As we continue to cover the quickly evolving trends around fintech, we see that there are three distinct fintech partnership models present, each bearing their unique risks and advantages to stakeholders of the venture. The following section will define and explore these models in greater detail.
1.Aggregators
Aggregators are fintechs that function as platforms to bridge buyers and sellers in a value-chain. Be it tangible or intangible products, the services offered by Aggregators can best be equated to third-party marketplaces, centered on a product/service that enables both logistical and pricing transparency, and timeliness.
The deeper implication to the market with the emergence of Aggregator fintechs is an increasing degree of equal participation and inclusivity among players – parties that stand to benefit most from Aggregator services are smaller businesses (or business units) that intend to scale their market presence without needing to invest into a proprietary channel network.
The nature of ‘products’ facilitated by Aggregator platforms can vary substantially. In most cases, they do not even facilitate the actual transaction between buyers and sellers, just the communication of intent. Payments and fulfillment are enabled by partner networks, ranging from banks, postal/logistics firms, over-the-counter merchants and so on.
However, in the economy of unfinished goods/services, the role of Aggregators becomes much more interesting – the trading of data (digital credentials) and the analysis of data (credit scores, prefilled forms) are becoming very sought-after. Open banking and open commerce models are highly dependent on universal repositories of personal data which Aggregators have access to (though this is currently cornered by social media platforms and Google due to their ubiquitous APIs). More complex/regulated business processes like eKYC and anti-money-laundering however are not as readily served, and this opens ample opportunities to new Aggregators to establish a foothold in the digital economy.
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The success of Aggregators hinge on several crucial factors. Most mature fintechs in this space begin by servicing a much narrower market, taking up channel-centric roles as a business process outsourcing firm for a market incumbent such as billings or onboarding.
During this stage, it is imperative for Aggregators to amass a significant-enough market presence to ensure it can eventually outgrow its dependency on initial partners – this is achieved through a mix of aggressive marketing campaigns and investments into user experience improvement (superior UI, multiparty workflow enhancements, API exposure). Such new capabilities are designed to complement rather than replace existing workflows in the partners’ companies, ensuring better throughput, experience and/or accessibility for buyers and sellers alike.
Given the Aggregator’s dependency on user volume, they are exceedingly susceptible to market saturation and need to diversify their business exposures to remain viable. This can be done by expansion into adjoining product/service marketplaces (facilitation of different commercial transactions), data monetization (transaction histories, digital preferences), or developing synergistic capabilities in the remaining two fintech business models (refer to ‘Challenger’ and ‘Developer’ sections below).
2.Challengers
Challenger fintechs create products and services that directly compete with traditional financial institutions. While lacking the characteristic breadth of products offered by formal banks or insurers, Challengers excel at providing a depth of product experience that incumbents can seldom achieve. This may take the form of better pricing, loyalty programs, or user interactivity, or alternative financial services that formal FSIs cannot provide because of regulatory restrictions (cryptocurrencies, investment/crowdsourcing platforms, deregulated financing), as well as the technical encumbrance of legacy systems.
Understandably, the Challenger space in Asia/Pacific is very heterogeneous given the types of niche products each firm can choose to specialize in, and as such, it is difficult to make broad generalizations on how such fintechs mature over time. Most business models rely on some variation of regulatory arbitrage – bypassing imposed restrictions between buyer and seller, be it in ‘product acquisition’ or ‘product availability’.
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Challengers specialized in ‘product acquisition’ are able to provide the same level of functionalities of traditional financial services at a lower barrier-of-entry. This enabled through various functional enhancements in the services offered, such as alternative risk profiling in place of mainstream eKYC parameters, alternative factors of authentication (biometrics, NFC, QR-code, or white-noise) to provide a more seamless, contextualized user experience, or simply lifestyle-linked financial products (travel, health, or retail -linked credit and loyalty services) to incentivize more frequent usage. On the other hand, specializing in ‘product availability’ requires a Challenger to provide altogether new financial offerings that are not present in a particular market – this in turn could be something as esoteric as altcoin-linked securities, to simple credit services (microloans, P2P financing, peer advisory) tailored for underserved demographic segments.
Overall, there is a much clearer demarcation between traditional financial services and Challenger financial services in the Asia/Pacific due to the rigidity of financial governance, the brand strength and service coverage of Tier 1 financial institutions, and the lack of financial sophistication among the mass market to generate sufficient demand. This has created a market where most emergent Challengers are founded as ‘captive financial service providers’ associated with an incumbent non-financial brand (usually retailer conglomerates) – potential users are chiefly drawn in due to loyalty incentives and preferential pricing conceived through branding synergies with the parent’s business(es). Conversely, Challengers in the EU (where such fintech models have found the greatest success) operate as independent direct disruptors of traditional financial services and compete through variants of fundamental banking products.
3.Developers
Developer fintechs operate similarly to conventional technology vendors by providing IT solutions to enterprises that would later assemble them into a variety of financial offerings. There are of course, several tradeoffs – as startups, they predominantly deal in software IP and basic hardware (point-of-sale devices, telematics sensors), where the ‘fabrication’ of the product relies on a leaner supply chain, if not being altogether internal.
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Commensurately, their portfolios are likely to be more specialized toward a narrower set of disciplines, either in the form of specific technologies (for example, social analytics, location intelligence, or document digitalization), or a specific business process associated with financial products (such as loan originations, payments UI, customer onboarding, and so on). The real edge that Developers have however, does not just lie in how well-versed they are in such disciplines, but in the ability of their business models to accommodate high levels of solution customization much more affordably. Incumbent vendors, in contrast, have largely positioned their product portfolio around turnkey solutions to maintain their advantage in economies-of-scale, creating solutions that are sometimes ‘overscaled’ or superfluous to a particular FSI’s product roadmap.
Successful Developer fintechs begin their journey as either a captive development house for a larger enterprise, or being reliant on a handful of strategic alliances with vested parties. This is due to the inherent risk that fresh, untested startups pose to their partners – a one-to-one partnership (with strong oversight from the ‘patron’), or a several-to-one venture (where the risk is distributed among a handful of parties) implicitly minimizes the peril of such ventures.
Early successes would then lead to the Developer leveraging on the channel network of its initial partners to reach a new audience, though history has shown that this usually occurs within the same geography. Again, risk management would be a consideration among potential new clients – working with a fintech startup with experience under the same regulatory environment, with knowledge of the market, and with strong localization capabilities in its solutions are altogether more appealing (though exceptions certainly exist).
Summary and Guidance :
Each fintech model does not exist in isolation. Instead, they each take characteristic paths to scale up and differentiate themselves within the digital ecosystem, given the unique strengths and weaknesses of said models. The effort to complement such strengths and compensate for inherent capability gaps means these models will often hybridize as a startup matures, acquiring new skillsets, IP and partner networks for long-term business viability. The following section summarizes the attributes of Aggregators, Challengers and Developers discussed previously, and provides potential hybridization strategies they could take over time.