8 lessons from building a credit infrastructure company
Gather 10 FinTech players in one place and a layman will be unable to tell them apart. All he’ll see is a jumble of catchwords indistinguishable from one another like lending, banking, APIs, identity, fraud, risk, data, crypto, payments, etc.
I wouldn’t blame him, though. For all our strengths, categorizing FinTechs based on organizational make-up, nature of product development and distribution, and sectoral overlap hasn’t been our strongest suit.
However, now, some semblance of a pecking order in the industry is emerging. Perhaps because of the sheer number of entrants that gravitate towards tried-and-tested business models and market orientations – neobanks; non-bank enterprises, platform aggregators, and marketplaces looking to launch financial services; and last, but not most minor, category-defining infrastructure providers.
There’s ample room for shape-shifting in an industry as young as FinTech. When my co-founders and I started FinBox, for example, we began by building advanced decisioning engines and then made that a stepping stone to do even more things such as embedded finance, partnership lending infrastructure, and so much more!
The telltale signs of becoming an infrastructure provider were there, so we veered sharply and decidedly in that direction. Little did we know that it would reorient our perspective on many fundamentals of running a FinTech business.
This week, I’d like to take a moment to reflect on the lessons we’re learning as we build a differentiated credit infrastructure company.
Lesson #1: Get involved in your customers’ operations till their life depends on it
At the cost of appearing begrudging, I’d say that your customers' operations must grind to a halt if your services are down. That’s the level of indispensability you need to bring into your product.
An infrastructure builder should ensure that they do one thing, and they do it well. We divided the entire process into parts where designated teams focused on each piece in a phased and focused manner. For instance, once we built and perfected the underwriting aspect, our customers overwhelmingly depended on us to perform credit risk assessments.
Becoming so central to another business has more to offer than just bragging rights. It dictates how you can price your services, drives up customer lifetime value, promotes product stickiness, and creates a moat. By placing your product at the heart of your customers’ daily operations, you become irreplaceable.
The big question is – how do you become absolutely essential to all your customers 100% of the time? The truth is, you can’t. The only way you can control this is by focusing on just a small set of customers to whom you are, indeed, critical. This will help you align your interests with the top line or bottom line of customers who are guaranteed to stick around.
Lesson #2: You can’t run if you don’t learn to walk
It’s the easiest thing in the world to get carried away by ambition. But it can be costly if the foundations of your services aren’t strong. We realized that to take the business off the ground, we first had to identify one pain point and double down on it.
Of course, the market was already buzzing with competitors solving similar problems. So we differentiated ourselves by treating our core product as a peerless intellectual property by building a unique credit intelligence piece, API design, internal architecture
We identified several potential (often unclear) use cases as we built the foundations and worked out the kinks, but stopped short of letting that derail us from the crucial initial roadmap.
With value propositions, execution, and sales strategy more streamlined, we could now take advantage of our footing and start expanding. There’s no better example of this than what our data science team has achieved.
Once exposed to thousands of customers via scores of platforms and lending partners, we created a behemoth of a proprietary data asset. This gives us a chance to experiment with other use cases held on standby, with greater guardrails against risk.
For instance, since we aggregated data from portfolios of varying demographics and risk profiles, we could build an ever-evolving risk assessment model that generated more stable credit scores in the face of economic shocks.
Our co-founder Anant gets into more details of the data piece here.
Lesson #3: Don’t steal away at your partners’ customers
Data can unlock all kinds of doors for FinTechs. One can analyze it to design personalized products and experiences, upsell and cross-sell existing products and even anticipate future demands.
The trick, however, is to know which doors to open. Credit infrastructure is deeply embedded into customers’ own technology, laying bare an opportunity to take their users for your own. Ready data on user habits is a pretty low-hanging fruit that can help you increase your proprietary user base and secure customer retention by innovating on top of the products already offered by the platform.
I, for one, believe that a breach of customer neutrality is a big ethical violation. It’s crucial to remember that you’re in the business of serving the same customers, but not at the cost of your business objectives and values.
I wrote about the challenges of building a differentiated product in a crowded market without compromising on integrity in this piece.
The question of neutrality brings me to another point – treat all your customers equally. It’s tempting to bend the rules for a coveted client by breaking policies around pricing, product design, branding, and more. But all confidentiality agreements in the world can’t keep customers in the dark, and they’re bound to find out one way or another, placing your customer relationship at risk.
Lesson #4: Tackle the Big P smartly
Should you offer your product at a license-based price or as per usage? There’s something to be said about both approaches.
License-based pricing results in more stable growth and reliable revenue. However, it often requires more contractual changes and negotiation. FinTechs pricing under this model usually try to increase prices by providing additional services like customer support.
We have found that consumption-based pricing works better for us, despite the arguments against it. It’s often considered more volatile and doesn’t come with the security of recurring payments like under the SaaS subscription model. But volatility alone is not responsible for risk. It’s essential to consider factors such as rate of product innovation, the nature of marketing, and where you stand vis-a-vis your customers’ operations.
Source: a16z.com
There’s also a lower barrier to adoption and improved user growth because the customer needn’t pay unless they use the product. Moreover, it removes the friction (involvement of sales teams) that comes with expanding product usage and improves retention by fostering transparency in pricing (they know exactly what value they can derive from dollars spent).
Lesson #5: Build a product for all sensibilities
The lines between tech and non-tech human resources are blurred in FinTech. We quickly realized that we’re not building only for developers but for business and enterprise-side employees who are often pigeonholed from executing ideas with immense potential.
It’s necessary to differentiate what both audiences need. Developers often look for more freedom to create their UX or analytics, and the best way to fulfill this demand is by offering clean data and building blocks that can shape their own vision.
For business-side customers, we developed plug-and-play products with personalized customizations that could be used as it is. We have been able to experiment with several novel ideas by taking this approach, like rescuing business rules from the bowels of application code and treating it as a resource in itself – a product fit for compliance officers.
Do check out our two-part primer on business rules engines here:
The possibilities of creating business-first products are endless. Drag-and-drop no-code products are becoming all the rage, with countless applications for a FinTech infrastructure provider.
Lesson #6: Invest ahead of the curve
We’ve found ourselves at the center of the ‘build vs buy’ discourse time and again. Truth be told, as lending infrastructure builders there aren’t many benefits to be enjoyed if customers started building more. However, that risk is always impending.
Customers often rely on credit infrastructure partners only until their own resources grow and they start to build these capabilities themselves. How can one avoid this risk?
Go back to lesson #1 – become a permanent fixture in their operations, not a stand-in for other alternatives. The challenge here is to balance scale with speed, continuously agile and willing to innovate for the future.
Lesson #7: When it comes to branding, less is more
When cruising down a highway, how often do you see the road's name on milestones? Never, it’s always the destination.
Credit infrastructure isn’t any different. White-labeling enables you to hero the anchor platform while taking a back-seat yourself. And this isn’t a bad thing. Forcing your own brand onto your customer’s is just another way to stoke competition.
In fact, it may lead to customer disengagement (remember lesson #3?) because they’re made aware of other options and often stray away from the journey in search of alternatives.
Having said that, subtle branding cues within a user journey never hurt anybody. In fact, when deployed after a reasonable investment in developing trust and security, bringing your infrastructure brand to the customer fosters reliability.
Lesson #8: Surround yourself with the right people!
Three words – don’t underestimate hiring. As founders, it’s easy to neglect the HR function and focus on other pressing matters like raising capital and polishing the product. In fact, most tech founders tend to have next to no HR experience.
Even though it’s a cliche, it’s important to set down your values and ensure that everyone you hire is inclined similarly. The next big challenge is to get the team prerequisites, segmentation, composition and expectations right to the tee. This may be challenging in the multifaceted credit infrastructure business.
Conclusion
Our journey from a single-product FinTech to a sprawling infrastructure company has been equal parts challenging and rewarding. Every lesson was learnt after making difficult decisions, many failures, and much trial-and-error.
The secret sauce, we discovered, was made from a handful of solid ingredients — a drive to innovate, uncompromised values and trust in your company and your product. Guided by these, it’s always simpler to manoeuver.
I'll see you next week!
Cheers,
Rajat