From opening accounts to insurance underwriting and credit profiling, FinTech startups are piggybacking on the various services of traditional banks and flipping the conventional business models in the financial industry.
With heaps of venture capitalist money flowing into the FinTech ecosystem, “challenger” banks are threatening to wipe out banking behemoths faster than Blackberry was taken out of the cellular telephone market.
Let’s look at 10 innovative FinTech business models that are leading the path of disruption.
1. Alternative credit scoring
Many self-employed people with a steady source of income do not pass conventional bank loan screenings due to strict and outdated credit scoring criteria. Credit rating FinTech companies such as Nova Credit are taking a new approach by considering alternative data points like social signals and percentile scoring amongst similar borrower groups. All these qualitative factors combined with an intelligent and self-learning algorithm can lead to better lending decisions over time. For example, if there is a way to determine negative profiles based on social presence before loan disbursement, then a lender can avoid having to deal with loan recovery.
2. Alternative insurance underwriting
In today’s world, two individuals with the same weight and height, both non-smokers and who don’t drink alcohol will be given the same life insurance premium. However, one person might be an exercise freak, while the other might be a couch potato and more likely to die of diabetes. These faulty premium calculations happen because of averaging out (called normalizing in actuarial terms) as risk premiums currently don’t account for factors that aren’t quantifiable.
As with alternative credit scoring, FinTech companies such as Carpe Data are building variable premium computing mechanisms with alternative data points such as social signals, lifestyle, and medical history. Combined with intelligent and self-learning algorithms, these InsureTech companies can determine whether or not to give insurance, provide different terms and conditions, and offer alternative payment options (for example, co-pay options).
3. Transaction delivery
4. Peer-to-peer lending
Peer-to-peer (P2P) lending is when an individual borrows money from other individuals. Similarly, peer-to-business (P2B) lending is when a business borrows money from one or multiple individuals. These lending models are making it easier for investors to get better returns than those offered in debt markets by giving their money to pre-approved and vetted borrowers. FinTech companies such as Funding Circle create platforms to match borrowers with lenders and usually take a fee from the borrower’s repayment.
5. Small ticket loans
Banks and other lenders typically don’t want to underwrite smaller ticket loans because of the low margins and high costs involved in setting up and recovering them. FinTech companies in this slice of the market (such as Affirm) are delivering impulse buy mechanisms (buy now & pay later, or BNPL) and one-click buy buttons on e-commerce websites to enable customers to buy quickly without having to enter any form of authentication or credit card details.
These loans will typically be underwritten at 0% interest so that almost anything can be purchased outright with the option to pay in instalments. How is the money made? By sharing customer data with the original equipment manufacturer (OEMs) as they will benefit the most from the increased affordability of these devices. Combining this with algorithms that will determine customer demographics ensures highly-customized marketing offers. Think of sharing of your data with them as the interest on the loan.
6. Payment gateways
Payment gateways are platforms that enable shoppers to pay for a product or service on a merchant’s website. Today, there are countless payment methods such as debit cards, credit cards, digital wallets, and cryptocurrencies. Typically, banks charge enormous fees to handle transactions from all these different methods, but FinTech companies are integrating all of these payment methods into convenient apps that online merchants can easily afford and integrate on their website. Typical users of these payment apps would be businesses selling either their physical products or services to end users, ex. Stripe, Alipay, iZettle.
7. Digital wallets
Digital wallets can be seen as a combination between a no-frills bank account and a payment gateway. With this business model, a user can pre-load a certain amount of virtual money into their wallets and use this virtual money to make either online or offline transactions with merchants who accept digital wallets as a payment mechanism.
A digital wallet business model typically involves giving users the convenience of making payments for a small fee that is typically charged to businesses in the form of a merchant discount rate (MDR) and via the float that they would make on the money lying unpaid in customer/business accounts. Typical end users of wallets would be businesses selling either their physical products or services in stores to end users, for example Venmo, Square Cash, Google Wallet, etc.
8. Asset Management
Ever heard of buying stocks or mutual funds without having to pay a commission fee? FinTech companies like Robinhood are enabling investors to trade for free in exchange for their data. They forward this data to high frequency traders who can then influence the price of the asset. Even though the investor might pay a slightly higher price for their asset, the difference between the amount they save from trading fees and the slight increase in price is still positive.
9. Digital banking
Imagine your traditional brick and mortar bank going completely online — no physical office, no bank tellers, no mail. Challenger banks such as N26 are offering no-frills individual and business bank accounts through a complete digital infrastructure. The business model here is almost identical to that of a bank with physical branches except that with the huge cost savings in manpower and real estate, customers can greatly benefit from reduced rates.
10. Digital insurance
As with digital banks, FinTech companies operating in the insurance industry are taking all of the traditional services to the digital world. Offering life and health insurance with better underwriting practices, these FinTechs can price their premiums at variable rates depending on the customer, thereby offering aggressively cheaper coverage compared to traditional insurance companies. These types of insurance, together with personalized marketing, can create business possibilities that insurance companies have only begun to explore. Lemonade, for example, is operating in the house insurance space.