Omidyar Network, the impact investing firm established by Pierre Omidyar, the founder of eBay, and Oliver Wyman, the global management consultancy, today released “Breaking New Ground in FinTech: A Primer on Revenue Models that Create Value and Build Trust.” The research report maps out a new set of practices by consumer FinTech firms, who are aligning their revenue strategies with real value creation for consumers as a competitive advantage to increase customer traction and future-proof their business.
Today, nearly 140 million adult Americans struggle with some aspect of their financial lives, such as paying bills on time or saving for emergencies. At the same time, these same households pay roughly $175 billion annually in fees and interest for financial products and services, which too often fail to improve their situations. The study has found, however, that using the right combination of financial health-focused FinTech products can yield the average household with a median of $45,000 in post-tax income at least $2,000 in savings annually. In order to provide this benefit at scale, mass-market FinTechs must design revenue models that are both economically sustainable and that reinforce consumers’ trust rather than threaten it, a tricky task in an industry that is ranked by consumers as the least trusted.
“Being the newcomer in an industry that is often plagued by ‘gotcha’ fees and with the lowest levels of trust among consumers is not an easy task for FinTechs, and is a reason why aligning incentives with consumers’ real needs is crucial for success,” said Tilman Ehrbeck, partner at Omidyar Network. “Embedding this principle early in the business culture is key to building and retaining consumer trust over time, a lesson that, if put in practice from the get-go, will avoid fixing fundamentals later.”
“Breaking New Ground in FinTech” offers a simple framework for thinking of revenue models, defined by what value is created, who will pay for it, and how they will do so. It outlines the three basic payer options—consumers themselves, third-party sellers who want access to consumers, or third-party beneficiaries who derive value from better-served consumers (for example, employers who see productivity gains from financial wellness programs). It also evaluates eight payment models that have reached traction, identifying keys to success relevant across all of them.
“Many current financial-health tools offer products for one specific need. So building strong linkages to other companies that provide broader solutions is a win-win,” said Aaron Fine, partner at Oliver Wyman. “Trusted referrals provide great additional value to the consumers as well as a source of revenue that the firm can feel good about—avoiding conflicts of interest.”
The report highlights trends from data compiled from 350 leading FinTechs, 11 case studies from frontier firms, advice from founders and investors collected during interviews and workshops with more than 50 entrepreneurs and sector leaders, and focus groups and digital diaries with dozens of consumers across income ranges and geographies. The research distills approaches on how to embed commitment to financial health into the company’s core strategy and how to mitigate the risks of their revenue models to customers.
The analysis of the market landscape found that:
- Sixty-five percent of FinTechs charge consumers directly for their services.
- Approximately, 3/4 of FinTechs rely on one material source of revenue (such as charging consumers directly). One quarter of surveyed companies rely on multiple sources of revenue and, interestingly enough, have raised on average twice as much investor funding.
- FinTechs that have raised the most funding to date build a lower cost (and often better) version of an existing financial product that consumers already pay for today, not a new solution with an unfamiliar value proposition.
- Mass market-focused providers were more likely than the average FinTech to rely on consumer income.
“One of the important trends we uncovered is that successful FinTech firms are not shying away from charging consumers directly for their services,” explained Sarah Morgenstern, investments principal at Omidyar Network. “The key difference is that they go above and beyond the established mindset around fee transparency to hit home to consumers what the real value-add is for them—a bolder way to build consumer trust.”
According to the report, common traits of the FinTech firms at the forefront of mass market solutions also include a more curated approach to selecting third-party seller relationships. They rely more on referral models that shift from advertising to advising, which helps to resolve potential conflicts between the interests of sellers and the financial health of their consumers.
In addition, FinTechs that use third-party beneficiary models are changing the conversation from how their solutions benefit consumers, to how they benefit everyone. For example, by showcasing not only the impact of their solutions on employees, but also on the financial prospects of their employers, FinTechs are unlocking new revenue pools. The report shows that FinTech firms serving mass-market consumers are forging the path for others in the space, with 43 percent of them adopting revenue strategies that charge third-party beneficiaries against 26 percent of broader consumer FinTech companies.
The report also identifies challenges ahead for the industry. While the report anticipates that viability of specific revenue models will continue to evolve, competition is poised to significantly increase, especially as new players such as the social media and e-commerce platforms enter the field. New technologies and the shift from “unbundling” to “rebundling” FinTech solutions may also shape the feasibility of different revenue model approaches.