Platform Fintechs Are Coming - How Should Startups Respond?

Forbes Finance 2 weeks ago

There's a key new player in the global financial services space. I'll call them the Platform Fintechs – or the “PlatFins.” Super platform technology companies (most famously Facebook, Google, Tencent, Alibaba, and their ilk) are playing an increasingly central role in the financial lives of consumers everywhere, including those that have been kept out of the financial system. The question of the role PlatFins will play in inclusive finance is a critical one for us at Accion Venture Lab — and also for the fintech startups that have already been working to make digital financial services available for all.

PlatFins initiate relationships with consumers for many reasons — they can start with ride-hailing like Go-Jek in Indonesia, food delivery like Rappi in Brazil and Postmates in the US, or even B2B sales like Alibaba in China and IndiaMart in India. But all of them end up as an app (or several) on hundreds of millions of consumers' phones, connecting the supply and demand of core services . Over time, these companies provide other services — Go-Jek offers auto-care, Alibaba provides chat and e-commerce (and just about everything else). Ultimately, many of these platforms become PlatFins, incorporating a slew of financial services that are highly relevant to the consumers they have started to know so well.

Most of these companies start by solving a hard problem that isn’t financial services — like moving things around cities with poor infrastructure. They begin to incorporate financial services in their offerings early on because they need to — fluid and digital payments are critical to the ability of the platform itself to operate optimally. Part of what makes Uber so popular is that you don’t need to pull out cash to pay. The same goes for an e-commerce transaction on Amazon. These companies are solving payments because they need to. They are then coming to the natural conclusion that they can do more.

The advantages of PlatFins

Because payments are central for PlatFins, they end up sitting directly in the middle of billions of transactions around the globe every day. That sort of information is invaluable for any financier who needs transaction records to assess creditworthiness or underwrite insurance.

Beyond their ability to collect information, PlatFins also have an advantage in engaging directly and regularly with consumers, since they already sit on the consumers’ phones and have already built trust around usable products. These relationships give PlatFins a leg up in solving the critical question of financial inclusion: How do I cost-effectively reach, understand and collect from historically ignored customers?

As fintech startups globally have struggled with this critical question, PlatFins find themselves with built-in advantages that financial services-first models can’t buy. The PlatFins have the transaction data they need to verify and underwrite consumers and the distribution to sell and engage them. Many of them also happen to be massively well-capitalized, so that they can experiment with financial use cases on their platform, however poorly imagined (see Libra).

What this means for fintech startups

So how should fintech startups respond? In short, they need to keep in mind that PlatFins make different strategic choices on expansion into financial services. PlatFins can develop services in-house (like Mercado Libre starting Mercado Pago), partner with startups or larger financial institutions (like Amazon’s recent partnership with JP Morgan and Google’s recent tie-up with Citigroup), or even invest in and acquire startups (like Go-Jek’s buying

If fintech startups want a viable path toward partnership or acquisition, they can take three approaches: solving platform players’ pain points in existing businesses, identifying potential services and products to cross-sell to participants on those platforms, or replicating PlatFins’ fintech solutions in untapped markets and building the customer base. Companies in the Venture Lab portfolio, like SmartMEi in Sao Paulo and Joust in Austin, partner with platforms to provide digital bank accounts and provide receivables finance. These partnerships help platforms become PlatFins by offering something the fintech is better equipped to do as a specialist.

There is another path. The line between fintech and adjacency business is suddenly blurring, and there is increasing interest from fintech-focused investors in supporting businesses that generate platform-like advantages, even if they start with limited “fin.” Companies that are innovating to optimize, for instance, pharmaceutical delivery in Africa or agricultural supply chains in India, are falling into our investment wheelhouse as the opportunities to build financial services on top of these platforms becomes more clear. These companies represent a new generation of startup PlatFins, and we look forward to investing in several such companies in the coming years.

Ultimately, we believe that startups are still best equipped to solve the challenges of the world's underserved because they are focused on the unique circumstances of their customers and can iterate on their approaches accordingly. But the rise of the PlatFins, with their advanced data and distribution capabilities, brings both opportunities and threats. We are betting that fintech startups are going to continue to lead the charge of financial inclusion, but the most successful of them will also learn to leverage PlatFins' advantages — or replicate them.

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