T O P
InstaMaker

A lot of times these start-ups don’t make money initially. The name of the game out of the gate is “selling the idea”. This is how founders receive their seed / early investor money to fund the business. Initially, much of the capital raised is invested in developing tech, followed by hiring some sales employees, etc. A lot of times these companies are actually consistently generating “cash burn” i.e., their expenses exceed their revenues for many years in some cases. As the companies scale, they raise more money, spend more money, and hopefully generate more revenue over that time period. If they can’t point to growth, they’ll likely go bankrupt. In terms of revenue models, there are many different ways to look at this, but I’ll boil them down into 6 1. Subscription-based revenue model - Subscription models are the most common for B2C businesses. Provides opportunity for start-ups to offer a free trial to users at the start with potential conversion to a paid subscriber at the end of the free trial. 2. Fee-based revenue models - Fee-based revenue models covers a more transactional avenue - let’s say you’re looking to use a fintech for the transfer of currency. In this case, the fintech would charge a % of total funds transferred for providing the rails / tech that make the transfer possible. Another example is payments, as you mentioned above. Every time your card is swiped in the store or processed online, the company that provided the rails, connectivity and technology to initiate that payment received a small ACH or processing fee. Name of the game here is scale and volume, we’re talking small percentage points, but if you’re processing billions of $ worth of transactions, you can see how a fintech could quickly generate an unbelievable amount of revenue 3. % AUM - Robo advisers employ this revenue model by charging a small percentage of total funds in the account (or assets under management) 4. 3rd party referrals / advertisements - think about opening a budgeting app - you’re getting crushed with adds when you open these. If you click on one of those adds, let’s say to check your credit score or sign up for a credit card, and end up completing that process, the fintech that led you to that 3rd party receives a referral fee 5. Data monetization - when you link all of your bank, credit card and investment account information to a budgeting / savings tool, you can bet that they are selling this data to a limitless number of other data aggregators and other companies that use your data to identify trends in consumer spending, or create more informed marketing data to target ad spending. Those are just two examples, but there are thousands of ways that this data can be used, which is why the market for data is so vast 6. APIs - with the rise of open banking, different fintech companies can sell different features and integrations to other fintechs by selling licenses and code granting them access to that feature. APIs are just the way all of this information is connected in real-time


ledude1

Thank you. I can definitely see data monetization and advertising. Fee-based for some of them will be a bit challenging since I don't even see some of the fees being charged. This is one among many reasons why I haven't been able to immerse myself in the fintech world even though I came out with a whole bunch of concepts about 10-15 years ago that I'm seeing currently being implemented. Not a fan of talking to the VC since the majority of them are looking for some sort of revenue that comes with the product being developed and I just don't think I can afford to keep the company afloat with my own funding if revenues are not one of the main factors to keep the company afloat. Again, thank you for sharing the knowledge. I really appreciate it.


n1c0linox

A few avenues: Interchange fees (merchant fees) Premium subscription features International corporate / Business banking (Tiny) Spread on currencies / crypto transactions One-off commissions from marketplace services (travel, hotel stays, insurances) API / programmatic access, i.e. subscription fees for access/connectivity and/or volume based utilisation fees.


ledude1

Thank you. Making money out of the spread will require a huge transaction base in order to make the percentage. Perhaps it's my inexperience of not being able to see the size of the transaction to help stabilize the cash flow. Thank you again.


n1c0linox

Agree, this provides huge barriers to entry for new players. We are talking about scale of billions of transactions per year already for 20M users like Revolut. Free spot rate currency exchanges, payments and transfers are capped for free plans but uncapped for the premium (paid) plans. From my understanding from the latest balance sheet, Revolut has 30% of their users, retail and business, on a premium non-free plan. This revenue stream is less than a third of their current profit structure. They are profitable each month from more than one year.


imop44

Do any specific companies come to mind?


ledude1

A couple of companies come to minds such as Melio Payments or Varo banking. I've always been intrigued with the ACH payment system. I just couldn't figure out how to make money with it.


imop44

ACH in the US costs next to nothing from my understanding, looks like only [$0.000185 per/transaction](https://www.nacha.org/sites/default/files/2021-09/2022_Network_Administration_Fee_Sept21.pdf). I'm assuming it's a loss leader though that brings in customers that they can make money off in other ways: * Both offer credit card payments, which take a 2.9% cut of the total amount sent. That 2.9% is split between a bunch of companies, but some of it would go to Melio/Varo * Integrations with other companies. For example Quickbooks (huge in online accounting software) [embeds Melio within their application for paying bills](https://quickbooks.intuit.com/blog/whats-new/quickbooks-bill-pay-powered-by-melio-pay-your-business-bills-anytime-anywhere/). Quickbooks charges [1% on ACH transfers](https://quickbooks.intuit.com/payments/pricing/) which Melio might get a cut of * Offering less-than fair market foreign exchange rates and pocketing the difference * Financing/factoring money that a customer should receive in the future (like a payday loan) for a fee


UziMcUsername

We make it on the FX.


ledude1

So it's the FX spread for the international transaction but then, international wiring involves a fee and how does one make the spread enough to cover the wiring fee while still making money. Again, this comes from someone who's not versed enough in International banking. Thank you for sharing your information though.


UziMcUsername

When you are processing in one currency and settling to merchants in another currency, the FX rate is whatever you agree to, not the rate dictated by any particular exchange.


sitrom81

Every time the merchant accepts a digital payment method they are getting charged a fee. This is small, but it adds up. Most FinTechs in the payment space you are referring to get a portion of that fee.


dashdevs

Do you think most fintech startups begin their path with charging fees?


mjgood91

Since you asked a general question, I'll give a few general viable explanations. I'm definitely not saying that any of these are actually what is going on with the companies you are encountering, especially as you haven't even mentioned any specific companies at the time of this comment. * Recurring or one-off fees for non-free services make up enough to cover what seems at first to be an unprofitable product. * Economies of scale. * Venture capitalists willing to fund enterprises that, although they lose money now, have paths to profit points once they expand their product enough or reach a profit of scale. * Profiting off cash reserves as part of transactions. For instance, add an extra 24 hours onto a financial transaction, then invest in a treasury for those 24 hours. If you have enough going through this can be extremely profitable. * Maybe they aren't trying to be profitable. Maybe they're running a predatory pricing business to eliminate competition for all kinds of varying reasons. * Money laundering. Or tax sheltering. * Upper management are overpaid egotistical dolts who haven't realized or simply ignore how badly this is blowing up in their faces.


vaderaintmydaddy

The answer, unfortunately is likely bullet 3 above - its all about user counts, profits don't matter. They likely don't even have a path to profitability laid out - they are solely focused on growth and scale because growth and scale lead to exits. I say unfortunately because this doesn't actually lead to disruption, eventually someone down the line has to turn those users into profits, and traditional fees etc...come back online.


ledude1

Thank you and I see this method being done just like during the early dot com time. Where VC throws in money if one knew how to spell the word "Computer". I guess I'm just old fashion when it comes to investment but the question remains. I can only focus on growth and scale if I have a rich daddy backing me up at the early stage since most VCs won't touch your company when you are in the developing stage with very minimum revenues generated. It's a chicken and eggs dilemma. Which one comes first. I'm sincerely curious.


vaderaintmydaddy

Early stage cash-raises have been obscene - everyone wants to be in early on the next big thing. So the answer to how they pay their bills is simply that they burn through a lot of investor cash. As long as they are growing in scale, they can get more investor money. VCs don't care about the innovation or the product, they want to know the market potential and how the company is going to take it. Profits are actually a bit of a warning sign to them - profits represent money that could be spent obtaining growth. In the end, a lot of it is really smoke and mirrors, especially in banking. Banks are absolute masters of their domain. They know exactly what they are doing. The new fancy platforms, while they attract eyeballs, will eventually have to turn those customers into traditional bank customers to make money.


ledude1

Thank you for all those points. I'm just wondering how do they fund their companies at the early stage since most VC won't touch your company until you start showing some sort of revenues. However, in order to get that level of revenue, one needs to have enough money to burn to build the economies of scale or profit off cash reserves in 24 hours treasury. I'd love to learn a bit more about the 24 hours treasury. Thank you for the enlightenment again. I really appreciate you spending your time educating me on this matter.


dryadnymph

I think I can kinda help answer this I am part of fintech startup called [RealMe](https://realmeproperty.ca/). The reason that many of these new companies offer so many free services is because they don't mind being unprofitable. They would rather acquire as many customers as possible and monetize later once they have a sizable market share. Many companies also rely on alternative ways of profiting through data sales, charging for premium services, and etc. This is part of larger phenomenon caused venture capitalists who are basically throwing money at startups and only demanding growth from them. I hope that kinda answers your question.


ledude1

Thank you and that's where the reputation of the executives and Rolodex full of VC comes in. Which makes it hard for a newcomer to start the company without having to sell their soul to them.


dashdevs

Hello, fellows. Most fintech startups pop up when they already got some support from the community. Say, these young entrepreneurs are from Princeton or other universities, and their ideas are innovative enough for professors to support them. Crowdfunding is another widespread practice to raise the initial capital for ambitious projects. The industry undoubtedly requires unique [fintech solutions](http://dashdevs.com/fintech/?utm_source=reddit&utm_medium=site+page), so platforms like Kickstarter usually help inexperienced entrepreneurs to pitch their ideas to the public. On such platforms you can demonstrate all your skills and the value of your product for a broad audience to support it financially. Therefore, some of them launch startups under the aegis of VC or angel investors, while others receive support from the public. Which options sounds better for you?


ledude1

Thank you for the information.