No man is an island when it comes to fintech, and in the pursuit of a better world driven by better financial services, it’s clear that standing together means progressing together. This September at The Fintech Times, we’ll be delving into every corner of what it means to be a fintech ecosystem. We’ve dedicated the entire month to investigating what makes a successful fintech ecosystem, how fintechs can work together more effectively, as well as providing a regional view of some of the industry’s best examples of community collaboration.
Here we are, the finale of our September coverage into fintech ecosystems. As October dawns, we share together one final article from our highly-anticipated series.
Throughout this month, we’ve spoken at length about what it means to be a fintech ecosystem, and how the industry can achieve more and be better by working together. We explored fintech partnerships and the wealthtech dynamic, before heading into fintech associations and now fintech expansions.
And so, joined here by a range of industry experts, we’ll answer fintech’s most pressing question of all: what is the most difficult market to expand into?
Nancy Langer, CEO of the campus technology ecosystem Transact Campus, starts our conversation with her view that fintechs may find higher education to be a difficult market to expand into.
She states that this is because payment processing alone doesn’t always meet their needs.
“Higher Ed institutions need software services that provide efficiencies and a connected system that aligns the schools ERP, billing, banking, and settlement and easily reconciles multiple systems,” she recommends.
Langer highlights the above as a significant investment with a longer sales cycle.
“Much of this is because their existing operations, systems and infrastructure are based on legacy technologies that are difficult to replace for multiple reasons,” she continues.
Langer cites challenges around security, compliance and government financial regulations as additional barriers which, as she explains “can in some instances prove quite onerous.”
For Langer, the right fintech solutions for higher education may not simply be an off-the-shelf or a software-as-a-service (SaaS) offering. So what needs to be done?
“To win as a fintech in the higher education space, companies should focus solely on solutions that enable providers of higher education the ability to transform how they operate and meet the needs, not only of their student populations but also their staff, professors and administrators,” comments Langer.
She explains how any fintech that strives to help universities connect their campus must also recognise the “multiple dimensions that they face when it comes to electronic mobile payments and meeting the needs of Gen Z, who want to do everything on their mobile device.”
“A fintech vendor in higher education will also need to understand the complexities institutions face, from a shortage of employees to being able to handle all the millions and billions of dollars in transactions that happen on any given day,” she concludes.
Performance reporting and fee billing
“I think the most difficult fintech market to expand into is performance reporting and billing,” says John Mackowiak, chief business development officer at Advyzon, a cloud-based investment advisor platform for portfolio management and performance reporting.
“Whether you’re at a big company with vast resources like many of us were previously, or a startup with considerably fewer resources but decades of experience, performance reporting is hard,” he says.
“For performance reporting, we’re processing daily feeds from dozens of financial institutions, and each is in their own ‘language’,” he explains. “From there, our team performs daily reconciliation to address any issues and ensure accuracy.”
Once the data is loaded into the company’s system, hundreds of data points can be derived, many via complex formulas and methodologies.
Yet Mackowiak recommends that reconciliation requires a very specific skill set and knowledge.
“Once you start to get into reporting on fixed income or derivatives,” he continues, “the degree of difficulty only increases. This data is then published to the user interface, static PDF statements, and client portals.”
Citing another area that’s difficult for fintechs to expand into, Mackowiak provides fee billing as another example, which he says typically goes hand in hand with performance reporting, as fee calculations are often based on portfolio values.
“Take the ‘industry standard’ one per cent annual fee, billed quarterly,” he begins. “In the simplest iteration, that’s 0.25 per cent per quarter. Easy, right? But what if the investor makes a substantial deposit a week before quarter-end?”
“Most advisors will pro-rate that cash flow when it comes to fee billing,” continues Mackowiak. “Maybe an average daily balance calculation is preferred.
“Perhaps a firm doesn’t bill on cash holdings and needs to exclude those balances. Exclusion can also apply to individual investment positions if a stock position is inherited and never expected to be sold, for example.”
Mackowiak reveals that the company has clients that have 50+ fee schedules.
Advyzon’s technology is popular with independent financial advisors, which is why Mackowiak explains that “accuracy is a must in order to maintain the trust and confidence of their clients, particularly in volatile financial markets.”
“The complexities in the above examples, along with the precision required when it comes to finances make performance reporting and fee billing a very difficult market to expand into,” he concludes.
Deep tech solutions
For Martin Hegelund, the development of deep tech solutions represents the hardest fintech market to expand into.
Hegelund is the CMO and co-founder of the fintech company Ageras Group, which offers an ecosystem of tools and services for small and medium-sized enterprises (SMEs).
In the last 12 months, the company completed three acquisitions and expanded its suite of fintech tools into a financial ‘cockpit’ for invoicing, accounting, payroll and banking for SMEs across Europe and the US.
“Despite the recent turbulence in the financial market, there has probably never been a better time for building a fintech company,” he continues, explaining how tighter funding has forced entrepreneurs and businesses to develop value-creating applications for real-life use cases, which Hegelund says is “filtering out the noise.”
“Some fintechs have enabled applications for the rest of us by providing deep tech offerings to make it easier to build new innovative solutions on top,” says Hegelund.
Hegelund compares this process to operating the railways or the trains.
“The railways are the infrastructure providers, like Stripe, Tink and Solarisbank,” he says. “Some are well known, but others are very niche and deliver a core component on which the fintechs facing end customers rely deeply on.
“It creates a beautiful symbiosis where the end-product is stitched together via APIs by components that each add up to a usable solution to solve a problem – whether in payments, lending, banking, insurance, or something else.”
“Therefore, due to the need for massive investments and a lot of courage, getting regulatory approvals, grabbing market share, and the benefits of being a first-mover entering into meaningful partnerships, it is not simple to build a ‘railway’ company,” warns Hegelund.
“Building new deep-tech solutions – or expanding the railways, so to speak – in the space takes a lot of time before you get validation and the first customers onboard,” he comments. “Once you succeed, you enter a market that’s being commoditised, with prices going towards zero.”
“Therefore, investors – and more than ever before – are increasing demands to fund new deep-tech fintech in the first place,” adds Hegelund.
Hegelund describes commoditisation as “generally a good thing for the end customers.”
However, he goes on to explain that “it creates a weird dynamic where it becomes increasingly difficult to start deep-tech fintech companies, where the cost and risk of building a customer-facing fintech on top of this infrastructure decreases over time.”
“On a high level, any industry with one or several large incumbents like credit card processing and banking/digital banking would be challenging for fintech market expansion,” comments Thomas Smale.
Smale is the founder and CEO of FE International, an end-to-end specialist mergers and acquisitions (M&A) bespoke advisory service for e-commerce, SaaS and content businesses.
He specialises in advising in the M&A of fintech, SaaS, e-commerce, affiliate and content businesses.
“Not only would a new investor be competing with incredibly well-funded, well-established players in an industry that doesn’t often welcome newcomers, but other factors such as the regulatory environment and challenges posed by data security would, without doubt, hinder a company’s expansion,” comments Smale.
Going further into the discussion, Smale cites investment management as a historically insulated industry where new players have not been overly successful.
He attributes the high cost of customer acquisition, and the difficult task of gathering enough assets under management (AUM) to generate enough return given the ultra-low fees.
As a result, often these companies are acquired by the old established players who don’t have the same limitations as smaller or less recognised businesses.
“For smaller companies looking to break into an insulated industry like investment management, Smale recommends working with a specialist M&A advisor.
“Not only will you have a larger pool of potential acquisitions, but a well-informed advisor can be the difference between success and failure,” he adds.
For Shawn Conahan, chief revenue officer at Wildfire Systems, consumer banking is becoming the most challenging to expand into for fintechs.
“After years of neobanks finding it easy to spin up and quickly attract customers as an alternative to legacy banks, it’s now harder to differentiate,” he comments.
Conahan explains how early on, many neobanks competed with legacy banks on price.
“They offered no-fee checking and waived other fees,” he says. “Or, they offered more-robust and consumer-attracting feature sets enabled by partnering with other fintechs.”
Despite neobanks enjoying their time in the sun, Conahan warns that larger, traditional banks are indeed catching up.
“These legacy banks are called traditional mainly because they have physical branches,” he continues.
Conahan sees traditional banks marching in the direction of becoming neobanks themselves in that they have to provide consumers with the digital banking access and services they demand.
“As well, digital banking is better as an add-on to a traditional bank than it is on its own, simply because the resulting hybrid gives consumers the best of both worlds: the convenience of digital banking with the confidence that comes with knowing they can walk into a branch and talk to a human when necessary,” he comments.
That leaves fintechs launching digital-only banks with an important question: Can they achieve scale quicker on their own or as part of a larger entity?
“Perhaps both are possible,” reassures Conahan. “A digital bank can have a consumer brand while also providing some or all of their functionality as a service to traditional banks,”
He gives Greenlight as an example of this, which grew its direct consumer base while simultaneously providing the same service to Chase on a white-label basis.
“So while consumer banking may be a difficult segment to tap, fintechs should consider approaching it with an intentional goal to reduce risk in the business model,” concludes Conahan. “This may in fact increase a fintech’s attractiveness to investors while, at the same time, appealing to customers who want a digital+branch locations hybrid.”