3 Ways Startups Are Coming for Established Fintech Companies -- And What To Do About It

TL;DR

Fintech startups are leveraging psychology, data-driven pricing, and behavioral change strategies to disrupt incumbent companies in the financial services industry.

Transcript

well hi welcome to the a 16z youtube channel I'm Frank Chen and today I am here with one of our general partners Alex R and pal I'm super excited that Alex is here so first fact we both have sons named Cameron so affinity there and then too one of the things that I really appreciate about Alex and you can sort of see this from his young chess playi... Read More

Key Insights

• 👋 Fintech startups are finding success by targeting the best customers and using positive selection bias as a marketing strategy.
• 👶 Startups are leveraging new data sources to price their products more accurately and attract profitable customers.
• ↩️ Encouraging behavior change in customers can help startups turn potentially unprofitable customers into valuable sources of revenue.

Questions & Answers

Q: How can fintech startups exploit the psychology of customers to gain a competitive edge?

Fintech startups can appeal to customers' desire for fairness by offering pricing models that reward positive behavior and providing lower rates to customers who are considered lower risk.

Q: How do startups use new data sources to price their products more effectively?

Startups collect a wide range of data and look for correlations that may help them better understand a customer's propensity to repay loans or behave in a certain way. By leveraging a multitude of data points, startups can make more accurate lending decisions.

Q: How do startups encourage behavior change in customers?

Startups like EARN incentivize customers to save by providing access to earned wages before payday. This not only helps customers with immediate financial needs but also encourages better saving habits.

Q: How can incumbent companies effectively compete with fintech startups?

Incumbent companies can create sub-brands that specifically target niche markets, utilize turn-down traffic to recommend startups, and consider acquiring failing startups with promising products and talented teams.

Q: How can startups come after incumbent FinTech companies?

Startups can come after incumbent FinTech companies by targeting their best customers and offering them better deals, exploiting the psychological feeling of unfairness. They can also use new data sources to price their products smarter than incumbents, finding miss-priced customers. Another approach is to fundamentally change customer behavior by encouraging positive actions and fostering a sense of community and accountability.

Q: How can the positive selection strategy be exploited by startups?

Positive selection strategy can be exploited by startups in industries like insurance and lending. By targeting the customers who are likely to be good risks, startups can offer them better deals and lower rates. This strategy not only attracts profitable customers but also creates a sense of fairness and differentiation in the market.

Q: How do startups use new data sources to price their products smarter?

Startups can generate and leverage new data sources to price their products in a more cost-effective way. By collecting and analyzing various data points, such as employment history, app usage, and social networks, startups can gain insights into customers' behavior and creditworthiness. This allows them to offer personalized and better-priced products than traditional incumbents.

Q: What is the significance of nurturing customer behavior in the FinTech industry?

Nurturing customer behavior is important in the FinTech industry as it allows startups to turn initially unprofitable customers into correctly priced and profitable ones. By encouraging positive actions, such as timely loan repayments or safe driving habits, startups can improve customer behavior and increase their profitability. This approach helps overcome the challenges of adverse selection and allows startups to cream the crop of neglected customers.

Q: What are some examples of startups using behavior economics research to change customer behavior?

Startups like EARN and some microfinance companies have used behavior economics research to change customer behavior. This includes encouraging social network references for loan applications and using continuous evaluation to incentivize better driving habits. By leveraging social pressures and accountability, startups can drive positive actions and improve customer outcomes.

Q: As an incumbent FinTech company, what strategies should I consider to compete with startups?

As an incumbent FinTech company, it may be beneficial to consider sub-brands that specialize in specific customer segments to create differentiation and attract more profitable customers. Investing in research and development to generate and leverage new data sources can also help incumbents compete more effectively. Additionally, fostering positive customer behavior through personalized incentives and engagement strategies can help retain and attract the right customers.

Q: What are some key takeaways from this discussion?

Startups in the FinTech industry can compete with incumbent companies by targeting the best customers, using new data sources, and nurturing positive customer behavior. By embracing these strategies, startups are able to offer differentiated products and better pricing, attracting more profitable customers. Incumbents should consider adopting similar tactics to remain competitive and retain their market share.

Summary & Key Takeaways

• Fintech startups are targeting the best customers of incumbent companies, exploiting the perception of unfairness and using positive selection bias as a marketing strategy.

• Startups are using new data sources to price their products smarter, allowing them to attract profitable customers that incumbents may have overlooked.

• By encouraging behavior change and nurturing customers into profitable ones, startups are able to turn potentially unprofitable customers into a positive source of revenue.