September 18, 2023 | By Silvio Piserchia
A common criticism of fintech companies used to be that they were less adept at the fin part than the tech part. That imbalance, if it ever existed, has now been largely redressed. But that does not mean there is nothing left to learn.
What follows is a series of questions for fintech companies to consider. Topics include operating models, fraud protection and customer lifecycle management.
Lesson 1: Building and partnering are not discrete operating models.
A value chain has many stages. Distinction does not come at the end of the chain but at every stage along the way. That raises a question:
Which parts of the value chain do you keep in house, and which do you outsource?
The answer is not a straightforward one. Some activities, such as customer relationship management (CRM) and portfolio management, may be best kept in house. Others, such as transaction processing or statement & repayment processing, may be best outsourced.
With no fixed answers, some balance is needed—not just across different stages of the chain but within individual stages too. That raises a follow-up question:
Should outsourcing be partial or full?
Conducting everything in house requires substantial upfront and ongoing investment. Alternatively, sharing profits with third-party processors or licensors may reduce revenue and limit control. Much of the decision will hinge on one simple question:
How do your revenue streams stack up?
And when you opt for in house:
What do you automate and with what technology?
How do you divvy up roles and responsibilities?
Or when you outsource:
Who is an ideal partner?
Partnerships are often based on access to technological capabilities. But technology should not be the sole consideration. Only a truly global partner may understand cross-market considerations, such as the difference between a bespoke digital banking license, a phased traditional banking license, a dedicated e-money license and a white-label banking license.
Underneath it all lies one essential consideration:
What are your long-term plans?
And as fintech companies attain the clout of traditional financial service providers, another question pops up:
Should you partner or buy?
Lesson 2: Fraud is not a single problem with a single solution.
Fraud is big enough to have a value chain of its own. The stages cover account opening and underwriting, transaction monitoring, customer authentication, fulfilment monitoring, automated and manual investigation, recovery of funds, and reporting.
The use of partners to handle fraud raises questions around responsibility:
Who provides underwriting?
Who processes transactions?
Less obvious is that partnerships do not absolve fintech companies from responsibility. No matter who is handling fraud behind the scenes, brand reputation mostly lies with the customer-facing company on the front end.
And many technological and strategic decisions remain:
How do you handle know-your-customer (KYC) validations?
Which identity scoring methodology do you use?
What is your fraud-tolerance level?
Digital banking, in which the word “digital” is largely redundant now, offers many advantages over “traditional” banking, including managing fraud. But it adds some questions too:
How do you straddle virtual versus physical products and online versus offline channels?
Do you use enhanced verification methods, such as two-factor authentication and biometrics?
How much manual review do you allow?
Some of those decisions spread into broader questions around daily customer relationship management:
Can customers verify transactions independently?
How do you handle failed logins and remove fraud blocks in a timely manner?
How do you recover funds, such as chargebacks on credit cards?
Lesson 3: Customer acquisition gets harder the more you practice it.
It sounds counterintuitive. But as niche becomes mainstream, customer acquisition can no longer rely on attracting disaffected and untapped audiences.
The new reality poses its own questions:
Who are the competitors that are making your uniqueness ubiquitous?
What do you “own” that you still do better than anyone?
The competition will catch up sooner or later. Competitiveness often then shifts to customer-focused considerations:
Who exactly is your ideal customer?
How do you balance brand consistency with tailored marketing?
How smooth are user experiences and communications with customers?
Data can help. And campaign data is a start:
Do you have metrics tied to spend and key initiatives?
But the metrics should be used with caution. Click-through rate (CTR), cost per action (CPA) and cost per click (CPC) are proxies for what you really want to know. Those insights come from combining campaign data with first-party customer data and independently anonymized global transaction data.
Ultimately it is a question of effectiveness. And that brings questions of its own:
Do you cross-sell to existing customers, or do you sell to new customers?
Do you appeal to pre-approved customers, or do you invite customers to check their eligibility?
Cross-selling to a pre-approved customer may be easier than selling on the open market to an unvetted customer. But it shrinks the pool, and it poses a further question:
Do all pre-approved customers accord with underwriting priorities?
Lesson 4: Customers are not all equal (at least in terms of revenue).
Having lots of customers is great. Yet they are a bit like CTRs, CPAs and CPCs; some context helps when evaluating them.
First it is a matter of identification:
Do you use a net promoter score (NPS) or customer lifetime value (CLV) to identify and measure loyalty?
Easier acquisitions sometimes need a little nudging:
How do you handle customers who only use a product once or never activate it at all?
Do you include a welcome kit, and is it physical or digital?
Do you notify customers when they are reaching a reward threshold or can cash out reward points?
Other customers may not need nudging. One question may suffice:
Is your focus on high-volume or high-value transactions?
The split need not be binary. Volume plus value is ideal. Still, both raise questions.
On volume:
How do you differentiate promotion of recurring activities, such as bill payments, from sporadic activities, such as foreign currency transactions?
Do you offer digital “wallets” and other apps to promote activity?
On value:
Do you offer discounts on high-value transactions?
Do you pre-approve customers for credit if they hit a limit while spending responsibly?
Volume or value, the most loyal customers bring further opportunities:
Do you recognize loyal customers by rewarding them?
How do you encourage loyal customers to promote your brand?
Then at the other end of the loyalty spectrum:
How do you manage customer complaints and capture feedback?
Do you use automated prompts to identify customers at risk of leaving?
Lesson 5: The questions will keep coming.
Some major topics are absent from the questions so far.
The questions do not touch on regulations, whose inconsistency across markets matters for international expansion. Nor do they cover risks other than fraud, such as credit risk or cybersecurity risk.
Then there are all the questions thrown up by emerging trends. Fintech companies are outgrowing single-purpose value propositions, embedded finance is shifting notions of “digital first” to “API-first”, emerging technologies like blockchain are transforming the ownership and transfer of financial assets, and concern for the environment and financial inclusion is no longer a moral nicety but a financial necessity.
All these topics warrant an article or two of their own. Such is the scope of fintech.
The questions will continue to come. In the meantime, trusted partners can help provide answers.
Request a demo to learn more about Success Planning for Fintechs: a go-to-market readiness assessment covering operations, risk and fraud, and cardholder lifecycle management.
