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Hey everyone! Some housekeeping:
At 12pm ET, I’m doing a 1 on 1 interview with Brex cofounder and co-CEO Henrique Dubugras tomorrow at The Treasury: New Rules Summit, put together by Acorns cofounder Jeff Cruttenden, Betterment cofounder Eli Broverman, and RISE cofounder James Layfield. I was able to snag y’all some free tickets, so hit the link below if you want to tune in.
Super excited to announce the launch of Fintech Today’s first podcast next week—an interview series with people in the fintech industry we admire. Our first interview is an hour long interview with SoFi CEO Anthony Noto, who dives into a plethora of topics—moving from Wall Street to Silicon Valley, fun tidbits from Twitter’s IPO, and a ton about SoFi; everything from getting started, to the Galileo acquisition and newly inked Samsung partnership.
Sign up for our waitlist here and we’ll let you know when the first episode drops next week.
The first 30 minutes will be freely available, but the full hour long interview is only available for FTT+ subscribers—subscribe today for $25/month.
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Many readers know my fascination with the fintech infrastructure space—I’m someone who firmly believes there needs to be a ton more innovation around infrastructure in order to truly enable digital financial services. And many investors in the space have been searching for infrastructure companies that are aiming to do just that.
Fintech infrastructure companies are all around, even if they don’t seem like it. Stripe counts—it’s the payment infrastructure for the growing e-commerce boom in the US and by focusing on developers and making payments simpler. Which is actually extremely difficult, because payments is not simple and neither is the tech behind it. It’s in compliance—with companies like Alloy making it easier to onboard customers by simplifying the Know Your Customer regulations by making it easy to hook up and find a fraud provider. Core banking, with companies like nCino going public; banking-as-a-service, with Galileo, Synapse, and others enabling partners to create entire consumer financial products from scratch.
Infrastructure companies are hard. It takes a lot of time to get off the ground, particularly if you’re in a regulated industry. Sales cycles are really long, especially if you also sell to financial institutions, who move slowly on vendor deals with tons of diligence before things get signed. Reliability and stability are a major factor too—will this platform go down if I use it, and if so, how often?
For early startups in the infrastructure space, these are all major issues. Some products take 16-24 months of development work before you can take on a customer—if you’re trying to create a Stripe-like experience in a highly regulated area of finance, like wealth management or international finance, you all of a sudden have a ton of other regulation and complexities to consider. Sales is difficult for early startups too—many don’t have a dedicated sales leader, because they’ve been building for so long, so the sales process falls on the leadership. There are tons of cases where that works, but tons of cases where that doesn’t either. And startups don’t have a reputation to begin with, but for many working with institutions, there could even be a negative connotation with working with a startup.
The awesome thing is that infrastructure companies out there now are solving this—many are signing up customers who’s needs have changed with the economic climate and COVID, are making headway with expanding their customer base beyond startup and into more established companies. That includes both financial institutions and non-fintech companies looking to develop financial services—the totally addressable market for many of these fintech infrastructure companies does include tech companies.
But, there are some things I’ve been thinking about as the infrastructure sector in fintech matures, something I plan on writing a lot about over time. Over time, infrastructure companies have a ton of different options to expand into, and a ton of different concerns that they need to think about. One is understanding how many potential customers these companies have. Contrary to consumer fintech, which has a potential market of millions or more, products by infrastructure companies are only going to be used by a few hundreds, if that. Another is a tremendous amount of competition, from incumbents and other startups, and it’s effects on revenue and margins.
Infrastructure is a cutthroat area of fintech—there could be incumbents that already provide something similar, but you do it with better tech or a cheaper price. Competition implies that margins will get compressed over time—if you’re not undercutting someone on price, then someone’s eventually going to undercut you.
For younger fintech companies in the space, this is a pressing concern. And I think there’s a playbook for companies—expand into value added services.
Technology is inherently replicable and replaceable with better technology. Let’s take Stripe for example. In theory someone else could make an API similar to Stripe’s and start selling it. The hard part are the other things—operations, reliability, handling things at scale, compliance, the list goes on. Stripe, understanding that, has leaned into value-added services over time to not only better serve their clients but capture more margin too.
Capital: Stripe lends money to merchants that qualify, and charges one flat fee for the loan.
Radar: Stripe manages fraud for companies, with varying stages of protection. The lowest is 5¢ per transaction, then 7¢ per transaction, and maxing out with chargeback protection at 0.04% per transaction.
Issuing: Stripe recently announced an issuing product to help client issue virtual or physical cards for their customers. Virtual cards cost 10¢ each, physical cards cost $3 each, and the first $500k of transaction volume is free. After, that Stripe charges 0.2% + $0.20 per transaction
Stripe leveraged the trust they have with their clients and their expertise in technology to solve core merchant problems—financing, fraud and chargebacks, and a new trend around creating your own card—and turned them into potential revenue lines. And also makes Stripe stickier—if I’m issuing cards on Stripe, moving off of that is going to be a nightmare. A win-win, we really do love to see it.
I think infrastructure companies are going to start exploring this more, and also services that aren’t driven by technology. I’ve seen companies that have had really fascinating approaches to services—with the plethora of changes going on, companies are getting creative on how they can help their clients.
In September 2019, Finix, a fintech infrastructure company that helps merchants manage their own payments internally, bought Fintech 513, a Cincinnati, Ohio based advisory and consulting firm. The acqui-hire led to the start of Finix Professional Services, “in-house professional services group that will better enable SaaS providers…to unlock additional revenue by becoming payment facilitators.” Finix is a technology company at its core, but since so many of its customers aren’t familiar with payments or fintech at all, having a professional services firm in-house that you can upsell consulting services is much needed.
Moov.io, an open-source banking-as-a-service startup run by Wade Arnold, is taking this to the next level by just open-sourcing their core banking technology. You could literally start building on top of it right now. Don’t believe me? Here’s the Github.
If a banking technology company is open source, how does it make money? The answer has to be value-added services. I’m excited by Moov.io and got a chance to speak to Wade a few months ago, which was a really illuminating conversation. I left thinking about the plethora of different ways the company could monetize—things like custom implementations for different partners, advisory services, value-added technology services like fraud detection, and more.
For other companies in the infrastructure space that are thinking through their long term vision, I’d urge you to consider what other problems you can solve for your customers, either with your domain expertise or new services at tech. Can your expertise help the client in other ways, or help you clients modernize and become more efficient internally? Can you think of other areas where the tech is stale and inefficient that you can build and upsell your existing user base with?
