FinTechFlipping The Convention: Unconventional Business Models Adopted by Fintech Companies

In the present data-driven, result-oriented FinTech ecosystem, startups have started to utilize innovative business elements. An attempt is made in that regard to categorically quantify these business models which FinTech startups can harness.

ALTERNATIVE CREDIT SCORING

Due to rigorous and outdated credit scoring procedures, many self-employed persons with a consistent source of income do not clear typical bank loan screenings. Credit rating FinTech firms have adopted an alternative data points like as social signals and percentile scoring across comparable borrower categories. All of these qualitative elements, when paired with an intelligent and self-learning algorithm, have the potential to result in improved lending judgments over time. For example, if it is possible to identify unfavorable profiles based on social presence prior to loan disbursement, a lender can avoid dealing with loan recovery.

ALTERNATIVE INSURANCE UNDERWRITING

In today’s society, two people with the same weight and height, who are both non-smokers and do not consume alcohol, will be charged the same life insurance rate. However, one individual may be an exercise enthusiast, whilst the other may be a couch potato who is at greater risk to die of diabetes. These erroneous premium estimates occur as a result of averaging out (also known as normalizing in actuarial jargon) since insurance risk premiums currently do not account for elements that are not measurable.

FinTech firms are developing variable premium computing processes based on alternative data points such as social signals, lifestyle, and medical history. These InsureTech firms, when combined with clever self-learning algorithms, may assess whether or not to provide insurance, provide alternate terms and conditions, and provide other payment choices. Example: Insurance companies have started a policy where 30% discount is provided if the user completes 10,000 steps each day.

TRANSACTION DELIVERY

Data in the contemporary world is the new oil, and effectively managing it may provide enormous insights into the requirements and desires of the client. FinTech startups in the transaction delivery space are developing free products, such as expense management apps, in order to collect customer’s data and then cross-pollinate that data with the rest of the group in order to map the customer’s potential to pay premiums, invest in real estate, purchase mutual funds, and so on. These FinTech firms’ business models are commission-based, for example, reselling third-party financial products.

ENABLING EASIER LENDING AND BORROWING

Peer-to-peer lending (hereinafter referred to as “P2P”) occurs when one person borrows money from another person. Peer-to-Business (herein after referred to as “P2B”) lending occurs when a company borrows money from one or more people.

By directing funds to pre-approved and vetted borrowers, these lending strategies enable investors to earn higher returns than those available in debt markets. FinTech businesses, now build platforms that connect borrowers and lenders, and they often take a charge from the borrower’s repayment, for providing services of an efficient, much needed middle-man.

SMALL TICKET LOANS

Due to the poor margins and significant expenses associated in setting up and collecting lower price loans, banks and other lenders often do not want to underwrite them. FinTech businesses in this segment are providing impulse purchase mechanisms (Buy Now & Pay Later, or BNPL) and one-click buy buttons on e-commerce websites to enable users to buy rapidly without entering any kind of authentication or credit card data.

PAYMENT GATEWAYS

Payment gateways are online platforms that allow customers to pay for goods and services on a merchant’s website. There are several payment options available today, including debit cards, credit cards, digital wallets, and cryptocurrencies. Typically, banks charge exorbitant fees to process all of these numerous payment methods, but FinTech businesses are merging all of these payment methods into easily accessible applications that internet retailers can easily afford and include on their websites. Businesses that offer actual items or services to end consumers are likely to utilize these payment applications.

DIGITAL INSURANCE

FinTech businesses in the insurance industry, like digital banks, are bringing all traditional services to the digital realm. Offering life and health insurance with improved underwriting methods, these FinTechs may charge variable premiums based on the consumer, allowing them to provide aggressively lower coverage than traditional insurance firms. These forms of insurance, along with tailored marketing, have the potential to open up new revenue opportunities that insurance firms have only begun to consider.

ASSET MANAGEMENT

FinTech firms allow investors to trade for free in return for their data. They provide this information to high-frequency traders, who can then impact the asset’s price. Even if the investor pays a slightly higher price for their asset, the difference between the amount saved on trading costs and the minor price rise is still beneficial for such firms as they can then have the data of target audience.

DIGITAL BANKING

FinTech firms in the insurance business are bringing all traditional services to the digital realm. Offering life and health insurance with improvised, underwriting methods, these FinTechs may charge variable premiums based on the consumer, allowing them to provide aggressively lower coverage than traditional insurance firms. These forms of insurance, along with tailored marketing, have the potential to open up new revenue opportunities that insurance firms are only beginning to consider.

AMLEGALS REMARKS

India’s startup economy has been growing since 2016 with businesses developing rapidly across the country. It has been observed that with massive cash inflow into the FinTech environment, the challengers are jostling for market share with banking titans. There is a problem of rigidity and slow-moving processes with the credibility that traditional firms offer. In this highly competitive environment, FinTech firms are aiming to fill these lacunae left by giant banking organizations. At the end of the day, consumers look for fast, reliable and efficient services, which the traditional sector does not fulfill. The collection and processing of data by FinTech firms, the data protection compliances of securing the data of their customers is a significant step that should be done with utmost cautious and take necessary steps to safeguard sensitive personal data.

-Team AMLEGALS assisted by Mr. Saswat Banerjee (Intern)

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or jason.james@amlegals.com