How to Choose a Focus for Your Fintech Startup

The banking industry has been losing customers to fintech companies, which have been gradually eroding profitable business lines from traditional banks through unique product offerings. These fintech companies are rapidly expanding and have started providing new products to their significant customer bases. At the same time, large tech firms are also developing financial products and tools for their massive user pools. 

The resulting boom in fintech has seen the emergence of hundreds of new startups, each promising to disrupt the industry. However, only a few have succeeded, with the rest failing to thrive. One of the most crucial factors for success in fintech is focus. Companies that have a clear focus have the greatest chance of success. 

In the following sections, we will explore why having a focus is essential for lending/credit companies.

Why a Focus is Essential

Before you dive into how to choose a focus, you should understand how having a focus for your fintech can benefit your business. There are several ways a focus gives your startup a leg-up on others in your space:

• Clear direction: A clear focus helps the startup to stay on track and maintain its vision. It guides the company’s decision-making and allows the team to focus its efforts on achieving its goals.
• Better product development: By focusing on a particular area, the startup can develop products that are more specific and targeted to its chosen market. This makes it easier to develop and market products that will resonate with customers.
• Easier to raise capital: Investors are more likely to invest in startups that have a clear focus and a specific area of expertise. This makes it easier to raise capital, as investors will be able to understand the company’s value proposition and market opportunity.
• Better marketing: By having a clear focus, the startup can create more targeted marketing campaigns that are designed to resonate with its specific audience. This makes it easier to attract customers and build a loyal customer base.
• Competitive advantage: By focusing on a specific area, the startup can develop a competitive advantage over other companies that are less focused. This allows the company to differentiate itself from its competitors and create a niche market for itself.
• Faster growth: By focusing on a specific area, the startup can grow faster as it can scale its operations more easily. This allows the company to take advantage of market opportunities and expand its customer base more quickly.

4 Value Propositions in Fintech

Consumer fintech startups have many categories, such as credit, neo-banks, p2p payments, real estate, and remittance. Most startups in these categories offer a value proposition that can be categorized into one of the following:

• Lowering cost  (Lending Club, SoFi, Chime, Remitly)
• Improving access  (Oportun, ZeroDown, Earnin, Stilt)
• Improving the experience (Flyhomes, Wealthfront)
• Increasing transaction speed  (Klarna, Opendoor)

While all fintech companies have some involvement in these four aspects, the most successful ones concentrate on one of them, which is fundamental to their value proposition. 

As a founder, you should select a focus area as early as possible, or at least identify the one you believe will be the cornerstone of your value proposition. This will assist you in comprehending your target market and how to enhance your value proposition tenfold for that market. 

This emphasis, however, is distinct from your product. Your company, like the majority of others, will most likely not introduce a completely new product or service. And because financial services are mainly a commodity-based industry with fierce competition, without a clear focus, you will be insignificant and fail quickly.

2 Focuses for Lending & Credit Startups

Two of the most common categories that apply to lending and credit companies are:

• Enhancing accessibility
• Reducing costs 

To survive in a competitive environment, it is essential for these companies to concentrate on one of these areas. Attempting to achieve both may prove difficult, if not impossible, and result in adverse selection issues as the company attempts to cater to the needs of two distinct market sides.

Improving Access and Lowing Cost Explained

Your focus will play a significant role in defining your business, including your customer segment, distribution strategy, and capital requirements, regardless of which area you choose. If you aim to improve access to a specific market, you will need a combination of unique data and a distribution advantage. As your company expands, your exclusive distribution channel(s) should scale to serve that market. Since your product fulfills a new or previously unmet need in the target market, you may charge a premium for your services.

On the other hand, if your focus is on cost reduction, it is critical to be better at lowering the cost of capital than your competitors. The target market already has access to a product (or a close substitute). You are only providing it at a lower cost and, at times, with a better experience. With a product that lowers cost, there is less room for charging a premium because the market is very price-sensitive. It is challenging to compete on distribution or unique data in the long term.

How Stilt Increased Access

Stilt, Inc. is a fintech company that focuses on providing affordable loans to immigrants and other underserved populations in the United States. They recognized the key insight that immigrants and visa holders are often mispriced or ignored by traditional financial institutions because they lack a U.S. credit history, even though they may be financially responsible and deserving of affordable, low-cost credit products.

To address this issue, Stilt utilizes an alternative set of data to underwrite loans, which takes into consideration factors such as borrowers’ education, employment, and available international data sources. By doing so, they are able to provide loans to individuals who may have been rejected by traditional lenders due to a lack of credit history.

Stilt also offers loans with flexible terms and repayment schedules, which are tailored to the specific needs of immigrants and visa holders. They offer a range of loan amounts, from $1,000 to $35,000, and provide loans for various purposes, including education, medical bills, and business expenses.

Overall, Stilt’s focus on improving access to loans for immigrants and other underserved populations in the United States has helped many individuals achieve their financial goals and build credit history in a fair and affordable way.

How SoFi Lowers Costs

To lower costs for customers, your company will need to have a clearly defined, high-quality customer segment and a capital advantage. SoFi, a company that provides student loan refinancing and other financial services, is a great example of this. 

SoFi focuses on lowering costs for high-quality earners with an average annual income of $150k, an average monthly free cash flow of $5.7k, and an average FICO of 756. This places SoFi’s borrowers in the top 10% of earners in the U.S.

SoFi’s distribution strategy is built around serving this specific customer segment, and they don’t try to market to anyone who falls outside of that profile. They could offer loans at higher rates to riskier populations, but they have very little advantage in terms of distribution or product. Instead, 

SoFi’s biggest advantage is its lower cost of capital, which is crucial to serving this highly coveted customer segment. The founding team’s strong background in finance was required to make the company successful.

Access Vs. Lowering Cost

We can represent the two types of credit businesses visually by plotting them on a graph:

When lending companies choose a focus, either Access or Lowering Cost, their trajectories diverge and the requirements of the business become more clearly defined. 

Companies that focus on increasing access target an underserved market, leverage unique data, adopt a premium pricing model, require a high cost of capital, and have a tech DNA. Conversely, companies that focus on lowering Cost target a proven segment, do not necessarily require unique data, serve a price-sensitive market, have a low cost of debt, and compete on operational efficiency.

Companies that fail to choose a focus fall into the Dead Zone and quickly become irrelevant due to their inability to resonate with a target market, distribute effectively, and compete with others in gaining mindshare.

Currently, the up-and-coming neobanks are mostly focused on improving access for a target population that is currently underserved by existing financial services providers. These companies need to develop products that build deeper relationships with these customers, rather than trying to target the adjacent segment by reducing costs.

Overall, products that improve access remain the best bet for most B2C fintech startups at present, even though they will eventually saturate.

Final Thoughts

The fintech industry is rapidly expanding, with new startups emerging every day, promising to disrupt the traditional banking industry. However, only a few have succeeded, and one of the critical factors for success in fintech is focus. Companies that have a clear focus have a better chance of success, with a clear direction, better product development, easier capital raising, better marketing, competitive advantage, and faster growth. For lending and credit startups, focusing on either improving access or lowering costs is crucial for survival. Companies that fail to choose a focus become irrelevant quickly, unable to resonate with a target market or compete effectively. Ultimately, while there is still room for growth and innovation in fintech, products that improve access remain the best bet for most B2C fintech startups currently.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

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