Fintech has changed the way we bank for more than two decades. As the market started maturing, we experienced some business models sticking and some disappearing. Economic and political difficulties seem to be testing even the most trusted concepts.
“All failed companies are the same”
Start-ups in the market can be divided into two main categories: successful and not-so-successful start-ups.
A start-up is traditionally considered “successful” if it can raise funds, grow a team, get a high valuation, capture the media’s attention, or launch a viral marketing campaign.
However, although fundraising or valuation are significant start-up milestones, they do not declare a quick proof-of-concept or promise longevity.
In Zero to One, Peter Thiel quotes Anna Karenina’s opening (“All happy families are alike; each unhappy family is unhappy in its own way”) and observes, “Business is the opposite. All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.”
Indeed, all failed businesses (swiftly or gradually) reveal the concept or execution mistakes and complete their lifecycle after enjoying a butterfly’s dream. But what makes some business models more sustainable or resilient than others?
Profitable Fintechs’ Secret Sauce
The secret sauce of a start-up has three components: focus, flexibility, and product-market-fit.
“Focus” keeps entrepreneurs’ feet on the ground, whereas “flexibility” allows them to move fast and change direction quickly when things go south.
What the heck is product-market fit, though?
Marc Andreessen defines product-market fit: “The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. So, you’re hiring sales and customer support staff as quickly as possible.”
In simple words, product-market-fit is the magic point where the user needs meet with the products/services the start-up provides.
This milestone is quickly followed by growth and profitability without any fuss. Of course, it goes without fuss since the companies usually get too busy to deal with PR and focus on their profitability instead.
We see these companies daily in the DACH region; the SMEs or mid-size corporates that do one thing well and work like well-oiled machines. You might not know about them, but they are great at what they do, and although these ventures are not monopolies yet, they are primarily competition-free.
Product-Market-Fit from the FinTech Angle
It’s fair to say that product-market-fit principles are generally similar, regardless of the industry.
However, Fintech-specific challenges can make it harder to reach PMF, for example:
- high competition
- regulatory and supervisory requirements
- unclarity and costs
- outsourcing and compliance-related approvals and waiting times
- hefty BaaS costs
- non-standard expansion process
- consumer prejudices and conservatism towards (novel) financial products
- long B2B sales cycles
Considering the high stakes and costs involved in building a successful FinTech product, entrepreneurs should create a bottom-up approach instead of a top-down product strategy, relying on conventional and costly sales and marketing activities.
Let’s take a closer look at the FinTech-specific challenges through the lens of one of the most popular product offers, neobanks. According to Bitkom’s (2021) research, more and more German citizens are changing their bank accounts. However, even after the eased account switching rules and the pandemic-influenced Fintech boom, the account switch rates remain below 50%, at 47%. Although there is a positive trend (34% in 2018 and 47% in 2021), the fact that the majority of the survey participants haven’t considered testing another bank shows how hard it is to convert customers. Statista reveals a similar challenge for the UK. Accordingly, the annual total number of customers who switched their current bank account provider in the UK has decreased overall since 2014.
The Road to Success
It is easier said than done, and sometimes looking for the product-market fit might feel as hectic as Nicola Tesla’s early days in Colorado.
Although the product-market fit is usually regarded as a moment of divine intervention, luckily for entrepreneurs, there is no more than using the correct methodology. So here are our pointers for finding product-market-fit in the highly competitive FinTech market:
#1: Problem w/o Solution vs. Solution w/o Problem
The key to the product-market fit is building the product or the service on an existing (user) problem. Often, we see solutions that do not address any problem (“solution without a problem”) or ones that are hard to differentiate from other solutions.
Ultimately, it is essential to understand that the customers do not care about the small details in the product pitch (“Similar competitors exist, but our neobank has a playful app“) or whether you use a blockchain or AI.
Instead, users care about tangible results and putting an end to a financial problem one way or another (e.g., sending money quickly or inexpensively, getting better rates, getting pre-approved for a loan, etc.).
#2: Use The Mom Test
“It’s not anyone else’s responsibility to show us the truth. It’s our responsibility to find it. We do that by asking good questions.”
Regardless of the reassurance, you might get from friends or colleagues when you come up with an idea, if your idea can’t pass “the mom test,” it is likely to be a waste of resources. Instead of basing the “problem” on your intuition or hearsay, ask your customers directly.
When communicating with your customers, it is essential to use neutral and open questions to reveal their real needs and problems (“Do you send money abroad? How do you send money abroad? Do you experience any challenges during the process?”).
On the contrary, confronting or guiding potential users during the survey process via closed questions (“Do you like our product?” “Will you use our product?” “What do you like about our product?”) will create answers that are not eligible.
#3: Too Generic vs. too specific target group
Contrary to widespread belief, the perfect target group should be a niche and ideally fit a printable excel list. If your product or service targets the whole market (“A credit card for all Germans”), this usually indicates that you haven’t done your homework well. Due to customer saturation, no financial (or non-financial) product could or would target an entire jurisdiction, whether it is a traditional finance or a FinTech product. However, a specific group with a particular problem (e.g., lawyers who need an expense solution for their in-court expenditures or student accounts that connect with student discounts and cashback) is usually a great way to start, as it can quickly spiral via the network effect. This niche should moreover be eligible for a business case and have growth potential.
#4: Minimize Freeriding
Bootstrapping can be an essential part of the game, but not spending enough time on budget on the crucial aspects of your conceptualization phase might result in the need to return to these phases. Spare an outsourcing budget for the research or planning-related parts you are not an expert on, as financial regulators and investors will expect diligence from you. Sloppy or simple forecasts, business cases, user research, and regulatory applications that do not reflect the diligence authorities expect from you might “deprioritize” your application or request.
#5: Plan Ahead
Offering services in highly regulated financial markets means your plans can be stalled due to additional bureaucracy or due to (existing or upcoming) regulations. Always factor in a buffer when planning deadlines. Also, you can stay ahead of the game by sniffing around new draft laws or regulations that might impact your business by getting in touch with lobbying institutions, regulators, or networks.
All in all, entrepreneurs should keep in mind that FinTech is not reinventing the wheel, but rather improving or bettering something people are comfortable with. Since financial services exist already for centuries, a little more than just new technology is needed to undermine the current alternatives. New FinTech products and services should create trust and change habits. Therefore, the FinTechs built on a real-world problem will be easier to comprehend for the customers and closer to the “Eureka!” moment.
The problem-based ideas are already marketable and do not need over-the-top budgets to start selling. On the contrary, the concepts that are not a part of an existing problem will need additional sales or marketing departments and extensive budgets to determine how to make or repeat sales.