March 31, 2017

Last month, Tommy Nicholas (co-founder of Alloy) wrote a great article on the need for fintech to innovate on the business model. While it is a short (10 minute) read, I wanted to summarize it here.

An aside for you bankers – if you have a need (and you do!) for automated identity verification for your online channels, reach out to the Alloy team via their website or Twitter @tommyrva. This is the best solution I have seen so far, and your fintech competitors are using it to move faster than you are…

As I have written about before, we are in the middle of a pivot for the fintech industry, as most startups have found that they cannot come in and quickly “unbundle” the banks thanks to the regulatory protections. This is why we have seen almost no innovation, especially in the US, around the core checking/savings products at the center of a customer’s life.

Tommy argues that it is not enough for startups to build a new/better product, but they also must tweak the business model to effectively compete. While this includes the commonly-referenced digital distribution and lower cost structure, it also requires examining the entire value chain and rethinking where, how, and from whom you add and extract value.

The traditional business models in consumer financial services are: Lending/Interest, Fees/Retail Banking, Assets Under Management/Advisory, Interchange/Payments, and Commissions/Brokerage. Tommy proposes three different models he thinks may hold value: Subscription, Direct Commerce, and Data. The marketplace lending model was also a new business model for lending, though common in other industries.

As my own example, the traditional model of merchant payments processing (supported by interchange fees) is being attacked by the Subscription model by Fattmerchant. Instead of confusing and opaque payment processing bills with variable costs, markups over interchange, and ancillary fees, Fattmerchant offers a flat monthly subscription rate, with no markups over the credit card interchange. They looked at the existing business model and chose the key areas where they could innovate to create better value for the customer.

Tommy gives a few more examples to illustrate his points, but the overall charge is clear: serious contenders in the next version of financial services will have to take the step from building product to more strategic thinking on how to reinvent their business model.

Venture Capital for Online Lending Thaws
Upstart, an online consumer lending platform, has raised over $32MM in funding in a Series D round. While Upstart raised money every year from 2012-2015, the lack of a new round last year seems to fit with the slowdown the industry had as a whole. In addition, Upstart is starting to explore licensing its software to banks and other lenders, following suit as many others in the industry pivot from B2C to B2Bank models.

Band of Bankers Back Kensho
Kensho, a provider of advanced analytics and intelligence for capital markets, has raised $50MM at around a $500M post-money valuation. S&P led the round, and announced a strategic data and product development partnership, while other strategic investors such as Goldman Sachs, Morgan Stanley, Wells Fargo, JPMorgan, and Citigroup filled up the round. Kensho is less than four years old and is quickly ascending the ranks of fintech startups

Lidya opens more banking access for Nigeria
Lidya, a Nigerian mobile banking/lending startup for businesses in Africa, has raised $1.25MM in seed funding. I got to meet the company last year at FinovateFall, so I am glad they have been able to continue to get interest given the lack of a huge banking infrastructure in Africa. Back then, they had 800 businesses who had registered, and their latest press release says they now have 20,000 registered businesses.