Fintechs make most of their money through subscriptions, third parties and advertising.
Since most fintech companies are at earlier stages in the business, many of them focus on growth rather than being profitable. That’s why you’ve got companies like Monzo that have been valued at over $2.5 billion and the most valuable fintech startup, N26, at $3.5 billion — but they aren’t profitable. Neobanks that are at a later stage are already turning a profit, such as Starling Bank and Revolut.
Many don’t understand how the fintech business model works, and many doubt that it’ll ever work. But in actual fact, it varies from fintech company to company. Here are the main ways Fintechs make their money. 💸
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Fintech categories
Eventually, fintech companies will need to turn a profit. How? Well it really depends on what they do.
Dashdevs categorises Fintechs into 7 categories:
- Budgeting, money management
- Crowdfunding
- Crypto
- Insurance
- Lending
- Payment
- Robo-advising
A revenue model is based on: who pays, the payment structure and how it impacts the consumer. The main challenge is to get the business making money all while supporting the company’s mission and vision.
Although the most mainstream fintechs may be neobanks such as Revolut and Monzo, there are many other fintechs out there making money in different ways. Here are the main ones...
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1. Subscriptions/Fee
Nice and simple: the money comes straight from the consumers themselves.
Every month or year, the fintech company bills the user a certain amount for their services. This is a useful monetisation strategy since free trials offer the user an opportunity to “taste” your product before going all in.
It’s pretty straightforward and it’s also pretty popular. Many Fintechs use this approach, such as Tandem (notoriously), Revolut and others.
The other strategy which is commonly partnered with subscriptions is a flat fee, also known as a “transactional approach”. The firm makes money every time there’s a fund transfer. For example, Transferwise charges between 1% to 4% every time you make a payment overseas (although it’s free if it’s another Transferwise account).
So how does a company like Monzo make money? Both through subscriptions and transactions. Every time a Monzo user pays with their Monzo debit card, Mastercard or Visa (in this case Mastercard) charges the merchant (Lidl, a coffee shop, wherever you’re buying) a small percentage for every transaction (that’s why some merchants don’t accept card or have a minimum card amount). Monzo takes and keeps a small piece of that transaction for themselves.
It’s not much, and that’s why Fintechs need to focus on growing in order to have millions of users and make it worth it. On top of those small percentages they keep, the fintech company may do subscriptions or adopt one of the revenue models below.
2. Robo-advisors
We’ve taken a look at neobanks, now let’s look at robo-advisors.
Robo-advisors are a type of platform that allows users to trade on the stock market paying incredibly low fees. The user doesn’t need to pay for investment advisors since the platform uses algorithms and machines to manage portfolios. Examples of companies like these are Betterment, Robinhood and Moneyfarm.
How do they make money? Like investment managers, they also charge a certain percentage of total assets. The difference is that it’s much cheaper. Investment managers can charge 1% or more, whereas Betterment charges 0.25%. Overheads are lower since robo-advisors use algorithms that automatically allocate, manage and optimize assets.
Therefore, more money for them. 🤑
Robo-advisors are a great way for a company to make money thanks to the low overheads. We’re seeing more and more Fintechs offer robo-advisors in order to increase revenue (see: Revolut).
3. Third parties
This seems to be the most lucrative and least time intensive revenue strategy for Fintechs.
Fintechs integrate with third parties that offer value in some other way to customers. Examples could be a credit scoring tool, health insurance, accounting services and more.
It’s pretty straightforward: the Fintech reels in the customers, directs them to the third party and the third party offers a percentage of their revenue to the Fintech. An example of a company rolling in money from this strategy is Coinbase. They’re a marketplace for buying and selling crypto. Thanks to their partnerships with Expedia, Dell and others, they can enable bitcoin payment functionalities with Paypal and Stripe. Mo’ money for them.
The Oliver Wyman paper reports that only 26% of total Fintechs rely on third party beneficiaries, but that nearly 43% of the mass market solutions ones (the budgeting and savings tools) use this revenue stream. There’s a huge opportunity here because financial services can literally be integrated into everything: governments, universities, schools, insurers and more. And with invisible payments soon being a thing… just imagine!
4. Advertising
One of the oldest forms of monetization is simply putting ads up and selling your users attention to other companies. This is a model that works because users don’t need to pay money to use your services - instead product owners sell customers’ attention or data to advertisers and business partners. These customers can also invite friends or relatives and encourage more users to join through referrals.
An example of this working is NerdWallet, a website that offers advice, information and tools to help people make financial decisions. They make money from ads and also from partners for reviewing and promoting their products.
You may not have seen many Fintechs with ads on their websites or apps (thank God!), this is because they mainly focus on referral arrangements rather than advertising - offering bonuses for signing up a couple of friends. Hopefully we won’t be seeing ads any time soon!
5. Data?
In this current information age, data is more valuable than gold.
One of the reasons some Fintechs are so successful is because they are able to gather data and offer a more personalised service to users. Fintechs are able to see what people are spending their money on, when they receive their salaries and who their favourite merchants are. This data is gold, and can also be a sweet revenue stream.
Just think about the huge amount of data Big Tech companies such as Google, Facebook and Amazon have. And once they enter the financial services industry… that gold turns into diamond! 💎
As the website LendFoundry states, Big Data is a huge asset. However, “the gap between Big Data and monetizing it requires careful strategizing and planning”. Companies should be focusing on enhancing their data economically, whether through upsells or cross-sells in order to make it even more valuable.
More and more Fintech and tech companies are taking on this strategy as an income stream. An example would be the budgeting app Yolt. The app has a ton of data on people’s budgeting habits. That’s incredibly useful data to third parties such as credit score companies and banks. Yes, it’s creepy, but you did sign that T&C before joining… 🙄
6. APIs?
Thanks to Open banking, APIs not only allows data to flow more securely, but it also offers the opportunities for companies to build products through partnerships. With Open Banking, Fintech A has built a pretty cool feature and could now sell it to Fintech B with an API.
The new revenue model means Fintechs could sell licenses and code. A collaboration might mean growth in revenue for all partners involved (including the big banks). Who’s going to build the apps and interfaces so companies and financial institutions can share customer data securely? Whoever that is, they’ll be making a pretty penny. 👛
As FIS Global’s white paper suggests, “This area is fertile ground for productivity-improvement, driven by new APIs.” Since Open Banking is pretty new and this revenue model is still pretty new, I put a ? - but I do believe more and more Fintechs will be adopting this strategy to increase revenue.
This is also how Banking-as-a-Service comes into play: fintech companies can charge retailers and other companies for using their banking infrastructure, which is another source of revenue. It’s an interesting development that will play out in the next few years.
Are fintech companies profitable?
The short answer: yes.
In fact, most fintech companies in Asia and the US are profitable because they can rely more on interchange (the fee that merchants pay card companies like Visa/Mastercard in order to accept card payments). The issue of profitability is mostly in Europe and the UK, where interchange is low and therefore fintech companies need to rely on other sources in order to grow revenue.
So there you go, six different revenue models for Fintechs to make money. Some Fintechs stick to one, some will adopt several and some will adopt all. Are they working? It seems that for some companies it does, such as for Zopa and Transferwise. And although everyone is making fun of the neobanks for not even breaking even, maybe there is hope if they adopt more of the strategies explained above. 💪
Sources:
- Report: Breaking New Ground in FinTech
- White Paper: Revenue Opportunities Created by Open APIs
