FinTech Guide for Founders and Startups (Pt. 1)
Despite the availability of modern technology, an entrepreneur’s journey (from idea to program launch) is highly complex.
For founders focused on some part of financial services (advice, payments, accounts, cards, lending, etc.), this path involves financial technology (FinTech) and innovating a legacy manual banking experience OR expanding product access to a user group. ‘Unbanked’, ‘credit invisible’, immigrants, gig workers, and newly incorporated small businesses are examples of underserved demographics that fintech startups target.
For many early-stage teams, this may be their first time launching a company & product from scratch. A background in financial services may be missing, having worked in a purely technical or non-banking operations role. When it comes to buiness planning and execution, founders wear multiple hats — strategy, product, business operations, marketing, etc. Resources, funding, and timing are all constraints in crucial decision-making and momentum towards a minimum viable product (MVP) and early success.
From 500+ discussions with startups in the last 4 years, we built an all-in-one resource for founders & early-stage teams. Part 1 (below) of this founder’s guide covers fintech product categories, narrowing to an MVP, and business (revenue) models. Part 2 (to follow in a separate post) focuses on app development, choosing providers, marketing, and growth.
TOP FINTECH CATEGORIES IN ROTATION
The majority of founders start this journey with a challenge or painpoint that they’re trying to solve for (the ‘WHAT’). Improving financial literacy, increasing financial inclusion, simplifying expense & tax management for small businesses — are all examples of what a startup is trying to accomplish.
Since this initial decision determines what road ahead looks like, teams should invest time and research in choosing this ‘north star.’ An entire post can be written on what thesis or problem to target — the common thread for founders is that they personally experienced the same challenge. The focus then shifts to what they will first build/offer (the ‘HOW’) to solve their target customer’s painpoint(s).
When it comes to modern product offerings, the most common categories that early-stage teams explore are:
Personal Financial Management (PFM) — lacking financial literacy, many individuals and businesses struggle to manage finances on an ongoing basis; this broad category covers advice and education for budgeting, spend management, savings, long-term wealth planning. Besides general info, PFM apps can provide custom insights for users based on data from deposit & credit accounts. No money movement or bank account creation takes place on these platforms;
Digital Banking — if there’s a need to transfer funds or make payments, then a wallet or checking/savings account must be part of the offering; these accounts offer similar functionality to traditional banks but through a digital channel (desktop or mobile app). As the market became saturated with digital banking programs, startups began to focus on niche user segments or embedded banking in their existing offering. Neobanks, challenger banks, peer-to-peer (P2P) wallets are all part of this category;
Trading & Investment — the latest technology (in artificial intelligence, machine learning, blockchain) is opening up alternative and long-term savings products for mass market customers; from bundled stock portfolios, self-directed investing, to purchasing shares of alternative assets, new platforms offer more market data and choices regardless of demographic. Cryptocurrency, robo-advisors, IRA and HSA providers are in this category;
Lending — access to credit is a major opportunity globally, especially for consumers & companies that lack credit profiles or requirements in being approved by traditional lenders; many users live paycheck-to-paycheck and need help with short-term cash flow. Fintech lending via micro-loans, cash advances, credit builder credit cards & loans are part of this group for consumers. Invoice factoring, receivables financing, equipment loans are common products for businesses;
Insurance — the newest category in this list, tech-savvy startups are modernizing this traditional business sector with faster onboarding, enhanced user support, and low user fees (leveraging AI in underwriting premiums); combined with fintech, InsurTech continues to grow as its own sector — addressing affordability gaps in health, life, and business insurance coverage;
The argument can be made that cryptocurrency should be its own category. Going back 1-2 years ago, I would agree with this sentiment — however, many of its top applications (staking, high-yield deposits, peer-to-peer trading, merchant payments) are no longer viable in this regulatory climate. Many crypto processors are also struggling to maintain bank partner relationships. In this ‘crypto winter’, overall demand in new programs subsided based on lack of foundational support from infrastructure providers.
Once a startup narrows down the program category, a founder can focus on attracting a target user base by developing their unique value proposition (aka ‘differentiation’) AND business (revenue) model — both showcased in their MVP.
getting to Minimum Viable Product (MVP)
In today’s mixed climate of economic uncertainty, angel investors and venture capital funds hesitate to invest in new platforms lacking customer traction. Gone are the days of growth at any cost. The critical priority is to deliver an initial product (MVP) to customers rapidly and iterate based on feedback. Insights gained from users ensures your team is directionally accurate and addressing a key challenge.
Founders should easily communicate descriptions of target users (characteristics & painpoints) and how they plan to acquire these users. This foundational understanding of customers will be represented throughout their new platform, but most importantly in user experience (UX). When executed at a high-level, UX builds trust with clients, communicates value, and creates a compelling user impact.
Here are common missteps to avoid in narrowing down the MVP:
Miscalculating the characteristics or market size of your target user;
Poor estimates of anticipated user activity (i.e. monthly deposits, card spend, etc.) which can throw off business models;
Prioritizing non-MVP tasks, such as marketing & hiring, before completing user research, projections, and prototyping;
Spending a few more weeks to solidify user case studies, feedback sessions, and market reviews goes a long way towards a robust MVP with a strong revenue model. This also minimizes the risk in spending resources on building a solution that fails to solve a significant challenge for prospective clients.
CLEAR & SUSTAINABLE BUSINESS MODEL
A major component of all new ventures is monetization. How does your product or program make money? Is this revenue stream sustainable? What do monthly unit economics look like on a per user basis?
Most revenue generation in financial services (for non-banks) comes from the following areas:
Transaction activity — platforms facilitating transactions (e.g. remittances, bill payments) can charge a fee; in holding user deposit balances, monthly interest revenue (rebates) accrue for fintechs; for startups issuing cards, interchange revenue (generated from merchants everytime a customer swipes to make a purchase) is a main revenue driver;
In consumer-based programs, there’s typically a higher volume of users (individuals) with lower transaction activity (such as spend or balances);
For business banking, the opposite is true — lower volume of business users with higher monthly activity;
Monthly subscription fee — many programs start out by delivering a software-enabled product for users (e.g. tax reporting, payroll, expense management, budgeting, credit monitoring), and then add a banking services component. Subscriptions are attached to different tiers of a program — the premium tier often bundling the most activity and highest monthly fee. For users who rely on these services to manage finances weekly, the fee is part of their budgeted costs;
Subscriptions are becoming more common for consumers interested in unsecured lending & advances, but not so much for deposit or card-only programs;
If a subscription reduces the need to hire a full-time payroll provider, HR firm, vendor, etc. then a business user would be all for it;
Referrals — platforms can advertise for other companies through recommendations, referrals, and partnership models; for every user that signs up to purchase a product (such as insurance or loan), a fintech receives a flat referral fee as revenue. A popular path is cashback rewards — fintechs set up a program with users purchasing from merchants at a discount (i.e. 2% - 10% cash back), and then keep a portion of the revenue. Kard is one of the well-known merchant network programs in this space.
With this discussion of MVP and business model, many companies are also focused on an embedded distribution model in which financial services complement an existing offering on their platform. Examples include merchant marketplaces and payment processors offering a bank account, or legaltech firms (who help entrepreneurs register a business with a state/county) offering additional accounting & banking services.
The newest area is insurance — non-bank and fintech firms can offer referral opportunities to existing users looking for custom business, cyber, home, renters, or life insurance (and earn revenue in the process). This especially blends well if the primary product or service from the startup is associated with an insurance need — vacations + travel insurance, new car + auto insurance.
Fintech Founder’s Guide - Part 2 (BAAS Providers, App Development)
With this foundation of product category, MVP, and business model in place, we can now focus on the ‘build out’ of the platform. This starts with front-end development (typically an app) that is a user’s first interaction with your program. Marketing drives potential customers to your app or site, and conveys the value + differentiation of your offering. Growth efforts are focused on deepening early customer relationships and scaling your platform successfully. We’ll cover these topics in the 2nd part of the FinTech Founder’s Guide.
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