With heaps of venture capitalist money flowing into the FinTech ecosystem, “challenger” banks are threatening to wipe out banking behemoths faster than Blackberry was taken out of the cellular telephone market.
4. Peer-to-peer lending
Peer-to-peer (P2P) lending is when an individual borrows money from other individuals. Similarly, peer-to-business (P2B) lending is when a business borrows money from one or multiple individuals. These lending models are making it easier for investors to get better returns than those offered in debt markets by giving their money to pre-approved and vetted borrowers. FinTech companies such as Funding Circle create platforms to match borrowers with lenders and usually take a fee from the borrower’s repayment.
5. Small ticket loans
Banks and other lenders typically don’t want to underwrite smaller ticket loans because of the low margins and high costs involved in setting up and recovering them. FinTech companies in this slice of the market (such as Affirm) are delivering impulse buy mechanisms (buy now pay later, or BNPL) and one-click buy buttons on e-commerce websites to enable customers to buy quickly without having to enter any form of authentication or credit card details.
These loans will typically be underwritten at 0% interest so that almost anything can be purchased outright with the option to pay in instalments. How is the money made? By sharing customer data with the original equipment manufacturer (OEMs) as they will benefit the most from the increased affordability of these devicesbining this with algorithms that will determine customer demographics ensures highly-customized marketing offers.
Payment gateways are platforms that enable shoppers to pay for a product or service on a merchant’s website. Today, there are countless payment methods such as debit cards, credit cards, digital wallets, and cryptocurrencies. Typically, banks charge enormous fees to handle transactions from all these different methods, but FinTech companies are integrating all of these payment methods into convenient apps that online merchants can easily afford and integrate on their website. Typical users of these payment apps would be businesses selling either their physical products or services to end users, ex. Stripe, Alipay, iZettle.
7. Digital wallets
Digital wallets can be seen as a combination between a no-frills bank account and a payment gateway. With this business model, a user can pre-load a certain amount of virtual money into their wallets and use this virtual money to make either online or offline transactions with merchants who accept digital wallets as a payment mechanism.
A digital wallet business model typically involves giving users the convenience of making payments for a small fee that is typically charged to businesses in the form of a merchant discount rate (MDR) and via the float that they would make on the money lying unpaid in customer/business accounts. Typical end users of wallets would be businesses selling either their physical products or services in stores to end users, for example Venmo, Square Cash, Google Wallet, etc.
8. Asset Management
Ever heard of buying stocks or mutual funds without having to pay a commission fee? personal loan California FinTech companies like Robinhood are enabling investors to trade for free in exchange for their data. They forward this data to high frequency traders who can then influence the price of the asset. Even though the investor might pay a slightly higher price for their asset, the difference between the amount they save from trading fees and the slight increase in price is still positive.
9. Digital banking
Imagine your traditional brick and mortar bank going completely online – no physical office, no bank tellers, no mail. Challenger banks such as N26 are offering no-frills individual and business bank accounts through a complete digital infrastructure. The business model here is almost identical to that of a bank with physical branches except that with the huge cost savings in manpower and real estate, customers can greatly benefit from reduced rates.
10. Digital insurance
As with digital banks, FinTech companies operating in the insurance industry are taking all of the traditional services to the digital world. Offering life and health insurance with better underwriting practices, these FinTechs can price their premiums at variable rates depending on the customer, thereby offering aggressively cheaper coverage compared to traditional insurance companies. These types of insurance, together with personalized marketing, can create business possibilities that insurance companies have only begun to explore. Lemonade, for example, is operating in the house insurance space.