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FINTECH
BUSINESS
MODELS
SUPER GUIDE:
FINTECH
BUSINESS
MODEL

BY DANIEL PEREIRA
© THE BUSINESS MODEL ANALYST

The Business Model Analyst is a website dedicated to

analyzing business model types, patterns, and innovation
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Daniel Pereira
The Business Model Analyst
Ottawa, ON, Canada
businessmodelanalyst.com
TABLE OF CONTENTS
Introduction 1
What is a Fintech? 2
Finntech exemples & uses 3
Banking 3
Cryptocurrency & Blockchain 4
Investment & Savings 4
Machine Learning & Trading 5
Payments 5
Lending 5
Insurance 6
How does fintech make money? 6
Cryptocurrencies 6
Crowdfunding 7
Digital wallets (e-wallets) 7
Lending / P2P Lending 7
Robo-advising 8
Money transfers 8
Payment processors 9
Advertising 9
APIs 9
Are fintech companies profitable? 10
The Fintech model benefits 10
Financially rewarding 10
Slow incumbents 11
Customer base loyalty 11
Economic Democratization 11
4 Main reasons why fintech is important 12
The technologies that power fintech 14
How safe is a fintech? 14
Major challenges of the fintech industry 15
Security Problems and User Privacy 15
Keeping Up with Modern Technologies 16
Quality of Software 16
Industry Regulations 17
Solutions for the major challenges of the fintech industry 18
Implementing Innovative Authentication Processes 18
Outsource Application Development to Experts 18
Hiring a Legal Consultant 19
The Role of financial institutions in fintech business model 19
Fintech trends for 2022 20
Digital banking 20
Blockchain 21
Artificial Intelligence and Machine Learning 21

Conclusion 22

References 4

About the author 5

 INTRODUCTION
Although the fintech business models have gained more space and
attention recently, we cannot say that they are new. Technology has
been part of the financial industry since the advent of credit cards
and ATMs.

Nevertheless, the fintech industry has evolved and grown very

quickly, thus calling the attention of different investors. Only in the
U.S., more than 8,775 fintech startups were created in 2021, attracting
investments of almost $50 billion.

Globally, the figures also impress: there are over 6.5 thousand
fintech, insurtech, and real tech start-ups in the world, and the
financial services market is expected to reach $158 billion by 2023.

Well, it is thanks to fintech that people can now carry out virtually any
and all financial transactions through a smartphone. And the whole
process has demonstrated unlimited potential for innovation.
 WHAT IS A FINTECH?

As it can be inferred from the name, fintech combines the words

finances and technology. In short, it is about applying technology in
the financial world. It refers, thus, to any business that uses
technology to automate or improve the financial industry, whether
services or processes.

Fintech business models integrate technologies such as AI,

blockchain, data science, and learning, to make the financial sector
safer and faster, this way, serving the interests of both consumers and
businesses more efficiently.

In simple words, the purpose of fintech is to employ specialized

software and algorithms to help businesses and consumers better
manage their financial operations and transactions. It now includes a
myriad of sectors, from education to investment management.

The objective of financial technology may vary broadly according to

the project and industry, and, as it grows, it faces more and more
concerns regarding cybersecurity, to minimize risks and avoid
exposure and vulnerability for cyberattacks and frauds.
FINTECH EXEMPLES & USES
The fintech innovation includes the following areas:

Banking
Probably the fintech business model that has increased at the fastest
speed today, especially with the rise of the neobanks, the digital-first
banks. They are banks like any other, with all the same services
offered by traditional banks, but without their physical branches or
correspondence.

With rapidly growing operations, these digital banks are offering

hassle-free individual and corporate bank accounts through
completely digital infrastructure, with huge savings in labor costs, real
estate, and other facilities, which allows these savings to be passed
on to customers, in the form of reduced rates. Some examples are
Chime, Simple, and Varo.

Cryptocurrency & Blockchain

Cryptocurrency is a kind of digital asset. A medium of exchange that
uses the internet and strong cryptography to carry out financial
transactions. It works through a database distributed around the
world, called Blockchain.
In Blockchain, each record is linked to the other, in an encrypted,
secure, permanent, and totally immutable way. And, since each of the
computers that are part of the network has a copy of each record, it is
impossible for any information to be lost or corrupted.
There is no single owner or creator of the digital gold, there is no
central authority or regulatory body for that – it is a completely P2P
process. Today, 90% of the mining process, which gives rise to new
coins, is under the control of three Silicon Valley companies.
Also, governments still don't know how to behave towards
cryptocurrencies, but digital money is likely to become an important
part of the online shopping and payment system.

Investment & Savings

Investment and saving apps have risen significantly these days, due
to financial technology. Companies like Robinhood and Stash are
democratizing access to the financial market, by giving opportunities
for investment to people with no experience and little knowledge in
stocks.

Although the companies and apps may differ in approach, they all
use a combination of savings and automated low-investment
methods, to give consumers access to the markets.
Machine Learning & Trading
AI and machine learning play fundamental roles in fintech since they
aim to predict the financial market behavior, through algorithms and
the automated analysis of a huge amount of data.

The purpose is to identify trends and risks, thus helping customers,

businesses, and financial organizations to have more accurate
information regarding investments, and reduce the chance of losses.

Payments
Payment platforms have changed the way businesses and
transactions are done nowadays. Moving money is easier than ever
now, and money can be digitally sent anywhere in the world, with the
help of just one smartphone connected to the internet.

Some popular payment companies are Venmo, PayPal, Zelle, Stripe,

Square, and even WhatsApp is now able to send and receive money.

Lending
Today, it is increasingly common for people to work on their own.
They may even have a steady source of income, but they will rarely
go through the typical scrutiny of financial institutions when they
need a loan.

That's because traditional banks usually operate with rigid and

outdated credit rating criteria. But fintech business models like Nova
Credit and Credit Karma take an innovative approach, by considering
alternative data such as social signals and qualitative factors that,
combined with an intelligent and self-learning algorithm, promote
better and fairer decision making over time.
Insurance
Currently, traditional insurance companies calculate benefits on fully
quantifiable criteria. However, life involves many subjective data. As
such, fintech business models like CarpeData are developing
computerized classification systems and mechanisms with alternative
information (social cues, lifestyle, and medical histories, for example).

This kind of new data, combined with an intelligent, self-learning

algorithm, allows fintech insurance companies – called insurtech – to
determine their insurance options, with non-standard terms and
conditions, including new payment options. Other insurtech
companies include Oscar Health, Root Insurance, and PolicyGenius.

HOW DOES FINTECH MAKE

MONEY?
Cryptocurrencies
Despite all the controversies cryptocurrencies have gone through,
they are considered by many as great investments. Several of the
most popular ones can be traded on some marketplaces, and their
companies have even developed their own credit cards to allow
users to make purchases.

Businesses can stake cryptocurrencies or facilitate their trading. Also,

besides interest-earning cryptocurrencies, many companies use
dividend-paying exchange coins.
Crowdfunding
Crowdfunding is about collecting smaller amounts of money from a
broader audience to finance a product or a project, thus making it
easier and usually quicker to raise the money than counting on only
one big investor.

The contributors may have access to the beta version of a product or

service, or share future revenues, in return for their contributions.
Sometimes, there is even nothing in return, and the donors simply
contribute to the growth of an organization. Anyhow, it is impossible
to guarantee returns and an investor may even be the victim of some
fraud in certain instances.

The crowdfunding platforms generally make money by charging a

percentage of the total funding gathered.

Digital wallets (e-wallets)

Digital wallets are a combination of a bank account and a payment
gateway. The user puts a certain amount of virtual money in their
e-wallet and uses that money to carry out transactions – online or
offline – that accept this payment mechanism.

The cost is usually charged to the vendor at a merchant discount rate

(MDR). Sometimes, the consumer will pay a small fee for the
convenience of not having to involve physical cash or a credit card in
the transaction. Additionally, the platforms also sell financial services
to third parties.

Lending / P2P Lending

Some fintech business models are aimed at enabling P2P or P2B
lending. P2P (peer-to-peer) is when an individual borrows money
from another – or other – individuals. P2B (peer-to-business) is when
a company borrows money from one or several individuals.
These platforms have created a way to promote the meeting
between those who need a loan and their potential lenders. This
makes borrowing easier and allows investors to get a better return on
their money as well, as they deliver their money to pre-approved and
system-verified users. The fintech companies charge fees from the
repayment process.

Robo-advising
Robo-advisors are automated platforms for trading. Instead of paying
high fees to investment advisors, the customers manage money and
trade automatically, through AI and ML technologies, which reduce
the costs.

The firms usually charge a percentage of the total assets they

manage. The investor ends up paying a slightly higher price for the
asset, but, in the end, the difference between the amount saved with
trading fees is still positive.

Some business models also allow the user to buy stocks or mutual
funds without having to pay a commission fee. What do they get out
of it? They allow investors to trade for free in exchange for their own
data. Then, they forward this data to high-frequency traders, who can
influence the price of assets.

Money transfers
Some fintech companies allow people to make money transfers
between countries at significantly lower costs than traditional banks.
Using a regular credit card, the customer transfers money to the
platform using local currency. The fintech converts the amount into
the currency of the destination country and performs the operation.
Often, these business models rely on charging consumers a
percentage of the funds they transfer.
Payment processors
E-commerce systems all over the world have to deal with large
amounts of financial transactions, so they rely on payment platforms
to make the processes quicker and safer. These platforms are the
payment gateways.

The payment gateway intermediates the purchase. It receives the

payment information, secures, and encrypts it before sending it to a
payment processor. After checking if the customer has sufficient
funds, the bank accepts or denies the operation. The whole process
takes just seconds. Most of the time, fintech businesses charge a
percentage of transaction volumes.

Advertising

As in many other sectors and industries, one of the most common

and traditional ways of monetization is putting ads for other
companies to reach one’s audience. In this business model, the end
consumer does not pay to use one’s service.

The fintech company can generate revenue through banner and

multimedia ads on its website or app. For example, the website can
offer advice and tools to help people manage their finances, and
make money from ads and reviews from partners.

APIs
API is the acronym for Application Programming Interface. In simple
words, it is a set of programming standards that allows two systems
to communicate with each other. That is why fintech companies can
sell licenses and code, and provide revenue growth for all the parties
involved.
With banking-as-a-service, for instance, fintech firms may charge
companies and organizations to use their banking structure.

ARE FINTECH COMPANIES

PROFITABLE?
Yes, they are. Most fintech companies are profitable, especially in the
U.S. and Asia, where there are most of them. Some companies adopt
more than one revenue model, while others stick to only one. And
there is still room for plenty of new companies and also new revenue
models.

THE FINTECH MODEL

BENEFITS
Financially rewarding
As just mentioned, the fintech industry is one of the biggest and
fastest-growing in the world. So, it offers many opportunities to
produce large sums of money, mainly because the great majority of
the people and the businesses on the planet already adopt some
form of money transaction.
Slow incumbents
Most of the traditional players in the market still use obsolete systems
and, as a result, take a long time to adopt innovative tools or
strategies, so, they end up losing customers for new players, like the
neobanks, which have taken advantage of the situation. Other
incumbents, on the other side, leverage on creating partnerships with
the new ones, with licenses and know-how.

Customer base loyalty

Obtaining new customers is not a cheap process. Usually, financial
institutions, such as traditional banks, spend billions on marketing
every year. However, the customers tend to trust their banks to both
keep their assets and operate their money transactions, and this
relationship is usually long-term. The average American, for example,
has had the same bank account for 16 years.

Economic Democratization
The heavy employment of technology in the economic system and
processes have been able to democratize access to financial
services, due to the fact that automation makes the operational costs
lower, by reducing the need for infrastructure and personnel.

While in the past only the people at the top of the pyramid could
participate in the economy, now the whole pyramid, even the ones at
the bottom, can have a chance to access similar opportunities.

4 MAIN REASONS WHY

FINTECH IS IMPORTANT
1. Fintech Creates Financial Inclusion

Besides the fact mentioned above about the larger access fintech
companies have offered to the population, there is also the
geographic point: Fintechs can be reached anywhere. Continents like
Africa, where most people have been away from the economic
system for years, are now able to manage their money on a regular
basis.

By providing financial services like mobile money and e-wallets,

fintech companies are changing the tough reality of many people.
M-Pesa, for example, has helped to take 2% of Kenyan households
out of poverty, which represents over 194,000 households.

2. Fintech is a More Cost-Effective Option

As fintech business models rely on automation and digital

infrastructure, they save money on human resources and physical
facilities. As they have lower costs, they can offer the same solution
as traditional players at a lower price, passing their own savings to
the customer. That is why, nowadays, the customer can opt for no-fee
bank accounts or no-commission trading apps.

3. Fintech Empowers Small Businesses

Fintech services have allowed small businesses and entrepreneurs to

expand their operations, in a safer, quicker, and more effective
manner. In the past, only the largest players would have access to the
latest (and expensive) technologies and tools. But, nowadays, they
are accessible to virtually everyone.

Currently, it is no longer about who is the biggest, but who is the

fastest in reaching the customer demands. Besides, fintech
companies provide targeted and niche solutions to meet particular
needs, at lower costs.

4. Fintech Enhances Financial Capability

The customers these days are savvier and more connected than ever,
and, because of that, fintech companies can bring solutions to old
problems, such as managing money or personal investing.

Besides simplifying our everyday finances, startups are also

promoting inclusion through financial education and literacy, which
enables people to understand the value of their money, by reducing
debts, saving economies, and investing in their future.
THE TECHNOLOGIES THAT
POWER FINTECH
Modern fintech is mostly based and driven by three technologies:

● Artificial Intelligence: AI offers priceless information on

consumer behavior and purchase habits, enabling businesses
to better understand their customers, easily meeting their
needs;

● Big Data: These analytics can make it easier and faster for
companies to predict changes in the market, adapting their
data-driven strategies quicker and more efficiently;

● Blockchain: This safe and encrypted technology permits

decentralized transactions with no influence from a third party.

HOW SAFE IS A FINTECH?

When it comes to information and cybersecurity, Fintech companies
adopt the latest technologies, thus their customers are more
protected than ever. Not only the customers’ transactions are safer,
but also their data and information are more secure. The traditional
institutions, which are usually believed to be safer, are in fact the
most fragile ones since they take too long to adopt the latest
cybersecurity measures and tools.

Nevertheless, it is important to highlight that many fintech

applications are fairly new. That means that they still do not respond
to the same regulations as old financial institutions. Although that
does not mean they are not supposed to be trusted, customers
should be careful about them.

Engaging with unregulated fintechs might lead to a riskier exposure.

Recent hacks and polemics over Bitcoins have uncovered this reality.
Therefore, it is essential to approach carefully, with some kind of
skepticism when dealing with online companies that are relatively too
new.

MAJOR CHALLENGES OF
THE FINTECH INDUSTRY
Security Problems and User Privacy
It is estimated that the largest majority of people in the world use
some kind of financial technology – over 75% of the worldwide
population –, which means that more and more consumers are
relying on managing money digitally, and it demands a huge amount
of valuable data to be protected. Cybercrime is the biggest concern
among fintech companies since they are the most common targets
for hackers.

Keeping Up with Modern Technologies

More than half of the CIOs in the financial services industry believe
the majority of businesses will operate via digital channels in the
future, and generate more revenue out of that. This may mean that
digital transformation is the only way for survival in the market.

Outdated management applications will not be able to follow up

digital technologies. Businesses will rely on big data, AI, machine
learning, and cloud computing, and the adoption of such
technologies depend on additional costs and risks, at first.

Quality of Software
As seen above, fintech cannot work without massive IT resources.
The employment of the latest technology will determine if a product
fits into the market or sinks. Cloud applications, particularly, offer
flexibility and scalability to businesses, since they do not face
hardware limits. Thus, some technical factors may have a heavy
impact on operations, such as:

● Quality of application code;

● Code maintainability;
● System performance;
● UX design;
● System security;
● Scalability and flexibility of infrastructure;
● Software development and adaptation speed.
Industry Regulations
Currently, some areas of the fintech industry are regulated and others
are not. The lack of regulations contributes to risks, and the
companies might benefit from regulatory standards.

The U.S. and Asia are moving quickly in this regard, much faster than
Europe, whose regulations are always at a slower pace, contributing
to making the European industry less competitive. Appropriate
regulations can provide a safer, more secure, and fairer environment
to fintech businesses.

Besides, there is a real concern among experts about the danger of a

fintech bubble, just like it happened with the dotcoms in the late
1990s. Regulatory standards could help force a separation between
unsafe and safer fintech operations, so the consumers are protected.
SOLUTIONS FOR THE
MAJOR CHALLENGES OF
THE FINTECH INDUSTRY
Implementing Innovative Authentication Processes
The future of authentication processes may shift from logins and
passwords to powerful algorithms that verify the person using the
device, without confirmation operations. The algorithm checks the
patterns of keystrokes, the swipes across the screen, the places the
user has been, and how they are holding their phone.

If anything is out of the ordinary, then the algorithm activates the

authentication process, through some facial recognition or
thumbprint, for example. The user experience would be smoother
and there would be much fewer frauds. But new privacy terms should
be discussed.

Outsource Application Development to Experts

A team of experts is certainly necessary to develop a new functional
and secure fintech solution. But most of the companies – especially
the new ones – are not able to hire such a level of talent to build their
product.

That is why companies have been outsourcing their software

development. This way, they are capable of having an efficient
user-friendly application made, without having to spend large capital
on personnel, as well as recruitment and training.
Hiring a Legal Consultant
Consultants may be an interesting solution, especially for new
startups. They are experts with powerful knowledge of technology
and markets, and they will be able to visualize and understand more
deeply the fintech environment, thus enabling the creation of more
accurate solutions for the customers.

THE ROLE OF FINANCIAL

INSTITUTIONS IN FINTECH
BUSINESS MODELS
The fintech industry has had its growth basically linked to the
provision of services by small technology entrepreneurs, associated
with the need for financial options by the customers. Information
technology and the globalization process have also facilitated their
development, as it has become possible for any business to reach a
global market.

But the role of large financial institutions cannot be forgotten. While

small entrepreneurs work on a small scale and can take the risk of
failure, the same cannot be said for large banks and institutions.

They completely depend on the audience’s trust. In addition, they are

heavily regulated by financial authorities, so that the trust placed in
them is validated and guaranteed, and these institutions are seen by
the customers as responsible for their operations. Therefore, they
need to make increasingly specific and specialized choices. Simply
because they can't afford to fail.
On the other hand, fintech entrepreneurs can venture out, as they are
"guaranteed" the benefit of failing. They don't have a name, a
reputation, or a clientele to protect. In addition, their initial
investments are considerably smaller, and if they fail, their
responsibility rests with the initial investors and financiers.

This is why small fintech visionaries can take innovative and

revolutionary projects, with high potential for success as well as
failure, while traditional financial institutions seem more
"conservative".

However, as these same institutions cannot lose their customers to

new entrants, they end up taking on innovations and offering fintech
services. And, due to their size, they are able to take innovation to
new heights.

In seeking to keep leading the market, these institutions are, after all,
collaborating with fintech projects. Innovative small entrepreneurs
can also join the "big players" in the market and solidify the
foundations of their business

FINTECH TRENDS FOR 2022

In 2022, fintech growth will be probably defined by the enhancement
of ongoing trends, such as:

Digital banking
Digital banking is getting easier and easier, and the simplicity of
managing money, making purchases and payments, and requesting
loans, all through the smartphone, will keep driving growth in the
sector.
Blockchain
Blockchain technology has been steadily growing for years and that
is going to remain true in 2022, as more and more companies and
sectors tend to adopt data encryption.

Artificial Intelligence and Machine Learning

AI and ML have redefined the services and products that companies
offer to customers, by analyzing their behavior in order to provide
more accurate and valuable solutions. As these technologies become
more affordable, they are expected to expand into the market,
reaching smaller and brick-and-mortar businesses.
CONCLUSION
Fintech business models have increasingly become drivers of
technological inclusion and sustainable economic development.
Through innovative ventures, financial services have reached the
masses, meeting their pains, needs, and expectations at significantly
reduced costs.

Fintech also offers new opportunities to small entrepreneurs. Thus, it

challenges the old paradigms and systems of the financial sector and
proposes to integrate technology and finance in an innovative and
accessible way, 24/7.
REFERENCES

The following references were consulted to create this Super

Guide:

➔ https://appinventiv.com/blog/guide-to-fintech-business-model/
➔ https://bootcamp.cvn.columbia.edu/blog/what-is-fintech/
➔ https://www.financemagnates.com/fintech/major-challenges-t
he-fintech-industry-faces-today-and-how-to-overcome-them/
➔ https://www.mobindustry.net/blog/7-key-challenges-fintech-st
artup-faces-and-their-solutions/
➔ https://www.forbes.com/advisor/banking/what-is-fintech/
➔ https://globalfintechnews.com/5-reasons-why-fintech-is-impor
tant/
➔ https://scalac.io/blog/how-fintech-businesses-make-money-fi
ntech-software-development/
➔ https://www.ideamotive.co/blog/how-does-fintech-make-mon
ey
➔ https://builtin.com/fintech
➔ https://www.investopedia.com/terms/f/fintech.asp
ABOUT THE AUTHOR
Daniel Pereira is a Brazilian-Canadian entrepreneur that has been
designing and analyzing business models for over 15 years. You can
read more about his journey as a Business Model Analyst here.

E-mail Daniel if you have any questions at:

daniel@businessmodelanalyst.com
You can connect with Daniel at Linkedin:
https://www.linkedin.com/in/dpereirabr/