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A Cynic’s Guide to Fintech Business Models

88 points by jackgavigan 11y ago

tim333 11y ago
I think this article has been posted three times with no comments so I thought I'd start one. It seems over cynical to me in that it passes over various successful models. LendingClub is doing well and has done over $5bn in loans. Transferwise seems to be going well and has done over $3bn of foreign transfers. Stripe is doing well. All are providing better service or value in fields that were poorly served and don't really fit with the articles views and categories.
- jackgavigan 11y ago
  I don't know a huge amount of LendingClub but I'll be very interested to see how well Stripe and Transferwise do in the long term. Both are spending a lot of money on expansion/marketing, and both operate in very competitive sectors.
  - tim333 11y ago
    Yeah, I'll be interested too. Stipe and Transferwise's sectors may be competitive now with other startups but they were kind of awful before they started. I'll also be interested to see how Tom Blomfield, formerly of GoCardless gets along with making a better current account. I went to a talk by him and it seems promising. http://www.techworld.com/mobile/mondo-ceo-tom-blomfield-explains-how-build-next-generation-digital-bank-3618866/ http://www.techworld.com/mobile/mondo-ceo-tom-blomfield-expl... https://news.ycombinator.com/item?id=9638345 https://news.ycombinator.com/item?id=9638345
- joosters 11y ago
  To be fair, it is labelled a Cynic's Guide for a reason... I agree that LendingClub (and others, like Funding Circle) would be separate model from the ones listed in the article. Passing risk onto others and being paid a commission for the job of finding buyers & sellers. It's a little like his business model #4 but setting up a new exchange rather than using an existing one. That said, these 'alternative investment' style companies haven't yet been tested. What will happen when the next downturn arrives, and lenders get hit with massive losses?
  - tim333 11y ago
    I guess you could argue Transferwise and Stripe fit in "model #7. Getting your act together with respect to an industry standard where the industry has conspicuously failed to do so" which he's positive about.
  - notahacker 11y ago
    My guess is that for many of the equity platforms, it won't take until the next downturn... Being a shovel seller in a gold rush is profitable enough whilst it lasts; the bigger worry is that it's not unheard of for UK regulators to decide that retail customers deserve compensation for financial products which were inadequately explained and a really bad deal, and put the vendor on the hook for it. I can almost imagine the next wave of robocalls from claims consultancies...
    - joosters 11y ago
      Yeah, there's a load of these p2p lending companies in the UK, some of them even describing themselves as 'savings' schemes rather than as speculative investment. That kind of language is asking for trouble. The business model even has remarkable similarities to some of the fundamental problems that aggravated the last mortgage collapse: the people who are credit rating these investments (i.e. the companies like Lending Club, Funding Circle, Zopa, RateSetter, Saving Stream and so on) are not the people taking the risk. So there's a great chance that the credit ratings will turn out not to be robust enough. IMO these companies should be forced to invest some of their own money in each of their lending offerings.
  - jackgavigan 11y ago
    > Passing risk onto others and being paid a commission for the job of finding buyers & sellers. That's basically what investment banks do (and people are pretty cynical about it).
    - joosters 11y ago
      Their occasional massive losses would hint that they don't always do a good job of passing on the risk.
- x0x0 11y ago
  Did you read the article? Transferwise is explicitly listed as a successful model. Stripe probably falls under #7 -- efficiently implementing industry standards.
  - brudgers 11y ago
    Please consider editing your post to improve HN. From the HN Guidelines [see link at bottom of page]: Please don't insinuate that someone hasn't read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that."
  - tim333 11y ago
    Ah - missed that.
- notahacker 11y ago
  Even I think the article is a bit cynical, but in fairness #6 does specifically reference TransferWise as an example of the most successful business model: undercutting bank charges on price (and specialist providers on service) It's also written from a London Fintech scene perspective, so the success of Stripe and LendingClub isn't that relevant. In the latter case, the UK p2p funding market is more characterised by less-established companies with more speculative investment opportunities and a lot less regulation to protect the retail investor (and more schemes for the taxpayer to ultimately underwrite some of the losses), so I'm actually surprised the author didn't go after the crowdfunding industry. I think a "Business Model #9: saving on due diligence costs by selling the investment opportunities to people who don't know about adverse selection" would fit in nicely with his narrative.
joosters 11y ago
BTW the author's book (as mentioned in the article) is pretty good: http://www.amazon.com/Secret-Life-Money-Economics-Explained-ebook/dp/B00R0IZFL4/ http://www.amazon.com/Secret-Life-Money-Economics-Explained-... It's fairly short but well-written, and the chapter on health insurance (and why genetic screening isn't the game-changing breakthrough that people think) is very interesting.
pbreit 11y ago
So the author would advise against PayPal & LendingClub, for example? Cynical indeed. And very short-sighted.
- ThomPete 11y ago
  No he wouldn't that type he is positive about.
jqgatsby 11y ago
Can anyone give specific company examples of business model #4: "Trying to use someone else’s network and only pay the marginal cost of doing so" Examples outside fintech are also very welcome.
- kabouseng 11y ago
  Outside fintech, whatsapp replacing sms's, OTT voice services replacing GSM voice calling.
- abritishguy 11y ago
  Simple.
- tim333 11y ago
  I'm having a job thinking of any of the "surprising number of viable business models which involve undercutting the incumbents for payment services." Outside of fintech I can think of companies using LVLT's fiber network and not paying much. Also travel companies booking off peak hotel rooms and paying enough to cover maid service etc but not the cost of building the hotel. Both of those happen where there is an excess of capacity in a competitive industry. When things turn and there is a shortage, hotels and the like can jack their prices.
- fegu 11y ago
  In the mobile industry all the service providers and virtual operators are such examples. They get to use the physical networks of the incumbents for a governemnt regulated price in most markets, to create competition an make sure the incumbents are not exploiting the natural oligopoly in the mobile industry (due to the cost and feasibility of several players with nationwide antenna-coverage).
abritishguy 11y ago
The article seems to be quite US centric when talking about regulation. The UK banking market is very different than the US with just a handful of banks. The regulator is actively trying to increase competition. Atom, a new challenger bank just got their banking license and Mondo (where I work) is on its way. We are looking to differentiate ourselves by simply not sucking, providing features people want when they want them not two years later. Water bill doubled this month, we'll flag it. Salary not come in when it should have, we will send you a notification. Api? Yup
- bjterry 11y ago
  It's interesting you say that, given that the author lives in London, most of his examples are from the UK, and he specifically refers to the UK government's desire to expand fintech in the last paragraph, which he says has received "uncritical support." When I read it I thought it was fairly UK-centric. What is it about his points that makes it seem US-centric?
- mianos 11y ago
  Have your heard of 'yodlee'? You can get the transaction feed from that and you don't even need a banking licence.
AnneBoden 11y ago
Jack may say he is only being cynical but there is a lot of truth in it. Perhaps worth taking a look at this analysis of UK market to give a sense of the players. https://starlingbank.co.uk/a-new-market-segmentation-for-retail-banking/ https://starlingbank.co.uk/a-new-market-segmentation-for-ret... Our next blog will to try to explain what Full-Stack Banking is both in terms of the technology stack and in a business model sense.
fegu 11y ago
I really enjoyed this article. It is obvious that the author has some real insight. Also, I am tired of otherwise smart people automatically assuming they are smart in any field, not just their own. It seems the author is too.
hackuser 11y ago
Can someone explain this? this tends to mean that you get a book of business which has loads of little concentrations in them - you’ve got all the mixed-race dentists in Yorkshire, or something. And this, in turn, means that when the world changes, your risks tend to be very correlated and you lose years' worth of profit in one lump. I would guess that many small concentrations would be less correlated with each other, not more, than a few large ones. Or is he comparing it to having fewer 'concentrations' (which I understand to be market niches you dominate) at all; that is, having a few customers in this niche, a few in another, rather than everybody in a particular niche.
omouse 11y ago
>financial services is an intrinsically regulated industry where consumer protection is often very rigorous for a good reason Hah, hahaha. Right. What kind of a cynic can say that without a trace of sarcasm?

88 points by jackgavigan 11y ago

I think this article has been posted three times with no comments so I thought I'd start one. It seems over cynical to me in that it passes over various successful models. LendingClub is doing well and has done over $5bn in loans. Transferwise seems to be going well and has done over $3bn of foreign transfers. Stripe is doing well. All are providing better service or value in fields that were poorly served and don't really fit with the articles views and categories.

jackgavigan 11y ago
I don't know a huge amount of LendingClub but I'll be very interested to see how well Stripe and Transferwise do in the long term. Both are spending a lot of money on expansion/marketing, and both operate in very competitive sectors.
- tim333 11y ago
  Yeah, I'll be interested too. Stipe and Transferwise's sectors may be competitive now with other startups but they were kind of awful before they started. I'll also be interested to see how Tom Blomfield, formerly of GoCardless gets along with making a better current account. I went to a talk by him and it seems promising. http://www.techworld.com/mobile/mondo-ceo-tom-blomfield-explains-how-build-next-generation-digital-bank-3618866/ http://www.techworld.com/mobile/mondo-ceo-tom-blomfield-expl... https://news.ycombinator.com/item?id=9638345 https://news.ycombinator.com/item?id=9638345
joosters 11y ago
To be fair, it is labelled a Cynic's Guide for a reason... I agree that LendingClub (and others, like Funding Circle) would be separate model from the ones listed in the article. Passing risk onto others and being paid a commission for the job of finding buyers & sellers. It's a little like his business model #4 but setting up a new exchange rather than using an existing one. That said, these 'alternative investment' style companies haven't yet been tested. What will happen when the next downturn arrives, and lenders get hit with massive losses?
- tim333 11y ago
  I guess you could argue Transferwise and Stripe fit in "model #7. Getting your act together with respect to an industry standard where the industry has conspicuously failed to do so" which he's positive about.
- notahacker 11y ago
  My guess is that for many of the equity platforms, it won't take until the next downturn... Being a shovel seller in a gold rush is profitable enough whilst it lasts; the bigger worry is that it's not unheard of for UK regulators to decide that retail customers deserve compensation for financial products which were inadequately explained and a really bad deal, and put the vendor on the hook for it. I can almost imagine the next wave of robocalls from claims consultancies...
  - joosters 11y ago
    Yeah, there's a load of these p2p lending companies in the UK, some of them even describing themselves as 'savings' schemes rather than as speculative investment. That kind of language is asking for trouble. The business model even has remarkable similarities to some of the fundamental problems that aggravated the last mortgage collapse: the people who are credit rating these investments (i.e. the companies like Lending Club, Funding Circle, Zopa, RateSetter, Saving Stream and so on) are not the people taking the risk. So there's a great chance that the credit ratings will turn out not to be robust enough. IMO these companies should be forced to invest some of their own money in each of their lending offerings.
- jackgavigan 11y ago
  > Passing risk onto others and being paid a commission for the job of finding buyers & sellers. That's basically what investment banks do (and people are pretty cynical about it).
  - joosters 11y ago
    Their occasional massive losses would hint that they don't always do a good job of passing on the risk.
x0x0 11y ago
Did you read the article? Transferwise is explicitly listed as a successful model. Stripe probably falls under #7 -- efficiently implementing industry standards.
- brudgers 11y ago
  Please consider editing your post to improve HN. From the HN Guidelines [see link at bottom of page]: Please don't insinuate that someone hasn't read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that."
- tim333 11y ago
  Ah - missed that.
notahacker 11y ago
Even I think the article is a bit cynical, but in fairness #6 does specifically reference TransferWise as an example of the most successful business model: undercutting bank charges on price (and specialist providers on service) It's also written from a London Fintech scene perspective, so the success of Stripe and LendingClub isn't that relevant. In the latter case, the UK p2p funding market is more characterised by less-established companies with more speculative investment opportunities and a lot less regulation to protect the retail investor (and more schemes for the taxpayer to ultimately underwrite some of the losses), so I'm actually surprised the author didn't go after the crowdfunding industry. I think a "Business Model #9: saving on due diligence costs by selling the investment opportunities to people who don't know about adverse selection" would fit in nicely with his narrative.

joosters 11y ago

BTW the author's book (as mentioned in the article) is pretty good: http://www.amazon.com/Secret-Life-Money-Economics-Explained-ebook/dp/B00R0IZFL4/ http://www.amazon.com/Secret-Life-Money-Economics-Explained-... It's fairly short but well-written, and the chapter on health insurance (and why genetic screening isn't the game-changing breakthrough that people think) is very interesting.

pbreit 11y ago

So the author would advise against PayPal & LendingClub, for example? Cynical indeed. And very short-sighted.

ThomPete 11y ago
No he wouldn't that type he is positive about.

jqgatsby 11y ago

Can anyone give specific company examples of business model #4: "Trying to use someone else’s network and only pay the marginal cost of doing so" Examples outside fintech are also very welcome.

kabouseng 11y ago
Outside fintech, whatsapp replacing sms's, OTT voice services replacing GSM voice calling.
abritishguy 11y ago
Simple.
tim333 11y ago
I'm having a job thinking of any of the "surprising number of viable business models which involve undercutting the incumbents for payment services." Outside of fintech I can think of companies using LVLT's fiber network and not paying much. Also travel companies booking off peak hotel rooms and paying enough to cover maid service etc but not the cost of building the hotel. Both of those happen where there is an excess of capacity in a competitive industry. When things turn and there is a shortage, hotels and the like can jack their prices.
fegu 11y ago
In the mobile industry all the service providers and virtual operators are such examples. They get to use the physical networks of the incumbents for a governemnt regulated price in most markets, to create competition an make sure the incumbents are not exploiting the natural oligopoly in the mobile industry (due to the cost and feasibility of several players with nationwide antenna-coverage).

abritishguy 11y ago

The article seems to be quite US centric when talking about regulation. The UK banking market is very different than the US with just a handful of banks. The regulator is actively trying to increase competition. Atom, a new challenger bank just got their banking license and Mondo (where I work) is on its way. We are looking to differentiate ourselves by simply not sucking, providing features people want when they want them not two years later. Water bill doubled this month, we'll flag it. Salary not come in when it should have, we will send you a notification. Api? Yup

bjterry 11y ago
It's interesting you say that, given that the author lives in London, most of his examples are from the UK, and he specifically refers to the UK government's desire to expand fintech in the last paragraph, which he says has received "uncritical support." When I read it I thought it was fairly UK-centric. What is it about his points that makes it seem US-centric?
mianos 11y ago
Have your heard of 'yodlee'? You can get the transaction feed from that and you don't even need a banking licence.

AnneBoden 11y ago

Jack may say he is only being cynical but there is a lot of truth in it. Perhaps worth taking a look at this analysis of UK market to give a sense of the players. https://starlingbank.co.uk/a-new-market-segmentation-for-retail-banking/ https://starlingbank.co.uk/a-new-market-segmentation-for-ret... Our next blog will to try to explain what Full-Stack Banking is both in terms of the technology stack and in a business model sense.

fegu 11y ago

I really enjoyed this article. It is obvious that the author has some real insight. Also, I am tired of otherwise smart people automatically assuming they are smart in any field, not just their own. It seems the author is too.

hackuser 11y ago

Can someone explain this? this tends to mean that you get a book of business which has loads of little concentrations in them - you’ve got all the mixed-race dentists in Yorkshire, or something. And this, in turn, means that when the world changes, your risks tend to be very correlated and you lose years' worth of profit in one lump. I would guess that many small concentrations would be less correlated with each other, not more, than a few large ones. Or is he comparing it to having fewer 'concentrations' (which I understand to be market niches you dominate) at all; that is, having a few customers in this niche, a few in another, rather than everybody in a particular niche.

omouse 11y ago

>financial services is an intrinsically regulated industry where consumer protection is often very rigorous for a good reason Hah, hahaha. Right. What kind of a cynic can say that without a trace of sarcasm?