Fintech entrepreneurs that set out to tackle major consumer problems nearly always do so with the finest of intentions: they want to benefit people. However, they frequently miss the goal by a long shot, raising concerns about how effective other fintech founders can be in assisting consumers. When you call your for-profit, venture-backed fintech business “Altruist,” expect to meet with a good dose of suspicion. That distrust is reasonable, as the fintech sector built on a basis of internal conflict in many aspects. The great majority of fintech entrepreneurs recognize the importance and potential of hyper-profitable business models in achieving less clearly profitable objectives.
Many have expertise in finance, providing them an insider’s perspective on how financial instruments and organizations fail to assist — and often harm — consumers. Founders recognize problems fast and have the abilities to solve them, so they lock on and begin developing a solution to assist people. Their motivations are, for the most part, altruistic. For fintech founders, here is when things start to get trickier. Many will drive onto a road that abandons their initial objective by the same industry expertise and business acumen that helped them find challenges to fix.
So, where do good-hearted fintech innovators go astray? What market forces cause “disruption” to resurface in the same old company models? In addition, more importantly, what can do to avert them? Keeping away from the exploitative route, the first step for any fintech startup correctly their addressable market, this does not simply imply finding a widespread need. “We want to assist individuals in starting to save,” is a terrific goal statement, but any founder must be realistic about how to meet this demand.
If your business plan requires you to earn revenue of 200 basis points or more from your addressable market, it may be prohibitively expensive for the individuals you are trying to help. In other words, you must do the arithmetic correctly. All of these solutions, whether they’re for saving, budgeting, or investing, are well-intentioned and well-executed, but they’re the financial equivalent of “curing” sleeplessness with bedding.
Your company’s unit economics are such that acquiring customers based on the assets of that client costs too much money. To make the math work, you will need to generate a huge level of LTV, and you will have to charge exorbitant prices because the consumers you are trying to serve do not have enough money. When you look at the business models of many consumer fintechs, especially savings programs, you will see that their costs are frequently around 5% per year, those dissimilar to predatory loans.
“We’re going to convince you to use our product and charge you on such minor transactions that you won’t realize that you’re never truly getting ahead,” they are effectively saying. Worse, many entrepreneurs follow this predatory route without even realizing it. The initial step should be to get the arithmetic right, but there is never a bad moment to sit down and look to see if there is another way.
High-pressure situations and gleaming items, if you fall foul of the addressable market “math,” you will be vulnerable to the next, most hazardous fintech founder trap: the “become huge quick” plan. The venture capital markets have made it so frothy to be in fintech, and there are big pressures to scale up an organization to raise a lot of money using the same playbook. Unfortunately, this strategy frequently leaves the customer high and dry.
One prominent fintech company, for example, that automates investing, purchasing, and spending, has a good aim and has openly said that it expects to make 1% on all assets. That is a hefty cost, about double that of many non-digital platforms. However, if you do the math and charge a truly “disruptive” quarter of a percent, $5 billion in assets becomes a $12 million company. Investors prefer not to invest in tiny businesses, and $12 million is a small business. At 1%, you are suddenly a unicorn with the power to transform the world.
Rapid growth can lead to pricey products that hold customers back, as well as “mission creep.” The founder who started out wanting to help people save money may end up adding a high-fee crypto investment option to their product. Another fast way to lose your direction is to be overly anxious to raise funds. When entrepreneurs raise a large amount of money quickly (through safe notes or typical preferred equity financing), they often end up controlling a small percentage of their own company.
