Time to create
Fintech is becoming a powerful force. Last year $2 billion went into the industry. Some have proclaimed fintech is everything and everywhere.
This misses a key subtlety: not all fintech is created equally. Like all innovation (and as I argued in my recent book: Out-Innovate: How Global Entrepreneurs – from Delhi to Detroit – Are Rewriting the Rules of Silicon Valley, HBR Press) some entrepreneurs disrupt while others create.
Fintech, when done right, can create entirely new product segments or markets. It can address needs in better or lower cost ways and align interests between company and customer. As it scales, this kind of innovation doesn’t just build large businesses – it can deeply impact customer lives.
Below, we’ll explore four example of this phenomenon and recommend practical principles for new entrepreneurs to become creators.
1. Home purchasing
Historically there was one way to finance a home: a traditional mortgage. Of course, there are variables that allow for some customization such as the amortization period, interest rates and interest locked periods along with home equity lines of credit (HELOC) and other refinancing options to name a few. However, these models don’t solve key pain points for many current or aspiring homeowners.
For a majority of Americans, their home is the only source of savings. This is a highly concentrated portfolio but an illiquid one for those in need of cash. For instance, more and more seniors are faced with needing to leave their home to pay for healthcare costs or at-home support, requiring money that is inaccessible because they are ‘house rich, cash poor’. And for new home purchasers with insufficient savings or credit histories, the prospect of purchasing a home may be impossible to begin with.
Enter fintech. New players like Divvy or EasyKnock partner with would-be homeowners in exchange for equity in the home (sharing a certain percentage of ownership, appreciation or potential downside) to help bridge the down payment gap. Others like Hometap help existing owners access their capital. Many of their customers have limited cashflow (e.g., seniors) so the investment is interest free until exit, up to a decade later, allowing them to access capital in the short term and pay back on their schedule. These approaches are poised to change the game.
2. Funding startups and SMEs
New products can be created in a variety of industries. We’re seeing this revolution play out right now in financing startups and small companies.
Startups face a challenging cash cycle. At the beginning, early-stage companies have low (or no) revenue but are spending to invest in the future. Bank loans, which require personal collateral, are often unappealing. Venture capital is the traditional vehicle to bridge this gap, where founders sell part of the company to access capital.
The problem is that venture capital is not a fit for every startup. Some startups are not growing at the right pace to excite a venture capitalist. And for those that are scaling fast, venture is an expensive source of funding, not well suited for all types of spend.
A growing cadre of innovators are developing revenue-based financing as an alternative. Companies like Clearbanc offer short term structures for startups to invest in predictable customer acquisition spend, including over platforms like Facebook, which can be a poor use of expensive venture capital. The cash can be used as an alternative to or a complement to venture capital to fund profitable growth. In the SaaS world, others like Capchase and Pipe are building similar funding mechanisms.
3. Embedded finance to create products where fintech is a feature
Fintech can also create entirely new product categories. One mechanism I’ve explored previously are embedded fintech strategies.
A financial product can be embedded into other products to change the nature of, availability and engagement model with customers. Companies like Opendoor give customers the ability to make cash offers for homes to make them more competitive. Boost allows companies to launch insurance products and bundle them into a broader offering.
Zola bundles loans and mobile repayments with Pay-As-You-Go financing to unlock demand for home solar systems in Africa. Without the built-in financing, the systems would be unaffordable making the loan a core piece of the business model, rather than a feature. Similarly, many boot camps engage in income sharing agreements – rather than charging tuition, the program is repaid through a percentage of future earnings for a set period of time.
Finally, players like ZhongAn have created fully automated insurance built into products. For instance, in a partnership with a telephone provider, they can automatically detect a broken screen. With that information they can automatically file a claim and issue a replacement – by the time the phone is picked up off the ground, a replacement can be in the mail.
4. New business models rethinking current products
Fintech solutions can also create new offerings by aligning incentives through the business model – which is particularly effective in reaching populations underserved by incumbents.
Sidecar Health (a Cathay Innovation portfolio company) is a perfect example. They offer healthcare insurance and are creating the cash-based market. By offering a fixed reimbursement for procedures, and providing tools like a map of cash prices and a card to automate spending and reimbursement, customers can better understand their coverage and shop around for the care they need – allowing them to spend on what they want wherever they want. Because interests are aligned, the company can manage loss rates.
Chime (also a Cathay Innovation company) revisited the banking model for the underbanked in the US. But the way they make money is where they shine. Chime offers a free bank account with no surprise charges like overdrafts or monthly payments. The way they win is when customers win – debit interchange – when customers use the app.
Robinhood similarly revisited the broker business model. Their account is free and highly engaging. They monetize on multiple fronts including order flow, not through transaction fees, and were early in offering fractional shares — allowing anyone to purchase even small increments of companies regardless of the stock price (e.g. Berkshire Hathaway BRK.B -1.3% is valued nearly $400k).
In all cases, these companies revisited the core product offering and business model to better reach underserved populations to scale.
So how does one put this into practice?
Creating categories offers a fintech the opportunity to lead. While the road is harder, the prize can be much larger. The actual tactics fintech leaders should embrace will often be germane to their industry, vision and geography. However, a number of principles can be used to succeed.
1. Listen to your customer’s problems: to discover new categories, understand your customers deeply.
2. Don’t start with a product in mind: instead of thinking about how to shoehorn an existing product into a customer segment, start with first principles.
3. Fintech is highly regulated, and Creators by nature are doing something new. One way to get ahead of the game is to engage. In some markets, models like regulatory sandboxes can facilitate.
4. Build a product with aligned incentives: as we have seen, a road to success is aligning incentives – the “one for all, all for one” mentality between company and customer can be a powerful force.
5. Think about the mass market, not just the top of pyramid, to build a product which will be accessible for all.
The future of fintech, particularly for the largest and most successful players, involves creating markets. This means offering a product or service that doesn’t just incrementally improve a solution, but fundamentally rethinks it.
What will you create?
I invest in, write about and teach global entrepreneurship and fintech. I am a venture capitalist with Cathay Innovation, a global fund that invests across North America,