Infographic on Blockchain Applications

Scope of Fintech Products & Services

source: McKinsey & Company

Key Metrics in E-Invoicing

Key Metric – Network Effects

E-invoicing is conversion of manual invoices into electronic ones. Sending and receiving electronic invoices is great as it saves time and effort for businesses.

Sending and receiving invoices in the same format, automatic tracking of receivables and payables, reconciliation, alerts on bad debts etc. are some of the benefits for users. Hence, for a user to fully enjoy the benefits, stakeholders in the supply chain should also avail the e-invoicing option and hence network effects has a strong role to play.

Secondary Metric – Cost Savings

As mentioned above as well, electronic invoicing helps businesses save time, effort and cost and also tends reduce the risk of any errors in the invoicing process. However, there is an investment which a user must make in terms of time and effort to switch to the e-invoicing option. The long term cost and time savings will be the major factor which will push the user to do so.

Key Metric in Robo-Advisory

Key Metric – Roll Over Rate

Robo-advisors invest people’s money based on an algorithm. Getting users to try out the service may be achieved through marketing efforts, but getting users to stay invested is the key for building a sustainable business. Hence, the rolling over of investments is the key metric for any robo-advisory startup. 

New Year Resolutions for Fintech for 2017

The year 2017 will play an important role in the growth of Fintech. Some of the resolutions which will drive growth in this area are:

Address security concerns & strengthen backend infrastructure – both in the transaction as well as the platform. Businesses involving online transfers of money such as e-payments, online money transfers and crowdfunding carry the most risk.

Scale to compete with incumbents – scale will lead to economies which will further drive competitiveness.

Adhere to new regulation – with the rise of Fintech, regulators are becoming active in order to stay ahead of the curve. Fintech startups must find the right balance between providing a value-added service and adhering to regulation.

Build a profitable business model – building a profitable business is a necessity as it is not possible to forceful tactics to drive incumbents out of the market.

Enhance customer experience by ensuring promises are delivered – to get a foot into this space, a very high standard of service is required.

Enhanced usage of the blockchain – the advantages of a distributed ledger must be utilized as a tool to deliver enhanced value and build differentiation.

The Hierarchy of Personal Investments

Just like we have Maslow’s Hierarchy when it comes to human needs and desires, I feel personal investments also follow a hierarchy based on the total amount of money available for investments.

The Base

When a person’s income starts exceeding expenses, that person may start looking for investing this surplus. At this stage, this person tends to be very cautious and invests with a motive of reducing risk on the capital invested.

Suggested Investments – Bonds, Fixed Deposits

The Shift

This is when the person’s surplus keeps growing and the person now starts thinking about being more aggressive with investments. A shift is seen in the investment approach of the person and investments with higher risk are typically looked at in this phase.

Suggested Investments – Mutual Funds, Real Estate

The Acceleration

Once the person starts saving more money, the risk appetite of the person starts going up at an increasing pace. The demand for greater returns drives the investing approach in this stage.

Suggested Investments – Stocks, Currencies, ETFs, REITs, Commodities, Indices, Bitcoin

The Peak

At this stage, the person starts looking at not only passive investing as above, but may actually start looking at active investments as well. The aim is to maximize returns using money and active participation in the asset operations and growth.

Suggested Investments – Crowd-Funding, Private Equity

Robo Advisory – An opportunity which is here to stay

If you spoke about investing your money in stocks, bonds etc., you always had to read up to take calls or had to look for financial advisers to help you with the same. The first option was risky and time consuming as you had only limited knowledge and the second one was expensive.

In came the age of Robo-Advisors, i.e. online algorithms which understand your investment requirements and structure your portfolio accordingly. Robo-adviros were able to add value to the retail investing ecosystem in many ways.

Value created for Users

-     Cheaper & Less Prone to Errors: because of low human involvement in the process. Fees generally lie in between the 0.3-0.5% range, as compared to fees of financial advisors which tend to be over 1% depending on the portfolio size

-     User Control & Transparency: users are in control of their investments and can easily track their portfolio

-     User Experience: most platforms offer users a very ‘human-like’ interactive platform

Value created for the Platform

-     Scalable: scaling is easier with an automated platform. No (or very little) additional resources would be required when adding users

-     Incremental Improvements: an algorithm can be tried, tested and improved upon incrementally. Human advice has more subjectivity and is more difficult to do so

Now that we see that there is value created for users, we can work out some use cases for robo-advisory. Use cases can be based on end use or a potential user.

Use Cases based on End Use:

Event driven: users may want to save up for some future event such as a child’s wedding, a child’s education etc.

Future purchase driven: users may want to save money to buy something in the future like a house, assets like jewellery, assets to start a business and so on.

Personal goals driven: users may want to start saving and investing their money to grow personal wealth or save for retirement or saving for an emergency etc.

Use Cases based on Potential Customers:

Young people in a job: looking to grow personal savings, buying assets like house and jewellery

Parents: wanting to invest for their children’s education, marriage

Aging people: looking to plan their retirement

The User Acquisition Funnel for Crowd-Funding Platforms

A crowd-funding platform is a 2 sided platform requiring fund raisers and funders to function effectively. Hence users include people who are looking to raise funds and people who are looking to fund projects.

The User Acquisition Funnel comprises of 3 parts:

-          Inviting

-          Engaging

-          Acquiring

PHASE 1: INVITING

This is the first step of the funnel where the platform uses different advertising strategies to pull in traffic.

Goal for this Phase: To get ‘desired traffic’

Here desired refers to what you quantify as traffic. Some platforms may consider all traffic received desired traffic. Others may want users to fill in a small interest form (maybe just name, email id, whether investor or startup etc.) to qualify as a lead received.

Action for this Phase:

Platforms need to draw out various use cases and use different advertising media to reach out to them. 

For example, an equity crowd-funding may be interested in very early stage startups and may reach out to accountants who assist in company incorporation. To get investors, platforms can reach out to seed investors and HNIs through professional networks. Scraping data from other platforms is also a good strategy to collect data and leads.

Important Metrics:

Customer Acquisition Cost (CAC): As defined above, you start by defining what a conversion is. For example, a visitor to the platform may be a conversion or a visitor having filled out a form on the platform may be a conversion. Then CAC has to be worked out based on the following:

Advertising Strategy Wise: assess the marketing spend on different media like SEO, SEM, Social, Guest Blogging etc. and calculate the CAC figure for each separately

Target Market Wise: do the same for different users targeted. For instance in the case of rewards crowd-funding, calculate CAC for film producers, technology product creators etc. separately.

Handy Tools to Use: GoogleAnalytics, Kissmetrics

PHASE 2: ENGAGING

This phase is about engaging the conversions from Phase 1.

Goal for this Phase:  To engage conversion from above.

Action for this Phase:

The best way to engage visitors is to give good and relevant content to them.

The content should be structured based on the nature of the visitors. If they are informed about the product, i.e. they are better qualified leads, showing them projects live on the platform, success stories, customer testimonials, FAQs & terms and conditions of the platform (in a concise and visually appealing manner) should suffice.

For informed visitors, i.e. if leads are totally raw and not qualified, you should start off by defining what solution your platform is giving in very clear layman terms. An example for a potential investor can be ‘earn higher returns than stocks or bonds’ or for a fund-raiser can be ‘raise money in 24% of the time required to raise seed funding’. After this, you need to clearly explain the benefits of the platform with facts and statistics to back this. Thereafter, you show the other content, same as in the case of the informed visitors. Since these uninformed visitors generally tend to enter the platform without sharing any details. Their data should be captured so that push marketing techniques can be used to bring them back if they leave. Filling up forms to download ebooks, guides, webinars etc. is a common trick to do this.

Content is the best way to build trust and must highlight all the factors which affect trust building with the platform. Data and monetary security is a big factor and must be addressed clearly with no ambiguity for the user. Tools such as chat should be used to ensure a continuous interaction of the platform and the user.

Important Metrics:

User Behavior: User flow on the platform must be analysed to see how closely it resembles what the platform had thought it would be. Here different metrics of importance include

-          User flow (planned vs. actual)

-          Pages viewed per user

-          Time spent on different pages

-          Total time spent/invested by users on the platform

-          Drop off rate at different points of the user flow

Content Metrics: To assess the performance of the content offered to users, the following metrics can be used

-          Times accessed (as a percentage of total users reaching it)

-          Time spent on it (if it is an online read)

-          Shared through Social Media etc. (if sharing option exists)

Handy Tools to Use: Kissmetrics, Zendesk Chat

PHASE 3: ACQUIRING

Here the user makes the desired interaction with the website.

Goal for this Phase: Users makes the interaction desired.

For example in an equity crowd-funding platform, a startup starts a fund raising campaign or an investor makes a commitment to a project.

Action for this Phase:

This step is about customer onboarding. The platform needs to guide the user step by step as to what has to be done. Information and help must be provided and also tools like chat can prove useful to ensure successful onboarding. The platform should also integrate tools to get back any users who abandon the process half way. For example if a startup founder is filling up a new campaign form and leaves the process half way, a reminder email can be sent to bring back this user.

Important Metrics:

User Flow: Since the user acquisition funnel completes in this stage, the following metrics to be assessed based on different advertising strategies deployed and different potential users targeted

-          Final conversion rate for the whole funnel

-          Total time taken to convert for the whole funnel

-          Drop off points of users in the funnel

-          Pages viewed and time spent on them

-          Step at which final conversion happens. Users may skip certain parts and reach this final          step directly.

-          Usage of different tools used (like chat)

Complete vs. Partial Acquisition: Here user abandonment during the onboarding stage needs to be studied. High abandonment may imply a long or unclear form, confusing terms and conditions etc.

Handy Tools to Use: Kissmetrics, Zendesk Chat

Thin File Customers – Who are they?

A person having a thin credit file, i.e. insignificant or no credit history, is referred to as a thin file customer. Traditionally credit has been offered based on the credit history of a person. However, this has led to a large part of the population across the world not having access to credit. Credit scorers have now started using alternative criteria such as online social and professional networks, education, earning potential, mobile connections, utility connections etc. to bridge this gap and come up with a rating for thin file customers.

Some thin file customers can include the following:

Students – School and college students tend to have no previous credit history.

Young Graduates – People in their first job or looking for a job may not find it easy to get credit.

Immigrants – An immigrant to a country will not have a credit history in that country and may find it difficult getting a loan.

Older Generations – Credit was considered risky by the older generation and was avoided as much as possible. Hence a lot of the older people tend to have very thin credit files.

Housewives – In developing countries especially, housewives tend to have little credit history as most loans are taken by their fathers or husbands.

People in Small Cities &Rural Areas – People residing in smaller cities and rural areas get loans from local money lenders and friends & family in cash, which largely remains unaccounted for. Hence they are not able to build up their credit files.

Startups & SMEs – Even in the corporate sector, new companies tend to have lower credit histories and find it difficult to obtain loans from financial institutions. Additional security like a collateral is required in most cases.

Game Theory Applied to the Growth of Fintech

Game Theory involves the study and construction of models of different decision nodes and the outputs resulting from them. The players involved, which may include individuals, corporates or any other organizations, have different options to choose from and do so based on the payoffs they expect from it.

The current state of Fintech startups presents itself as a very interesting game, the decisions of which will impact the growth and future of this upcoming space.

My understanding of the current Fintech space and the game which can be constructed based on it is as follows:

The Players:

The players of the game include a Fintech startup & an Incumbent (like a Bank).

Possible Actions:

Fintech startup – can either Compete or Cooperate with incumbents.

Incumbent – can either Compete, Cooperate or Ignore.

Payoffs:

If the Incumbent & the Startup Compete – the startup has certain advantages in terms of focus, agility and cost and can gain a good market share in the particular focus area. However, the incumbent, owing to its size and customer base, will have an advantage.

If the Incumbent Competes & the Startup Cooperates – again, the result will be as above as the incumbent holds advantages of scale and existing customer base.

If the Incumbent Cooperates & the Startup Competes – a startup wanting to compete with an incumbent looking to cooperate will prove detrimental for the startup. Startups will find it very difficult to match the advantages an incumbent has owing to scale and the data it owns. Also an incumbent can easily find another startup looking to cooperate.

If the Incumbent & Startup Cooperate – this seems like the best case scenario for both as the synergies between the cost advantages of a startup and the scale advantages of an incumbent can result in significant value creation.

If the Incumbent Ignores & the Startup Competes – the startup will gain advantages as the incumbent is not willing to react to the former’s progress and is losing out business in that area of its business.

If the Incumbent Ignores & the Startup Cooperates – since the incumbent has chosen to ignore the startup’s actions, the payoff remains as above.

Finding the Equilibrium:

Looking at the Startup’s payoffs, it should always choose to Cooperate as the payoffs are higher for it in either of the options selected by the incumbent. The same holds for the Incumbent as well. Hence, Cooperate-Cooperate is where the equilibrium lies.

The ‘Bid-Ask’ Model for a Customer Purchase

A good way of looking at any customer purchase is by analysing it using a Bid-Ask Model, where the customer’s Ask has to be matched with the business’s Bid to result in a transaction (just like a stock market transaction). The customer Ask is the value a customer requires to make a purchase and the business Bid is the value which is offered by the product/service the business is selling. This concept is particularly interesting and useful for early stage companies and startups as these businesses are not or less sure about how potential customers will accept the product/service offered by them.

So the concept seems simple. However, calculating the same is the tricky part. So let me try to define the terms in more detail.

The Customer Ask – This is the value the customer is looking for before buying the product or service. Any value under this value might not be enough for the customer to switch from the current solution he/she is using. To calculate this, we need to start off by identifying the best current product/solution which customers are using. The best way to identify this is by looking at the market shares of various products in your space or by simply asking the customers themselves. In addition, we would also need to calculate an additional factor, i.e. the Spread.

The Spread – The spread is the additional value a customer requires to move to a new solution. This value depends on a lot of factors like

- the type of customers – demographics, buying behaviour

- the particular Industry – essential or non-essential, nascent or mature

- the utility and importance of the product/service in the customer’s life – measuring customer stickiness

So to put it in a formula,

Customer Ask = The Best Current Solution + The Spread

The Business Bid – This is the value the business’s solution offers to its customers.

FOR A SALE, THE BUSINESS BID = THE CUSTOMER ASK

Now that the concept and the terms make more sense, how do we go about calculating the bid-ask for any business? What are the various features which add value to a product and how much value does each hold? Since the customer has to buy the product, she is the right one to ask.

For a startup, asking some potential customers (through family, friends, communities, online groups, social media etc.) to fill a Survey or participate in a Focus Group Discussion would be a good idea. It makes sense to ask potential customers and not existing customers as the latter are already buying your product.

The aim of the above is to get the following:

- attributes important for a customer in a product

- weights for each attribute

- the current best solution which the customer is using

- ratings for the various attributes for this solution

- how important the product is for customers and how open are they to try a new solution

These inputs will then need to be used to calculate the Ask of the customer and also the Bid of your business. 

Startup Model – Short Term Finance to SMEs

THE MODEL: A startup which offers SMEs access to short term financing with no paperwork. Typically finance is offered to fund gaps in cash flows and for stock purchases.

STARTUP: Iwoca (British startup)

WHAT I LIKE

Core Idea – Access to short term financing for SMEs.

Benefits to Users – Users can get funds by simply linking their online accounts (such as Paypal, Amazon etc.) or by uploading bank statements. An offer is given within hours of doing so. Loans are unsecured and have no documentation or origination fee attached.

Ease of Use – Loans are approved and available within hours. Money can be transferred to your bank account 24*7 and interest is charged pro rata based on the time you take to repay the loan.

CONCERNS

Competition – The startup is competing with banks and other established financial institutions. Building trust will be key.

Asset Performance – Lending to SMEs without collateral is risky. Bad debts can be an issue of concern.