Blog: How does fintech make money? 7 business models explained
In recent years, the Fintech industry now worth £3.8 trillion, has experienced rapid growth and disruption, revolutionising the way we handle financial transactions. Fintech companies have introduced innovative solutions to various financial challenges, including mobile payment, digital wallets, funding circles, and robo-advisors. The billion-dollar question is how do these companies generate revenue?
A solid business model is crucial for any company, new or existing. It’s a plan for how the company will make money, including products or services, target market, and expenses. A well-thought-out business model can make all the difference in success. In this blog post, we will explore seven common business models employed by fintech companies to generate money and thrive in this digital era.
1. Digital Banking
Traditional brick-and-mortar banking is witnessing a digital revolution, completely transforming into an online institution, leaving behind physical branches, banking staff, or the reliance on post-based services. Digital banks like Revolut, are steering the way in providing simple and efficient banking solutions through a fully digitalized infrastructure. Their business model is almost identical to that of a bank with physical infrastructure except that with the huge cost savings in staffing and real estate, customers can significantly benefit from reduced rates and the digital banks can benefit from reduced costs and increased profits.
2. Transaction Fees
One of the most common methods fintech companies monetize their services is through transaction-based fees. Organisations like TransferWise and Elavon charge a small percentage or fixed fee on each transaction taken through their platforms. This model allows them to earn revenue in proportion to the volume and value of transactions facilitated, making it highly scalable.
3. Data is King
One of the main reasons fintech companies are successful is because of their ability to harness the data they collect and offer a more personalised and unique service to their consumers. Data about people’s spending habits, including their income, expenditure patterns, and preferred shopping places, is information that is more valuable than gold. Experian is a renowned fintech data provider and a global leader in its field. Their vast database includes over a billion individuals and companies worldwide, and they collect comprehensive financial information and credit reports. With their data assets, Experian has developed a monetization strategy that also benefits developers and businesses through their Developer Portal. This portal serves as a gateway, providing seamless access to Experian’s fintech APIs, along with relevant documentation, credentials, and test APIs. As a result, companies can easily harness Experian’s data to construct innovative fintech products.
APIs are essential to fintech applications and provide secure communication between businesses and banks. For example, consumers can use APIs to access their account information while logging in to a banking app and perform transactions such as making purchases through payment processors like Stripe. Fintech companies can sell their APIs’ license and code to other businesses, helping to drive revenue and expand their reach.
One of the most successful forms of monetization is simply Advertising. An organisation can leverage their user base and customer data to generate revenue through advertising. Fintech companies can monetize their platforms without directly charging users. For example, personal finance apps might display relevant financial product recommendations or offer sponsored content to users.
Robo-advisors are platforms such as Wealthsimple that generate revenue through trading. They provide smart, simple investing, without the high fees and account minimums associated with traditional investment management. A Robo-advisors such WealthSimple charges a 0.40%-0.50% management fee, depending on the portfolio.
7. Funding Circles
Funding circle platforms are growing in popularity in the Fintech industry. This model allows borrowers to access loans directly from individuals, without financial institutions. Investors can earn interest while Fintech companies earn fees. This simplified lending process can offer better returns than traditional debt markets. Fintech companies can also streamline commercial lending by matching lenders with borrowers and earning fees from the repayment process. There is still room for innovation in financial planning and management apps.
Thank you for sharing your interest in exploring the various business models in the fintech industry. At MPA, we are committed to helping individuals stay up to date with the latest financial technologies and gain practical knowledge in the field of fintech. If you require expert guidance and support, or are struggling to navigate business growth, we’ve launched our free Business Clinics to help give you clarity. Book a session today or speak with one of our experts on 0808 302 9512
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