- Gary Palmer |
- White papers
- Dec, 2019
The best way to get your FinTech idea to market. And not go out of business trying
Fintech is hot
A Google search for the “definition of FinTech” returns over 59,900,000 results. Before we get started let’s agree on a definition of FinTech:
“FinТech firms, those that apply technological innovation to financial functions and systems...”
Patrick T. Harker, “Philadelphia Fed's Harker: Regulation Is Key to Safeguarding Fintech, Consumers”
This article explains the arcane innards of FinTech and an alternative paradigm for accelerating product development and reducing cash requirements by thinking about banks, technology and people in a fundamentally different manner.
My thinking around FinTech is organized by three broad vertical markets or user profiles — Business, Government and Consumer.
There are numerous examples of FinTech products. Some are quite mature, such as Electronic Benefits Transfer (EBT) for the delivery of social benefits while more recent examples include cryptocurrencies, blockchain applications and mobile payments.
FinTech applications vary and are supposed to be better than the existing proposition from the perspective of user accessibility, cost, speed, ease of use, control, integration with non-payment applications or safety.
But most new FinTech companies fail
Many FinTech companies failed over the last 20 years. Some products failed to solve problems or add better value, some were difficult to acquire or complicated to use; Others killed-off by regulators; Many burned through their budget before they even earned enough revenue to cover costs.
The approach I describe enables FinTech visionaries to minimize cash requirements, shrink development timelines and even come close to the impossible — flipping the classic FinTech business model from a high fixed cost to a variable cost model.
Every FinTech product must have a Regulated Entity, Technology and People to exist.
I call this the FinTech Triad.
Deposit Institutions, Acquirers, Issuers, Consumer Lenders, Commercial Lenders, ACH Operators and more.
The “official name” and service provided by each Regulated Entity varies by jurisdiction. State Banks, Federal Banks, Credit Unions, non-bank entities such as eMoney Issuers and Payment Institutions are all regulated for specific payment services.
In order to understand the importance of Regulated Entities, let's examine the case of Bitcoin: Bitcoin is often cited as the prime example of FinTech gone bad since, according to many, Bitcoin operates “entirely outside the financial system.”
In fact, all funds that flow into Bitcoin come from a “source”, and that source is always a bank — either by money transfer or a credit/debit card transaction.
This means that a Regulated Entity — a deposit bank, a credit card issuer, or a debit card issuer - plays an essential role enabling the funding of an account to purchase cryptocurrency. Without Regulated Entities completing due diligence on these customers. Moreover, it also authorized or approved the transaction to fund the account used to buy Bitcoin.
When Bitcoin is converted to fiat, funds are transferred into an account at a Regulated Entity. It’s clear that Regulated Entities are essential for Bitcoin to exist.
Again, all FinTech, even crypto products, depend on Regulated Entities.
FinTech operators should consider an alternative and far more effective approach, which involves engaging a specialized Regulated Entity.
In the US, a leading prepaid issuer is Meta Bank. For 15+ years, Brad Hanson, CEO of Meta Payment Systems, has built a highly focused, efficient and innovative prepaid business. He powers hundreds of prepaid programs and numerous program managers. This is an example of specialization by a Regulated Entity that works to provide quality services within a specific need.
FinTech operators should select a bank based on the specific services needed instead of convenience. When choosing to partner with Regulated Entities based on needs instead of convenience, it becomes an open, constructive process rather than a stifling relationship. Specialty services available from Regulated Entities include payment card acquiring, ACH origination, prepaid issuing, core banking services, consumer or business lending, and other.
Respecting Regulated Entities and engaging them as valuable partners ensures the existence of a strong (yet progressive) compliance foundation on which to build the FinTech business and operate.
Working with a Regulated Entity is a requirement - they’re invaluable partners and are often the “ticket” required to be in FinTech!
Core Systems, Acquirer Processors, Issuer Processors, ACH Originators and more.
Few FinTech solutions are technically revolutionary. The technical differentiator that powered the success of PayPal, Square, BillMatrix, Evolution1, Eccount and even WildCard Systems (a prepaid processing company I co-founded) and many other current and previous notable FinTech companies is how these businesses enveloped or repurposed existing technology, and then just added their own “special sauce” to solve the big problems. It is about the efficiency of getting the unique product to the market – not about developing technology from scratch.
TransCard is an example of a technology firm that a FinTech business can build around with their “special sauce”. While broadly categorized as an issuing processor of network branded prepaid cards, their capabilities are more akin to a specialized corporate disbursements engine that features a robust data processing microservice prior to reaching the prepaid issuing platform. This enables payers of all sorts (from medical or pharmaceutical to entertainment platforms) who require enhanced decisioning based on a set of rules, to leverage the TransCard service rather than build their own from scratch.
If existing capabilities aren’t sufficient, FinTech companies face a choice to either a) build additional tools or b) engage companies like TransCard to incrementally extend their service. Generally, the latter is much faster, cheaper and more efficient than an external build.
Once systems are constructed, the ongoing care-and-feeding for the product begins. From funding a data center and perpetual PCI-compliance to ongoing network administration, software support and technical operations, quarterly updates from the likes of Visa and Mastercard... Data centers. Hardware. Software. People. The high-cost nature of this approach sucks cash - fast. It’s difficult to balance devoting energy to both the processes of keeping the product running and attracting customers in order to maintain sales.
What’s the alternative?
Figuring out how to integrate with or wrap-around a payment technology provider is much better than building everything from scratch. There are several capable processors, software companies and core system providers that can make ideal partners.
Just as with Regulated Entities, the big-payment and banking technology companies can also be sales channels and, eventually, buyers of the FinTech business.
Which sounds more appealing?
Paying a technology partner a penny per transaction, a modest subscription or license fee, versus spending millions (or tens of millions) of dollars and wasting months or years building readily available services?
Developers, KYC/ AML, Compliance Experts, Product Managers, User Support and more
At a high-level, I’ve dissected People into 3-types: Development, Operations and Sales. To be clear, these are highly specialized for FinTech, but with the ability to broadly apply financial concepts to new applications.
What if there was a way to leverage a single company for a wider set of core people functions necessary to support the development of “special sauce” and the entire FinTech people operations?
When we dissect “what people do” or “what people services are needed”, clear repetition and overlaps emerge. Some companies already tackled this overlap by creating “FinTech people platforms” consisting of an entire team of professional FinTech-specialized services.
Some of them offer services on a subscription basis, which can replace the typical high fixed payroll cost for a core team with a variable cost structure. This saves cash — not to mention a lot of management calories to identify, recruit, hire, train, manage and keep motivated an oftentimes underutilized and expensive team.
There’s no panacea. By thinking along the dimensions of the FinTech Triad (Regulated Entities, Technology and People), critically analyze what needs to be developed and what a partner could provide. Carefully selecting the right partner allows FinTech products to launch faster, cheaper and easier than the alternative of building, hiring and managing everything in-house.
A jack-of-all-trades is a master of none when it comes to building an efficient and successful FinTech operation that makes it to market quickly. Instead of trying to stretch time, energy and capital thinly across all the necessities of creating and maintaining a FinTech product, delegating areas of the process to well-equipped partners allows the product to come alive quicker and thrive.
This is an excerpt from a White Paper published by Gary Palmer in March 2019.
Read and download the full version here.