Fintechs use partnerships to speed up implementation and offer a variety of solutions to its customers. Part of the Fintech revolution we are seeing is based on these partnerships, with the unbundling of banking processes and their provision as a service, using the provider’s bank license, infrastructure, and relationship with regulators. This partnership is known as Banking as a Service, or BaaS.
The BaaS model allows for any business to build a financial brand and embed financial services into its customer experience, as shown in the illustration. But while this makes it easy to build and start a Fintech business, it is important that the company keeps control of the customer experience and ensures that specific requirements are incorporated in the systems, regardless of how many services are outsourced.
There are other established forms of partnerships such as white labels, or distribution contracts, and other partnerships customised to each case, where one company uses another company license or service with specific contracts. This is normally remunerated through commissions.
Such practices are very particular and intense within Fintechs and are enabling many new companies and solutions to grow with no deep investment. This enables a fast-learning curve. As a result, new entrants both small and large and including Mobile Network Operators and social media businesses.
Normally, Fintech start-ups do not have external funding until the pilot, when they will have something more tangible to show to potential investors. So, it is fundamental for you to understand how much money you need at this stage, so you can perform your test of concept and pilot and have a solid proposal to show to potential investors.
To properly budget, the decisions regarding the business model and architecture must be taken into consideration. This means deciding how much will be built internally vs. acquired from third parties, as this usually means a trade-off between higher set-up costs (to build in-house) vs. higher cost per transaction (acquiring from a provider).
There are many ways to have money flowing into your idea, which we will discuss next.
Although the normal steps of a start-up journey apply to Fintech, they may require some steroids, depending on the business model.
The normal funding cycle starts with money from the founders and family to build the pilot and what is called a minimum viable product (MVP) to test the product and proposition with some customers.
Once you have proved that the product works efficiently and there are customers interested in it, it is time to seek external funding to support the growth. This is the stage where angel investors or crowdfunding enter. Angel investors are individuals that use their own money to invest in businesses at an early stage. Crowdfunding is the raising of funds or equity from many people via an internet-based platform. Some Fintech business model funding gets challenging. As the business models often involve subsidising user acquisition, the investment required to achieve a sustainable business model is significant. So, when seeking additional funding, Fintechs try find creative ways to acquire many customers/users to make a case that the target market will accept the concept.
This type of big money funding usually comes from venture capital or private equity firms, and when done properly can allow companies to focus purely on growth and scale without the burden of oversight by public shareholders. However, there are questions of whether the economics of these start-ups can work and if the business model is sustainable.
This makes up a significant challenge for Fintechs, many of which are still not profitable and have a continuous need for capital as they complete their innovation cycle: attracting new customers, refining propositions, and ultimately monetising their scale to turn a profit. When liquidity is reduced, Fintechs find themselves forced to look for ways to reduce costs, increase margins, and find more sustainable growth channels.
Finally, it is important to understand that the funding depends on the level of development of local capital markets. In countries where there is less venture capital available, this will limit or reduce the speed of growth of Fintechs, especially those that are thirstier for funds.
In such scenarios, an alternative is to seek funds outside the Fintech’s home country and even eventually move the headquarters closer to where the funding is. (It’s no accident that many Fintechs from outside the US will try to establish a base in San Francisco or Silicon Valley, close to the epicentre of venture capitalists.)
To help Fintechs raise funds, many specialists can help to prepare the material to be presented to all kinds of investors, from a self-service crowdfunding platform to a sophisticated investment consultant who can help with an IPO. What is important is not to burn money at each step, otherwise you may end up putting in a lot of effort seeking money not needed, as the higher the amount involved, the more complex the process and the requirements for fundraising and management.