Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, I’m digging into companies that are adding financial layers to their core business to go to the next step of their journey.
Entrepreneurs are tipping points craftsmen. They go along their journey lighting one match after the other and working diligently to transform them into fires. Entrepreneurs build products, bring them to the market and toil to refine them until the market starts tipping in their direction. By adding a fintech layer to their business, they can trigger one of these tipping points that will carry their company on to the next level: they can become a fintech-enabled business.
I define a fintech-enabled business as a company that is adding one or several fintech layers on top its core value proposition.
In this paper, I will show you that the infrastructure stack is here to build a fintech enabled business. I will tell you what the benefits of adding a fintech layer to your core value propositions are. I will give you concrete examples in both companies in North America and Europe that have made this decision. I will also try to give you a framework to help you think about this idea and apply it to every company.
The Infrastructure Stack to Build a Fintech-Enabled Business
Cloud provider Amazon Web Services revolutionized the way we build software with its infrastructure as a service architecture. 10-15 years ago, to build a software, you had to start building your own IT infrastructure with physical servers. It took a long time to deploy and it was expensive. If a bug happened, you had to move physically to the place where your servers were to debug them. If you were growing faster than planned, you had to go back to the store to buy other servers to be added to your rack. With cloud providers, you can now start building a company at a much lower cost and with almost no complexity. As a result, it has generated a wave of innovative companies that would not have been started otherwise due to the upfront cost and complexity related to a proprietary IT infrastructure.
This infrastructure as a service architecture is coming into the financial services world. Obviously, due to the complexity of the financial stack, there is not a single player offering everything finance related as a service. You have several companies unbundling the banking stack and offering a layer as a service.
The IT infrastructure as a service enabled an innovation wave in the software world. This rising finance infrastructure as a service will enable another innovation wave. New and existing companies could leverage this new financial as a service infrastructure to reach a new tipping point in their journey. It's what I call fintech enabled business. I also believe that this combination of both IT and finance infrastructures as a service is the key to disrupt old fashioned industries like real estate, transportation, manufacturing, logistics, healthcare, etc.
This idea is well covered by Angela Strange at a16z. I have just summarized her key insights. If you want to know more, I invite you to read her writings in the resource section of the newsletter.
Shopify as the Perfect Fintech-Enabled Business
Shopify breaks down its revenues between subscriptions and merchant solutions. Subscriptions are monthly SaaS fees paid by merchants to access the Shopify platform. Merchant solutions are additional services provided to merchants to help them manage their businesses. Most of them are financial services. In 2019, Shopify generated 59% of its revenues from merchant solutions.
Shopify started to add financial layers to its offering back in 2013 when it introduced Shopify Payments in order to allow merchants to accept credit cards and other payment means without having to set up and rely on a third party provider. To process payments, Shopify is relying on a partnership with Stripe which provides its payment technology under a white label in exchange of a payment fee split between both player.
Since then, Shopify has added several financial services layers to support its merchants:
Shopify Capital (2016): it provides capital to merchants in exchange of a higher stake of their revenues. It has several products:
Cash advance to merchants and loans: debt to finance your working capital needs or investments to grow the business. Shopify provides 1y loan. You pay back the loan by giving a percentage of your sales to Shopify to align repayment with business success.
Initial $200 loans to kick-start a business on Shopify (opening a bank account, starting to make marketing, building a logo etc.).
Shop Pay (2017): it's like an Amazon one-click-button-to-purchase experience increasing the checkout speed by 4x and used by 40m customers.
Shopify POS (2017): it's Shopify branded hardware to manage transactions in a retail store while staying in the Shopify ecosystem.
Shopify Balance (2020): it offers a business account and debit card to business owners connected to your shop. As soon as a customer buys something on your website, you are able to spend it. You have no fees and no delays.
Shop Pay Installments (2020): instead of buying your purchase upfront, you are able to smooth it overtime in several monthly payment. Klarna and Affirm are the main players in this buy now, pay later market. Having an installment payment solution is a good way to boost your sales while having the cash front the purchase directly. Most of the time the solution is free for the customer and it's the merchant who will pay for the option by giving a cut of the sale to installment players.
Interestingly, Shopify is providing this additional financial service either with a third party partner (Stripe for payments, Affirm for installment payments, Sift Technology for fraud) or is building in-house capabilities to provide them.
Shopify has now an hybrid business model with subscription and financial services revenues. It has added several fintech layers overtime to become the perfect paragon of fintech enabled companies.
What are the Benefits of Adding a Fintech Layer to your Business?
I looked at fintech enabled companies in both North America and Europe to understand the rationale of adding financial products to their core offering.
Here is a non exhaustive list of reasons to add a fintech layer to your core business:
Expanding your total addressable market size,
Making the unit economics of your business more sustainable,
Driving usage and retention,
Addressing your customers financial pain points,
Reducing the frictions to purchase your product,
Removing barriers to acquire new customers,
Adding a recurring revenue line to your business.
A Framework to Become a Fintech Enabled Business
To brainstorm around adding a fintech layer to your business you can start by using this table in which you combine the key stages in your business cycle (acquisition, activation, usage & retention and market expansion) with the main financial services that you can offer (payments, lending, insurance, cards, bank account, benefits and compliance). At the intersection of each stage and financial service, there is an opportunity to find a tipping point for your business.
Let's consider that you are a marketplace in which independent workers are providing a service to consumers or businesses (Uber, Airbnb, Deliveroo, Getyourguide, Upwork, Blablacar etc). Here are example of financial services that you can provide at each stage of your business to make it more successful:
Acquisition: reducing the onboarding friction for your supply side with a KYC as a service solution like Onfido, giving a small financial incentive as a kicker to push independent workers to join the supply of your marketplace (e.g. Substack’s grants to push writers to become independents),
Activation: offering an insurance product (e.g. Host Protection Insurance at Airbnb), reducing the friction points around the booking process (e.g. instant bookings at Airbnb, one-click purchase with Amazon), offering buy now pay later solutions for large purchases (e.g. Cowboy using Alma),
Usage and retention: become a full service neobank for your independent workers (managing payroll, pensions and benefits; offering income smoothing or loans solutions; giving them a bank account and a credit card), offering an annual subscription to your demand with specific advantages to increase their usage and retention over the long run (e.g. Deliveroo Plus, Uber Pass),
Market expansion: managing payments for transactions happening between stakeholders in your company’s ecosystem beyond the encounter between your supply and your demand (e.g. salaries for your supply).
Please note that this is the first iteration to write down an idea that is closed to my heart. I would love to have your feedback to refine it. If you are building either a fintech-enabled business or a financial infrastructure as a service solution, I would love to have a chat with you. Send me an email at email@example.com.
🗞 Super SaaS (Pietro Bezza, Jun. 2020)
🗞 Fintech Scales Vertical SaaS (Angela Strange, Aug. 2020)
🎥 Every Company Will Become a Fintech Company (Angela Strange, Aug. 2020)
🗞 A Neobank Stack (Fintech Ruminations, Sep. 2020)
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋