Market Specialization For Fintech Growth
Whether to specialize or generalize is one of the big decisions that most businesses will be faced with at some point. Both models offer opportunities; however, it is often argued that specialization – or targeting a specific niche – can be the way forward in a crowded marketplace. And specialization is something that is common in the fintech industry because of the fierce competition, but is it really the best approach for fintech growth?
Should Fintech’s Take the Broad or Narrow Approach?
A generalized offering is often viewed as having its advantages because it can be seen as providing a wider variety of opportunities and potential clients, and therefore maximizing possible profits. However, it can also mean the business gets lost in the crowd and faces stiffer competition; therefore, many companies favor the specialist or niche approach, where they have a narrower, more targeted offering and less competition.
Naturally, some companies will have a concern about narrowing down their niche in case it limits their profit potential, however, it is specialization that can help set a business apart. We’ll talk more on the advantages of choosing a niche model later, but focusing on a narrow market allows a company to demonstrate its expertise, answer the specific needs of a particular audience, and position itself as an authority; while these attributes are importance to any business in any sector, this is even more vital in an industry that has grown in the way fintech has over the years.
The Growing Scale of the Fintech Industry
The fintech industry has shown remarkable growth over the last few years, and with many more start-ups coming along, the future for the industry is also looking bright.
Fintech’s success story has been global. Currently, it is performing well in Switzerland, the United States, China, Canada, Europe, and well-known corporations like Goldman Sachs and JP Morgan aren’t afraid to invest millions into new innovations. However, it’s not just the larger companies who are enjoying success, emerging fintech companies like Adyen, Zopa and Stripe, are also beginning to gain a fair amount of audience share.
And the wealth created by the industry is incredible. Goldman Sachs estimate the fintech sector is worth approximately $4.7 trillion, and it is an industry that is proving to be increasingly attractive to newcomers. In 2016 it was estimated that there were 2,000 fintech start-ups compared with just 800 in the previous year.
However, while this growth is no doubt beneficial to revenue and job creation, it also means there is stiffer competition and this could mean less opportunity to get noticed.
Nevertheless, the fintech sector does have one advantage: it is an area where specialization is commonplace, and many companies that have adopted this model have managed to capture the imaginations of investors and consumers alike.
And there is an extremely good reason why specialization works in fintech – or in any other industry: By identifying a problem that no other business is addressing and providing a solution for it, the company can build trust and attract clients because they can demonstrate expertise in a specific area and offer a product or service that is unlike anything else out there.
The potential benefits of specialization are demonstrated well in a recent article by Business Insider. The article features 16 fintech companies that are all predicted to reach a net worth of one billion dollars at some point in the future, and these companies all have one thing in common: they all focus on a niche. For instance, Azimo is a money transfer service that sends money to migrants, while SETL concentrates on blockchain for quicker payment settlements in the financial industry.
Another aspect that is striking about the article is the amount of fintech’s specializing in payment innovations, and this is something that there will be more of in the future as the payments industry as gone through many changes, with many more to come.
For instance, peer-to-peer lending is becoming a popular model with sites like Zopa securing substantial investment, and other sites like Funding Circle coming to prominence. In addition, regulatory and technical developments will lead to new opportunities for start-ups and established fintech’s alike to niche down and specialize.
A further example of a company that has taken the niche route is Atom, a UK-based digital only bank, which uses a mobile only approach. Its niche model has certainly got it noticed, and it was quick to secure £49 million worth of investment from Spanish bank BBVA, and it had already attracted funding of £150 million after just 18 months of operating.
For the companies mentioned above, specialization has been one of the keys to success and industry experts agree that this is one of the factors in accelerating growth in a start-up fintech business.
Specialization in Fintech: An Industry View
While specialization is not a guarantee of a success, several industry experts state that finding a niche to target is one of the elements that can enhance a fintech’s success rate, and others say that identifying a niche is imperative to business survival.
Specialization is certainly an approach that has worked well for YapStone, a payments processing company who target their services to a select group of vertical markets, including vacation rentals and homeowners’ associations.
In an interview with PYMNTS.com, YapStone President David Weiss explains that “…The decision to avoid the one-size-fits-all model and instead focus on specific, large vertical markets can enable fintech’s to deliver faster, more sustainable and more profitable growth”.
The model has worked well for the company, which now handles more than $15 billion in revenue every year.
Going niche is also the advice offered by software company Blackmountain Systems. When asked how fintech companies could accelerate their success, one of the tips co-CEO and co-founder, Kevin O’Donnell gave was to identify a niche that nobody else was targeting. His exact advice is to:
“Find the pockets of the financial sector that are underserviced and build your start-up to cater to those needs”.
The niche approach is also favoured by Skype founder Niklas Zennström. In an interview with LendInvest he discussed his passion for fintech and what, in his view, made a business investable. His response? “We like the niche approach: a focus on solving one problem.”
Zennström, who also owns the venture capital firm Atomico, went on to explain that fintech companies were drawing his interest because they tended to take a niche approach to business.
And in China, which is one of the strongest growing markets for fintech, new start-ups and small businesses are being warned to go niche if their companies are to survive, because of the fintech giants already dominating the market. By specializing, smaller businesses and companies can set themselves apart from the bigger corporations and get themselves noticed.
However, aside from standing out from larger competitors and attracting the attention of potential investors, there are several other reasons why your fintech business might benefit from going niche.
The Advantages of Specialization
In an industry where it is becoming increasing difficult to make an impact due to the sheer volumes of companies competing for a share of the market, specialization offers many advantages over generalization. These include:
Higher earning potential – as an expert in your field, clients are willing to pay more for your expertise. Clients understand that genuine expertise costs more and they are willing to pay extra for the added value you can offer. In addition, as a specialist, your company is more likely to be among the first a potential client calls when they are looking for expert knowledge.
Also, if you’re in a narrower niche, you also won’t be competing so heavily with rival companies. This means you won’t have to compete purely on price so you can boost your earning potential that way too.
Easier branding – niche companies are easier to brand, which helps to build recognition and trust. Branding also helps potential clients to understand exactly what is on offer and what the brand stands for. Branding can help with consumer confidence and seal your reputation as an authority too.
Targeted marketing – concentrating on a narrower niche can help you target your marketing efforts more effectively, thus helping you to save money. By tailoring your marketing efforts, it is easier to find which ones are working and which are not, and you can send tailored messages to your existing clients to further boost your business.
Fintech in the Future
If the fintech sector seems crowded now, competition is only going to increase as the years go by. New initiatives and new developments will open up new opportunities to both start-ups and existing companies in the fintech arena, and this will make the standing out all the more important.
For example, one such initiative that is likely to fuel fintech growth in Europe is the European Commission’s fintech task force. The task force aims to maximize fintech’s potential throughout Europe, as well as come up with strategies to manage the challenges it might face in the years to come, while encouraging innovation among businesses.
In addition, the revised payment services directive or PSD2 will be valuable to fintech companies wishing to specialize. PSD2 is an EU direction that comes into force in 2018 and will change the face of the banking industry by allowing a third party to look after a customer’s money. As Evry.com explains, the directive will allow businesses without a banking license to join the banking market; this is likely to lead to new innovations in payments and to further increase competition in the fintech sector.
Fintech start-ups are also going to benefit from more funding from investors. In 2016, global events, such as the Brexit vote and U.S. presidential election, caused uncertainty for the fintech industry – and for businesses in general – which in turn led to a reluctance to invest, and caused some to speculate that the interest in fintech was on the wane.
However, investments in fintech for 2017 is so far looking different, with significant funding already being made, and there are predictions that payment processing and alternative lending opportunities are again being viewed as attractive propositions by venture capitalists. But it’s not just the payment processing industry that is benefiting from this renewed confidence.
There has already been significant interest in niche fintech companies in 2017, with savings app Oinky, among those attracting large levels of funding, and specialized insurance and real investment start-ups are gaining ground.
And looking further ahead, there will be many more opportunities for start-up and existing fintech companies with new innovations to offer as the wants and needs of consumers change.
For instance, it is expected that there will be a greater shift towards speed and convenience, and Vice President of Global Operations at PayPal, Louise Phelan, recently told a conference that there would also be a greater need to concentrate on user experience to make transactions quicker and easier.
And with the changes in technology, the insurtech market, is expected to grow rapidly. Insurtech is defined as:
“The use of technology innovations designed to squeeze out savings and efficiency from the current insurance industry model. Insurtech is a portmanteau of “insurance,” and “technology”and will change the insurance industry in the same way in fintech changed financial services.
Statistics from Technavio are predicting a 10 percent growth by 2020, and this will also lead to new opportunities for niche businesses to target.
Concentrating on a niche can offers numerous advantages, no matter the industry you are working in. However, specialization is a distinct trait in the fintech sector, and for many of the companies who have adopted this model, it has paid off.
As detailed in the article, niche businesses that offer something different to everyone else also have the potential to capture the imagination of investors, so specialization could help a company to attract vital funding to grow their company, and going niche will also enable a business to stand out in the competitive fintech market.
However, it also needs to be considered that concentrating on a niche is just one element of accelerating a fintech’s company’s growth, and despite the opportunities specialization can offer, it is not a guarantee of success.