Fintech founders who set out to solve big problems for consumers almost always start with the best intentions – they want to help people. But they often miss that mark by a country mile, which raises questions about the effectiveness of other fintech founders in helping consumers. Trust me, when you name your for-profit, venture-backed fintech like “Altruist”, a certain amount of healthy skepticism follows.
This skepticism is understandable because, in many ways, the fintech world is built on a foundation of internal conflict. The vast majority of fintech founders deeply appreciate the power and value of hyper-profitable business models in realizing less profitable goals. Many come from finance backgrounds, giving them an insider edge in identifying the ways in which financial tools and institutions fail to benefit – and sometimes exploit – consumers.
Founders quickly identify problems and have the skills to fix them, so they hang on and start building a solution to help people. Their intentions are generally altruistic.
This is where things start to get more complicated for fintech founders. The same industry know-how and business understanding that helped them identify problems to solve will lead many down a path that abandons their initial mission.
So where do altruistic fintech founders get lost? What market forces transform their “break” into the same archaic business models? And, more importantly, how can they be avoided?
Avoiding the path of exploitation
The first step any fintech founder must take is correctly sizing their addressable market, and that doesn’t just mean identifying a pervasive need. “We want to help people start saving” is a great mission statement, but any founder should be realistic about meeting that need.
If your business model means you need to generate revenue equal to more than 200 basis points of your addressable market, it can cost a lot of money to the people you set out to help. In short, you have to get the math right.
Whether solving savings, budgets, or investments, all of these solutions are well-intentioned and well-executed, but they are the financial equivalent of “solving” insomnia with bedding.
The unit economy of your business is such that it costs a lot of money to acquire customers based on that customer’s assets. To make the math work, you need to generate a huge amount of LTV, and since the customers you want to help don’t have enough money, you need to charge huge fees.
If you really look at the business models of many consumer fintechs, particularly savings products, their fees are usually 5% per year. That’s not far from predatory lending.
In effect, they’re saying, “We’re going to make you use our product and charge you for transactions so small you don’t realize you’re never really moving forward.”
Worse still, many founders go down this path of exploration without ever realizing it. Getting the math right should be your first step, but there’s no wrong time to sit back and take another look to see if there’s another way.
Scratch pressure and shiny objects
If you find yourself on the wrong side of the “mathematics” of the addressable market, you are open to the fintech founder’s next dangerous trap: the “get big quick” scheme.
Venture markets have made being in fintech so fluctuating, and there are huge pressures to use the same playbook to grow an organization to raise big money. Unfortunately, this approach often leaves the customer waiting.
For example, a large fintech that automates investments, purchases and spending has a noble mission and has also publicly said that it expects to earn 1% on all assets. That’s a high rate and nearly double that of many non-digital platforms.
But if you really do the math and charge a truly “disruptive” quarter of a percent, $5 billion in assets is just a $12 million deal. Investors don’t want to start small companies, and $12 million is a small company. At 1%, suddenly you are a unicorn with the ability to change the world.
Getting big quickly like this can lead to overpriced products that retain consumers and “slip the mission”. The founder who sets out to help people save money can turn into the founder who bundles a high-fee cryptocurrency investment service into their product. Why? Because cryptocurrency offered a faster path to growth and funding at that time.
This urge to raise funds is another quick way to get lost. When founders do a lot of quick funding rounds (insurance or traditional preferred stock raises), they often find themselves owning a minimal percentage of their own company.
At this point, you are stuck with “growth at all costs” and need to build a monster to see any benefit.
Solving for C going B2B
Of course, some of the founders reading this column are probably already mid-flight. You’ve evaluated your addressable market as best you can, picked up the necessary funding, and chosen your investors. There may be very little you can do to manage the risks described above.
That said, there is still an often overlooked path for an altruistic founder to help consumers – by addressing the root cause rather than the end result.
There are few issues more complex and personal than a consumer’s relationship with their money. Too many companies think they can create a consumer pain point to somehow create systemic change and a better financial life for someone – they identify a consumer problem and think the solution should be a direct-to-consumer move.
Whether solving savings, budgets, or investments, all of these solutions are well-intentioned and well-executed, but they are the financial equivalent of “solving” insomnia with bedding.
I don’t mean that you need to ignore consumers’ problems, but you can help them more by focusing your vision beyond what the average person deals with in their day-to-day lives.
The difficulties people face in saving money can be resolved by developing new banking systems. The challenges people face getting to payday can be solved by working with employers and improving their payroll solutions. Wealth management difficulties can be eased by providing consultants with better technology to help their clients.
Best of all – solving business problems means you can better avoid the other pitfalls of fintech founders. Correctly sizing the addressable market of a B2B solution is much less prone to delusions of grandeur. There are far fewer distracting shiny objects and “fast growing” gimmicks in the B2B world. Investors who support B2B fintechs tend to be more patient and reasonable in their expectations for lane and ARR.
You may still end up launching a consumer product, but you will have achieved the right stability and scale to effectively serve consumers by that point.
In many ways, the best way to help consumers is to look beyond them.