Scenes from a marriage: Will FinTechs and lenders become estranged?
Does lending really hold the key to revenue generation?
Hi,
Over the course of the last year, funding crunches have pushed those in FinTech to face a reckoning about their very existence – they must balance innovation with the reality of revenue generation, which has become (as it should be) the long-term goal.
In a rapidly developing industry like FinTech in India, about a year ago, the discourse was that lending could be the answer to their profitability (and by extension, funding) woes. While some FinTech players partnered with regulated lenders, others in the space have been making a beeline to secure NBFC licencesto realise their lending objectives. But now, in keeping with the fast pace of how things change here, this perception seems to be challenged.
A crop of FinTech companies with a unique value proposition – and no lending ambitions on the radar – seems to be propagating.
This holds true especially in the case of personal finance management. Where older, established names have entered digital lending, new players are proposing refreshing solutions across expense tracking and management, wealth monitoring, and investments in varied instruments from mutual funds to the humble fixed deposit. And none of them have a digital lending arm. Yet.
Could it be that many are seeing the futility of the argument that to make money, they must lend? Their focus remains on creating a product or service that solves a pain point, innovatively – does this mean that they’re still using their value proposition as a customer acquisition tool to ultimately foray into lending, or do these products stand on their own as revenue generators?
To answer this question, let’s take a step back and examine the nature of these new business propositions – are they painkillers, or vitamin supplements? To extend the argument even further, are these products that will go out of fashion, or will they always command a premium?
Does the lending-for-revenue argument still hold water?
As critical as lending may seem to the success of bottom lines to the (ever-evolving) FinTech status-quo, the ramifications of it being a tightly regulated space have always been a roadblock for FinTechs, especially those with B2C offerings. As a result, players that have standalone models with their sights set on lending stand to lose out, no matter the excellence of their product. Lending in partnership with banks, or having an in-house NBFC, hold the key to the success of their digital lending operations.
Similarly for B2B FinTechs, the nature of the solutions tends to be such that they are deeply integrated within the core systems of banks and other regulated entities. Moreover, such solutions are built to solve banking problems that clearly look like banking problems – which means that the competition for such products is, naturally, fierce. So, unless the value proposition presented by these B2B FinTechs is truly distinct, they do not warrant an overhaul of banks’ core banking systems.
In their pursuit of lending as a revenue generating operation, such an overwhelming reliance on regulated entities can pose a hurdle for FinTechs. Is this what has driven players to double down on innovation, create a product that has an irreplaceable value proposition, and is capable of turning a profit on its own?
I believe that it is entirely possible for FinTechs to innovate and generate revenue on their own, given that they can do both – come up with a solution that solves a pressing problem, and do that like no one else can.
Supplements come and go, painkillers are forever
Partnerships with lenders aren’t necessary to succeed in this industry. But it’s critical to understand the trade-offs and whether they are worth it. Let’s weigh the pros and cons of a highly specialised FinTech choosing to not go the partnership way.
Pros:
A product tailored for a particular market would ensure wider uptake, due to word-of-mouth endorsement within such a small, albeit underserved community.
When the product is hyper-specific to a particular market, chances are that the competition will likewise be thin. This would enable players to establish an unchallenged niche and win a majority of the market share, creating the much coveted moat.
By virtue of solving a specific problem, such players can become so indispensable to their users that replacing them becomes a difficult task.
Cons:
Innovative business models often come at the cost of being untested. So, where the FinTech-lender partnership playbook may seem to guarantee results, pinning all hopes on a new product and pricing strategy may be a risk.
Partnerships come with a neat little benefit of expanding user bases. While we generally talk about how lenders can tap into FinTechs’ customer bases, lender partnerships offer a lot to FinTechs when it comes to upselling and cross-selling in the long run.
It may be a stretch to say that these new companies will herald an age where FinTechs and lenders drift apart – I do not believe that they can be completely siloed from one another. But that’s the beauty of it, not all solutions are created equal, and the decision to lend or not to lend is ultimately made based on the nature and merits of the product, and whether the company is at that stage in its lifecycle where scale is a priority.
More importantly, as I wrote in a previous edition of this newsletter, success depends entirely on the resilience and dynamism of the underlying product, no matter how many bells and whistles it may have. In other words, while vitamin pills are optional, it is the painkillers that will leave an indelible mark on mission criticality.
That’s all from me this week!
Cheers,
Rajat