Fintech 3.0 👑

Fintech like all internet businesses has gone through various phases of evolution🐣 over the last 5-7 years

It all started with Fintech 1.0 which was very much like Internet 1.0🦕. Think companies like OLX or Craigslist. Simply connecting the borrower and the lender with no control over the user experience.

This did not work for a variety of reasons. A few reasons are mentioned below:

• Poor experience for borrowers 😾

  • High rejection rates 

  • Tedious application process

  • If approved, they would either get rejected after a few days for a random reason or the disbursement of funds took days/weeks 

• Unsustainable unit economics for Fintechs and no Intellectual property 🧟

  • Cost of customer acquisition went through the roof since Fintechs had no idea on the kind of customers to be sourced 

  • Barebones commission of 1%-2% received from lenders for only approved leads 

  • All negative feedback of the borrowers were left on the Fintech’s app slowly killing its brand and trust index

  • Unable to create proprietary lending products or cater to customers outside the spectrum of traditional lenders 

• Amazing for Lenders 🤑

  • Received leads for free 

  • Only paying Fintechs commission in the case of an approved lead 

  • Complete control over the customer experience, underwriting, and collections 

  • Pay the Fintech once for the borrower and then continue cross-selling other Financial services to the borrower for free in the future 

This model has slowly given way to Fintech 2.0🌟. This is very much like Internet 2.0 where companies like Flipkart and Amazon operate on a mixed marketplace model.

Just like Amazon who enables other merchants to sell on its platform along with its close partners like Cloudtail and allows other products to sell on its platform along with its own products like Amazon basics, Alexa, etc, Fintechs are now not only connecting the borrowers and the lenders but in about 30-40% of the cases also controlling the entire user experience by participating in the underwriting, the collections, and product creation activity too through close partnerships with NBFC’s like Apollo Finvest.

The Fintech 2.0 model solves for many of the deficiencies we saw in the Fintech 1.0 model specifically for Borrowers and Fintechs 

• Better Experience for Borrowers since Fintech’s participate in the underwriting and collections 🥰

  • Higher approval rates 

  • Easier application process 

  • Money received by the borrowers in a matter of hours if not instantly 

• A+ unit economics for Fintechs thanks to larger control over their lending ecosystem and creation of Intellectual property 🚀

  • Lower cost of customer acquisition since Fintech’s now have a clear idea of the type of customers to acquire

  • Commission’s driven model changed to a profit-sharing model where margins for Fintechs can be as high as 15%-20%. Game-changing! 

  • Positive experience for borrowers results in great app reviews leading to the creation of a trustworthy and positive Fintech brand  

  • Ability to create unique lending products and cater to customers outside the spectrum of traditional lenders. This allows Fintechs to innovate!

Slowly but surely, Fintech’s are taking more and more control over their ecosystem. While most start at 30-40%, leaving the rest of their marketplace to the Fintech 1.0 model, we are seeing Fintechs completely flip that ratio to having majority control in their marketplace to even 100% control💪🏻 and abandoning the Fintech 1.0 model completely 

The next stage of evolution 

But there’s something much much more interesting brewing in the Fintech world today🔮. Platforms like Zomato, Swiggy, Ola, Uber, Flipkart, Amazon, Apple, etc. are gearing up to enter the Fintech space. They are sensing an opportunity that aligns beautifully with their core businesses and takes advantage of their platform strengths and positioning🧑🏻‍🔬. If done right, Fintech can be used to supercharge their businesses and drive the next generation of growth. We call this Fintech 3.0. Here Fintech’s will not only control the underwriting, collections but also where and how efficiently the capital is deployed 😯 

Let’s break this down with an example 

Let’s talk about a company on everybody’s lips today, Zomato🍔

• Zomato’s north star metric is the number of order’s delivered every day. The higher this number, the better their business does🕊

• Like most large internet platforms, the top 10-20% restaurants serve 70-80% of the orders coming in on Zomato 

• Zomato of course knows which are the top 10%-20% performing restaurants on its platform.

• Zomato needs revenue to justify its valuation. For this, Zomato has to grow. If Zomato has to grow, the restaurants on its platform must process more orders. If restaurants have to process more orders, they need more capacity. For more capacity, they need working capital and scale. This is where Zomato comes in👀 

• Capital is the easy part. Zomato’s secret sauce would be to help restaurants scale using data. For example: A certain pizza place doing well in a certain part of Mumbai would do great even in a certain part of Delhi. This is the power of the Zomato platform analytics⚡️ 

• To put the icing on the cake🧁, Zomato won’t need to provide capital to restaurants. You see, the growth requirements of most restaurants are largely similar. Think spaces, equipment, staff, etc. Zomato will strike bulk deals with suppliers and pay them directly on behalf of the restaurants. In this way, Zomato will not only ensure restaurants scale but scale efficiently thanks to Zomato’s economies of scale 

• Zomato controls order’s coming into these restaurants through its app. Using this data, Zomato knows the future order’s a restaurant is likely to receive. If a restaurant is financially powered by Zomato, it could further boost their ranking on the app to attract more orders for the restaurant. This solves for “Ability to pay”💰

• Zomato collects the money from the customers and pay’s the restaurant. Zomato has the ability to deduct a portion of every transaction to pay for the financing/infrastructure they have provided the restaurant. This solves for “Intent to pay”😇

• Further, imagine a restaurant is given this infrastructure and does not perform well, Zomato would simply replace the restaurant with another restaurant on its platform, and the infrastructure continues being utilized 🥶

• Lastly, to further flex their muscles, Zomato could demand exclusive arrangements with restaurants in exchange for scaling their operations significantly. Restaurants would jump at this offer like a kid on a Mcdonald’s Sundae🍦. Restaurants have no loyalty to Zomato or Swiggy. They would happily be exclusive with a platform if it would provide them with attractive growth infrastructure and ultimately more money 

• As all marketplaces evolve, exclusive supply will become more and more important to differentiate against competitors🤴🏻 

This example can be taken across any platform🌅 

Over the next decade, platforms will be the best lenders to their ecosystem participants. Platforms will provide the most efficient path to growth forming a win-win relationship with their ecosystem participants🤗 

Smart platforms will not enter lending to simply make interest income. Net interest margins (NIM’s) are a banks game. Synergies🦄 where 1+1 > 2 is where these mega-platforms operate. Companies like these will only enter lending if it kills the friction to grow their platform. It’s simply a means to an end 

A tsunami of capital 🌊 about to enter the Fintech world with such structures and forever change the landscape of lending. Of course, in order to do this, platforms will require a world-class lending stack. This is where Apollo Finvest comes in. The Apollo stack enables ANY company to start digital lending in 48 hours. We provide the complete lending infrastructure: The license, tech, and the capital and as is evident in this post, we are extremely bullish on platform lenders going into the next decade

Many people ask us for our predictions on the digital lending ecosystem. So we leave you with this: 

The Future Order of power in the Digital Lending landscape🪄 

• Platform Lenders like Zomato, Ola, Uber, Swiggy, Amazon, Apple, etc

• Payment gateways 

  • Payment gateways will provide Revenue Based Financing to the long tail  i.e. the balance 80% of merchants operating on the internet platforms like the ones mentioned above 

• Vertically specialized Fintech lenders 

  • Fintech’s focussed on specific use cases or borrowers. For example: Lending to Instagram/Youtube bloggers, D2C Online brands, Truck drivers, etc.

• Horizontal/General Purpose Fintech Lenders