Have anyone ever pondered how tech is changing the finance sector? From mobile payments to online lending, we see many fintech companies business models disrupting traditional financial institutions, achieving billion-dollar valuations, and changing the way we perceive and manage our money.
But have you also considered the various business models that these companies are using to provide their services and disrupt the financial landscape?
Well, in this article, we’ll take a deep dive into the world of fintech business models and explore some of the most successful models that are driving innovation and disrupting the financial services industry.
So, whether you’re an investor, an entrepreneur, or an ordinary person who is interested in the future of finance, sit back, relax, and let’s learn about the exciting world of fintech business models.
Financial technology (fintech) is a fast-rising sector which is threatening the old-fashioned financial business. It implies the application of modern technology to deliver banking services and remedies.
The fintech industry is constantly evolving, and fintech companies are using a variety of business models to create a paradigm shift that is said to be disrupting traditional finance industry models, so let’s take a look at some of the different fintech business models, explain how they work, and discuss the benefits and drawbacks of each model.
Types of Fintech Companies Business Models
Firstly, a business model is the approach which a firm employs to produce profit as well as revenue.
It outlines the way that a company creates, delivers, and captures value and includes things like the products and services being offered, the way these services are priced, how the company reaches and interacts with its customers, and how it manages its costs and resources.
Essentially, a business model is the structure to which a firm functions and generates revenue.
Marketplace Model
The marketplace model is one of the most popular fintech company ideas, as it connects consumers and sellers and facilitates transactions between them.
Filter firms using this model act as mediators among consumers as well as sellers, with both parties receiving an income on every deal.
EBay is an example of a successful marketplace-based firm. Now, eBay is a marketplace on the internet that links consumers and vendors and conducts payments between both, it earns commission per transaction.
Etsy is another example of a successful marketplace model implementation. It is an online marketplace that connects purchasers as well as sellers of handcrafted or vintage products. Etsy gets a commission for each purchase completed on its website.
Jumia and Conga, Kilimall from Kenya, and Souk from Egypt are examples of marketplace model fintechs in Africa, with all of these platforms connecting customers and sellers and earning commissions.
Advantages Marketplace Model
1. It is simple to scale since new customers and sellers may be added to the platform with no overhead costs.
2. Because the marketplace concept attracts Sellers from many places and industries, consumers can access a varied choice of items and services.
Disadvantages Marketplace Model
1. The filter behind the platform has limited control over the products and services offered on its platform, as well as very little control over the customer experience, which can result in quality issues that cause users to be dissatisfied or customers to leave negative reviews of the platform’s services.
Payment Processor Model
Another common fintech business model is the payment processor model, which currently offers payment processing services to both consumers and businesses.
Filter companies that utilize this model function as mediators between buyers and sellers, processing payments on their behalf.
Payment processing is the transfer of funds from the buyer’s account to the seller’s account; PayPal, PayStack, and Stripe are examples of fintechs that have successfully exploited this concept.
PayPal is an online payment system that allows individuals to make payments to other consumers and businesses, while Stripe is a payment processing platform that allows businesses to accept payments from consumers.
Both earn a fee on each transaction that occurs on their platforms as a means of generating revenue.
Advantages of Payment Processor Model
1. It is a scalable business model because payment systems can process enormous volumes of transactions rapidly and efficiently, resulting in highly scalable enterprises.
Additionally, the volume process generates a consistent stream of money from the percentages charged as a fee per transaction.
This model also has lower overhead costs than other financial services businesses because it does not require investment in physical infrastructure such as branches or ATMs.
Payment processors can also integrate with other financial services such as accounting software and e-commerce platforms, providing added value to customers.
Disadvantages of the Payment Processor Model
1. The payment processor model is dependent on banks; it typically relies on partnerships with banks to access payment networks, which can create dependencies and vulnerabilities in the business.
Additionally, the payment processor bears the responsibility of risk management, and they must manage fraud and chargebacks on their platform, which is a significant business risk.
Alternative Credit Score and Lending Model
The alternative credit score is a filter designed to assist lenders in determining the creditworthiness of their borrowers by utilizing non-traditional data that is more relatable, current, and easily accessible, such as the customer’s digital footprint.
This business model is useful for fintech companies that want to lend to clients that are not well recorded by standard credit score systems or, in certain situations, are not even included in any financial system.
The lending model, on the other hand, provides loans to consumers and businesses, and lender companies that use this model act as intermediaries between lenders and borrowers, earning a fee on loan disbursements and collections or entering into a revenue-sharing agreement with funders based on the interest income generated.
Advantages of the Lending Model
1. Access to credit is always a subject worth addressing because so many borrowers are unable to receive credit from traditional lenders.
2. By providing cheaper interest rates than traditional lenders, alternative credit scores and lending fintechs can obtain a competitive advantage in the lending industry.
3 By providing credit to underrepresented communities, lending fintechs can help to promote financial inclusion and social responsibility.
Disadvantages of the Lending Model
1. Assessing creditworthiness via alternative data sources carries some risk because the data may not be as trustworthy as traditional sources and you do not have the safety of collateral, which can lead to defaults and additional risk management activities.
New Bank Model
The new bank model is a relatively new fintech business model, also known as the digital banking model, that includes web-based services and a high level of automation, such as generating and integrating APIs that allow cross-institutional services to deliver banking services and financial transactions.
To put it simply, this model provides banking services to consumers without the need for physical branches. New banks operate purely online and use technology to give financial services to their customers.
Chime and Revolut are two fintech companies that have successfully applied the new bank model.
Both are only online banks that offer customers checking and savings accounts, digital wallets, debit cards, and other financial services.
For example, Revolut offers cost-effective international funds transfers and global spending at the interbank exchange rate to attract a larger customer base, so it operates in multiple countries and has millions of customers worldwide.
Advantages of the New Bank Model
1. Lower overhead expenses than traditional banks because they lack the same brick-and-mortar infrastructure and employee requirements.
2. They are more adaptable and agile because they are less constrained by legacy systems and processes, allowing them to respond rapidly to consumer needs and market changes.
3. They can also provide a better client experience through more tailored and digital services.
4. By providing more comprehensive and accessible financial services, new banks can gain access to formerly unbanked and under-banked groups.
Disadvantages of the New Bank Model
1. It has significant customer acquisition expenses because new banks usually rely on digital marketing and partnerships to grow their customer base.
2. It may also struggle to generate profitability in the early stages, making funding rounds more challenging as investors become more concerned about the model’s long-term viability.
Robo Advisory Model
The robo-advising model is a fintech business model that employs technology to deliver investment advice and portfolio management services to clients.
It analyzes customer data using algorithms and artificial intelligence to provide personalized investment advice.
Betterment and Wealthfronts are two successful robo-advisory companies that use technology to provide investment advice and portfolio management services to customers.
Both provide a variety of investment portfolios and charge fees dependent on the size of the client’s portfolio.
Advantages of the Robo Advisory Model
1. This business model is scalable, cost-effective, and accessible. Robo advisory Investment Management fintechs can scale their services quickly and efficiently to a large number of clients because their algorithms and automated systems can handle a high volume of transactions and portfolio management.
2. Because they do not require as much human labor and resources as traditional investment managers, they may provide services at a lower cost.
3. They can provide Investment Management Services to a broader audience, including people who do not fulfill traditional investment managers’ high minimum investment criteria.
Disadvantages of the Robo Advisory Model
1. The limited human involvement may not be suitable for many clients who prefer a hands-on approach to investment management.
2. Their reliance on technology to supply services makes them exposed to technical faults or cyber assaults.
3. This strategy has minimal market differentiation because fintech may copy the same thing, increasing rivalry and causing poor market differences, resulting in pricing pressures.
Conclusion
Fintech has transformed the way financial services are provided, challenging conventional business models and introducing new ones for marketplaces, payment processors, new banks, and Robo-advising investment management techs.
Fintech business models have brought significant benefits to both customers and fintechs. As we move into a more digital world, the fintech industry will continue to evolve and innovate, creating new business models and opportunities.
As consumers, we can expect even more convenient, accessible, and personalized financial services in the years ahead.