Navigating Business Models in FinTech (B2C, B2B, B2B2C)

The financial services industry (and all its participants) are facing an uphill battle this year. Lower funding levels from investors, increased competition, changing regulatory landscape, and poor economic conditions have created a challenging market environment — for startups, established companies, and enterprise platforms.

For the fintech sector in particular, the challenge comes down to strategic decisions on how best to stay relevant & profitable during a market downturn. This is the first time that many of these companies are experiencing so much pressure from multiple directions. Those unable to raise additional capital must make the decision to shut down, get acquired, or find a way to pivot their business model.

This third option is being explored proactively by companies of all sizes, especially ones initially focused as business-to-consumer (B2C) platforms. As the industry shifts from ‘growth at all costs’ to ‘sustainable growth’, pivoting (or adding business models) will become more common.

Types of Business Models available

Before jumping into the discussion of shifting between business models, let’s first list and define the most common ones in the financial services sector.

Business-to-consumer (B2C) is the most straightforward, easy-to-understand option. A fintech or non-banking company offers their product or service directly to an end-user (i.e. an individual utilizing the offering themselves) within their own channels, such as their website. Examples include banks offering their branded bank account or card to new or existing clients through their retail branches. There is no intermediary involved between the bank and customer. The customer is not offering this banking product to someone else. The variation with D2C (direct-to-consumer) comes down to channels — not using a retailer (or other party) when selling & acquiring an end-user.

B2C typically represents the business model with the largest opportunity for user volume & scale as there are millions (if not billions) of consumers within specific demographics (e.g. Gen Z, immigrants in the US, international students, etc.). The ample market size makes D2C highly attractive for companies in general, thus its a highly-competitive option in which acquiring and maintaining a consumer becomes an ongoing battle.

Business-to-business (B2B) is similar to B2C, but with a non-person entity (typically a registered business, sole proprietorship, trust, or estate) and another company. A fintech or non-banking company offers their native product/service directly to an end-user (a business in this case) — no intermediary or 3rd party channel is used. In keeping with same example above, a retail bank branch opens a business account for a local merchant (e.g. flower shop) that recently signed a lease.

There’s less competition in B2B than B2C due to the smaller market size of businesses versus consumers, which can be a downside for potential growth. The upside (especially for fintech companies) is that businesses tend to have higher monthly activity levels than consumers, specifically with deposits, spend, and payments. This recurring business activity means it takes less business clients to reach profitability, in comparison to the number of consumers.

Business-to-business-to-consumer (B2B2C) brings another level into the user equation. From the B2B model, the business receiving a product or service is offering it to its own users (typically consumers, not other businesses). The retail bank above provides a business credit card to the flower shop owner, who then provides individual spend cards to employees so that they can purchase inventory for the store. Ultimately, the activity funnels up to the business but adding consumers changes the overall offering as now the product needs to be optimized for a different end-user.

A more modern example in FinTech comes from Banking-as-a-Service (BaaS). Banks partner with BaaS vendors/providers who are able to bundle banking services and sell them to companies (aka platforms) for the benefit of end-users. Chime (one of the top US neobanks) leverages a bank to be able to offer Chime clients a bank account, debit card, and other banking services. Chimes’s bank partner (B) —> Chime (B) —> Chime users (C).

Pivoting BETWEEN BUSINESS MODELS in fintech

Switching operating models is the equivalent of establishing a new standalone business, which is why many startups initially focus on only one. Even established firms with successful core business don’t take the decision to add a business model lightly as it requires a totally new approach and allocation of resources. Some companies (such as software providers) may have an easier pivot if their core offering has similar applications & benefits for consumers and business users — think benefits & wellness platforms being able to work with employers or directly with individuals that are self-employed.

In moving from B2C to B2B, there’s a new customer segment that must be profiled. A company can’t assume that all the success factors with consumers apply to business users, which is the main complaint of business owners — “this product (experience) is the same.” Budgeting, managing costs, and optimizing cash flow are key priorities for companies of all sizes. A direct offering needs to have valuable services & features that help out in these areas.

Within fintech there are a few examples of companies pivoting from B2C to B2B — one of the most well-known ones is Marqeta. The top card issuer (and public company) initially started as a prepaid provider back in 2010. Based on its experience with legacy processors (such as FIS), the company decided to create & manage a proprietary platform for issuing and processing. B2C attempts didn’t work out and Marqeta pivoted to a B2B model, serving top brands (Doordash and Square).

For B2C to B2B2C, the dynamics resemble more of a channel partnership for referrals. Insurtech companies (such as Covered Genius, Ladder) are prime examples — able to be a direct offering to insurance clients OR work with companies (brokers, agents) and their clients (the end-user receiving insurance coverage) as an embedded financial service. Insurtechs create distinct user experiences through portals customized for partner companies or insurance clients. A fee is paid to the partner for each client that signs up for insurance. The insurtech receives residual revenue from monthly / annual premiums paid by the client.

Many consumer-facing fintechs with stalled growth over the last year explored becoming more of an infrastructure player. As a platform, these companies can serve financial institutions with value-added services such as user onboarding, design, data enrichment & analytics, personal financial management, and tax reporting. Being able to land a bank or credit union as a client can be enough to a fintech afloat.

In this current market, few companies are considering a shift from B2B / B2B2C to B2C. The saturation of options within the financial services industry for banking, lending, and payments makes it difficult to capture and maintain market share. More companies are competing for the same amount of customers — prices & costs start to come down in order to gain clients, and so do profit margins.

With any pivot of business model, there needs to be a better way to improving margins (aka unit economics). This can be through a lower cost of capital, lower operating costs, new revenue streams, or new distribution channels (leading to new users and/or improved conversion rates). Differentiation from unique value propositions creates business traits the boost revenue/profit per user — a separate topic we’ll jump into in the next weeks.

BEST PRACTICES BY BUSINESS approach

Once a company has executive buy-in and resources allocated towards changing its existing model, its time to decide what’s best in making the switch successfully.

• Which model to choose? There’s no cookie-cutter response. Companies can run small experiments based on their existing products and market position. For B2B2C in particular, early signs of success come from feedback of businesses not wanting to own a service/feature as their core competency — they’d rather just sell (not build & manage) a program.

• Be lean & nimble at the start. It’s startup / build mode all over again — assign staff and resources as necessary for the new business model. Small unit consisting of a business manager, product person, and engineer is a good starting point. Going beyond what’s needed for the build impacts how the overall success of the initiative is measured.

• Autonomous teams. With proper staffing and resources allocated, new business units should feel confident in being able to execute on their own. To wait for other teams (who may be focused on notifying existing customers about upcoming changes) can cause delays, poor work quality, and lack of progress.

• Timebound transition. Moving fast towards a conclusion is critical for a successful pivot. Make changes as needed to the new initiative based on experiments. Speed & quality in iterating towards a final product by a certain date ensures progress is being made.

The potential for a strong transition is there for companies willing to put the work in. For platforms with one successful pivot under their belt, being able to add a new operating model becomes that much easier.

With bleak conditions ahead for the economy, there’s an expectation that more fintechs will experiment with pivots to new business models.

Staying connected with target users and providing products that deliver value still holds true. Being able to adapt to changes is necessary at all times for companies in the financial services sector. Strong hires and work culture are invaluable in weathering future storms.

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