Close to customer

For Fintech stars that have reached or or are at the point of reaching the fabled Unicorn status – a billion-dollar valuation – continuous customer interaction is an absolute requisite in the minds of investors.

In the digital world, a business model that enables customers to interact and engage with customers on a daily basis, like Facebook or Google or whatsapp, is far more valuable in the eyes of the doyens of Silicon Valley, than one that demands only a one-off or occasional interaction, like an online insurance company which, barring any unfortunate events, is pretty much forgotten after the policy is sold till the time comes to renew it.

Banks have known this for a very long time. They offer current (or checking) accounts that yield little for their bottom lines but are the best tools for brand visibility and customer interaction. Customers check their balances often and log in to their accounts to make payments or download transactions. Mortgage loans, on the other hand, are profitable for banks but require little customer interaction after the contract is completed for the bank to sell the customer additional products and services.

So now, the Fintech stars want to take a leaf from the book of banks and offer customers financial services that keep them hooked. This, and the public ambitions of some of the high profile Fintech CEO’s, who believe they are fighting an epic battle with banks to disrupt, destroy and re-define the financial landscape of tomorrow, means that successful Fintech start-ups are spending significant sums of money to enhance their product sets and also going out to acquire firms that will help them do more for their customers.

Note that not all Fintech stars follow this approach. In a recent study by the Economist Intelligence Unit, the most important driver of competitive advantage for Fintech (cited by Fintech executives) was: “Focus on limited product set” – not quite the complete suite of financial products.

High flyers think differently though. Prominent Fintech stars believe that banking disruption must go deep and are following clear strategies to expand the services they offer. But, for all their success and ability to identify the right opportunities, the Fintech front-liners are pursuing one of the oldest ambitions that banks have nurtured over the years – to be a one-stop shop to customers.

The need to expand

Like other online lenders, Social Finance or SoFi in the United States has recently encountered funding problems and its focused business model with dependence on one product has given it a greater urgency to diversify. Starting off only a few years ago with student loans, it has now introduced wealth management, mortgages, and personal loans – business areas which SoFi believes will help it stay on on its trajectory for growth. All this while, Mike Cagney, CEO of SoFi, insists they are not a bank – but aim to be the most successful non-bank bank. On a more informal note he adds: “(Banks) they’re the dinosaurs and I’m the meteor.”

Online lending platforms like SoFi, Lending Club, and Prosper must source funds from institutional lenders of investors (usually by selling their loans to these institutions). These institutions are tightening the supply of funds or raising interest rates to make it more expensive. There is also a continuous worry with investors that online lenders like SoFi will not be able to weather future economic downturns as they do not have access to cheap source of funds as banks do from customer demand deposits. SoFi has set up an internal “hedge fund” to protect against future capital droughts (though it recently received a billion investment from Softbank).

SoFi competitor CommonBond is also pursuing this all encompassing strategy. The company is expanding its existing niche of student loans and wants to get into mortgages, credit cards, and wealth management services. David Klein, CEO of CommonBond has indicated, “It’s absolutely a life-cycle strategy.”

Max Levchin, CEO of checkout finance specialist, a member of the pioneering PayPal team that built PayPal, and another enfant terrible of the Fintech world, is equally boisterous crying out out that banks are ripping everyone off. His start-up “Affirm” offers funding alternatives at the point of checkout.

Checkout finance is founded on the wisdom of changing generational preferences. Market surveys have shown that especially in the United States, a majority (63%) of young people (or millennials in marketingspeak– those born after 1980)– prefer not to use credit cards. The reason for this shift is not clear except that some fundamental and underlying changes in customer preferences are taking place due to our familiarity with mobile devices and digital services. Look at the data from Uber and Lyft ridesharing. 57% of all rideshare passengers are in the 25-34 age bracket. Customers 45 and above represent only 7%. Young people change their service providers based on who has a better app.

Affirm has great promise and believes that checkout finance will gradually substitute existing forms of credit at the point of sale such as credit cards or traditional forms of store credit including instalment loans. Other firms offering checkout finance include Klarna and PayPal (PayPal Credit).

Affirm acquires Sweep

Affirm, like other specialists, is worried about being a one-trick pony. It downplays this to some extent by saying that over a third of its customers who have financed a purchase of under $250 come back as repeat customers. But the constant worry with Fintech specialists is that they may miss a trick because of their narrow field of activity.

What better way to connect with customers on a daily basis than through a slick personal financial management (PFM) app that lets customers check their bank balances, and calculate their net worth, every day of the week and some, every hour of the day.

Affirm announced it is acquiring Sweep, a small start-up, that developed a slick PFM app that Affirm thinks will help it progress on its way towards extended customer contact. The company is small with only half a dozen employees but Affirm will incorporate its technology to offer money management to its customers and potentially to offers loans to them based on their cash flow needs. A recent funding of $100 million Series D funding is helping drive Affirm towards its vision of continuous customer engagement and positioning itself to become a serious substitute for banking services.

Summary: Does a strategy of total banking disruption make sense?

Affirm’s strategy, like that of other online lenders, is to expand from its successful core product to other more interactive products. But in doing so, it overlooks the fact that the very reason it has done well so far is that it has not tried to be all things to all people but has focused on improving and enhancing a core product and tailoring it to meet user needs.

Rather than incorporating PFM features in its service offering, online lenders like Affirm which have successfully identified the need for financing at the point of checkout should identify other services that aim to capture more closely aligned opportunities that relate to its core competence: online lending.

One closely related opportunity for online consumer lenders is merchant lending, a growing industry in its own right. There are already a number of companies pursuing this area which has long been neglected because of the difficulty of evaluating the credit worthiness of businesses.

But companies such as American Express have long realised that small businesses require cash flow like Oxygen. Its outstanding merchant loans increased nearly 4 times over a short period of two years to 2015.

OnDeck, a merchant financing specialist, is now offering its technology to assist banks. It has partnered with Chase to offer loans to small business. The loans will be Chase branded but the technology to enable a fully digital experience (replacing the old loan process which used to take a month) will be OnDeck’s.

To be fair to Affirm, it has already identified some linked opportunities. It partnered with First Data to offer checkout loans to consumers at the POS in connection with First Data’s Clover merchant terminal suite. But Affirm, as well as other online lending firms, should resist the temptation to provide a full suite of financial services and avoid the old one-stop-shop vision that the diversity of the Internet has proved unattainable. Instead they should dig deeper for opportunities in lending – or specific areas within lending – developing technology and expertise that is truly next generation.