data and tech efforts in banking and lending.
Zachary Miller | September 21, 2023
Partner, Payments

The opportunities and evolution of the consumerization of B2B payments

  • B2B payments are slowly but surely following in the footsteps of consumer payments, becoming faster and more secure.
  • Visa, with solutions like Visa B2B Connect, is leading the way in streamlining cross-border transactions and improving efficiency, enhancing the business payment experience.
Darren Parslow, Visa | September 18, 2023
Partner, Podcasts

Navigating the future of digital banking: A conversation with Deloitte’s Nick Cowell

  • Join Nick Cowell, Deloitte Partner, as he discusses the digital banking landscape in North America and how traditional banks are adapting to meet evolving consumer demands.
  • Explore the changing dynamics of the banking industry and learn about the rise of digital neobanks, evolving customer expectations, and the critical success factors for incumbent banks in a digital-first world.
Zachary Miller | September 14, 2023
Partner

Empowering people and connecting communities through remittances

  • The remittance industry has evolved, reaching $800 billion in 2022, benefiting immigrants and their families with near real-time, transparent transactions.
  • Digital remittances, supported by Visa Direct, offer cost-efficiency and financial inclusion, but infrastructure challenges in some regions persist, highlighting the need for wider participation in building global digital networks.
Visa | September 13, 2023
Partner

Temenos: How SaaS for BaaS is putting banks back in charge

  • Many incumbent financial institutions fail to capture the BaaS opportunity, because of constraints imposed by their legacy monolithic IT architectures.
  • Temenos’ open platform for composable banking caters to an array of use cases. From product engines and financial crime, to payments and origination that enables banks or license holders to not only run their own business but also provide BaaS to brands with the same underlying platform.
Temenos | September 12, 2023
More Articles