This is a guest post by Armands Liseks, co-founder of the financial technology startup “inGain”. Liseks has been in the fintech space since 2016, in the area of open banking and data analytics. He advocates technology and applied analytics being the key competitiveness drivers in today’s financial services industry.
The financial technology industry was born about 14 years ago. Traditional players in the financial industry, such as banks, were anxiously watching what would happen. It was a time when many small players entered the market, offering highly specific products and attempting to capture even a small market share from the giants. These newcomers were called industry challengers or disruptors, and it seemed that the financial landscape would change beyond recognition. Now, we see that while changes have occurred, nothing has been rapidly destroyed. There is room for everyone. Moreover, the understanding of what financial technology is, in general, is evolving.
New times
Financial technology is now primarily about solving financial problems rather than focusing on the technology itself, as the necessary tools are readily available. Gone are the days when offering a new financial product required building your own system, a project that could take up to a year to develop a minimum viable product. These projects used to cost between 300,000 and 400,000 euros. Only after such investments and nine to twelve months of work could a company enter the market and test its idea. The speed of modern technology development is such that an opportunity available today may not exist in a year. Someone else might have already taken your idea and started implementing it.
Gone are the days when the biggest players in the fintech industry were primarily online lending companies. Now, they are simply lenders. Just like that, there are numerous payment institutions, credit risk analysis tools, and various risk assessment and fraud prevention tools. The financial technology industry has evolved to the point where anyone, even without specialized knowledge of the industry, can test and experiment with their ideas.
Self-financing their services
Regarding the evolution of fintech, I think we will increasingly see new companies creating small niche products to address specific customer needs. Additionally, we will witness more large companies becoming financiers themselves. These companies have all the necessary prerequisites – both a vast customer database and their own capital.
In fact, we are already seeing this trend. For example, a local timber trading company has lending company operating inside the group. The telecommunications company offers phones and other devices on a subscription service basis. If earlier it was a way to attract more customers, now it has already become a separate line of business. An interesting example of this business model is the company ”Vapaus” in Finland. It allows company employees to buy e-bikes through employee support programs and tax credits. As a result, ”Vapaus” has financed the purchase of more than 10,000 electric bicycles, with a total value exceeding 40 million euros. Moreover, lending has become its main business. Now, the bicycles are sold to customers by the company’s cooperation partners.
Piano leasing
Lending is still a free niche with relatively many opportunities, as the solutions cannot always be offered by the major market players. For example, a chain of musical instrument stores in Switzerland, whose most popular products are expensive pianos, wants to become a financial technology company. Children everywhere attend music schools, but often, after six months, they lose interest in this activity. What should parents do with a musical instrument that is no longer needed? Therefore, the piano dealer wants to offer parents the option of operational leasing for pianos.
As long as the instrument is used, it can be purchased outright, but if the need arises, it can be returned at any time. Of course, the end consumer will overpay, but this is a convenience. If this same customer were to go to a bank, would piano leasing be available? How could a bank even finance the purchase of a piano? The bank recommends taking out a consumer loan or using a credit card with a 20% interest rate, which is too disadvantageous.
Another local example is a manufacturer of wooden modular houses. The value of these houses manufactured by the company starts at 37,000 euros. The most expensive houses cost around 80,000 euros. The bank does not understand this product because it does not meet the conditions of a mortgage loan. Namely, the house can be lifted and taken away. But it’s not a car. So what is it? Banks and traditional lenders don’t understand how to solve this. And this is precisely the moment when new ideas can emerge from shops or trading companies looking to create niche products.
All of the above are examples of embedded finance, clearly indicating that finance will continue to appear exactly where the customer and their needs are. Be it demand for cars or solar panels.
Banks don’t understand
Another niche in demand that banks don’t understand is expatriate finance. After the pandemic, “hibernating” in warmer climates during winter has become increasingly popular. For example, people might live in Spain for a few months while earning income and paying taxes in other countries.
Consequently, it is currently difficult to buy real estate in Spain, as banks won’t issue mortgage loans due to the lack of local income data and credit history. But I can afford it. Perhaps even more so as a local resident. That is why, for example, the “rent to own” service is already becoming popular in Dubai – real estate developers offer to rent apartments with the right of redemption. It is an expensive service but in demand among a certain group of customers.
If we look at the fintech life cycle, we all start with a small niche. We learn to do something very well, we grow big and we start not to notice that new niches have formed. This is an opportunity for competitors to enter as they notice these new opportunities. And that’s what’s happening right now in fintech. The market opportunities are huge. If you can solve a specific need, you have an immeasurable market.
