Sarah Morgenstern
Principal, Investments
&
Tracy Williams
Director, Intellectual Capital

Doing Well By Doing Good

December 3, 2018

At Omidyar Network, a big part of our work involves backing companies whose mission is to help the more than 170 million Americans who are struggling financially to lead more secure and prosperous lives. These households spend as much as $170 billion per year on products and services that too often fail to improve their financial health. This disconnect represents both a societal problem and a market opportunity. An emerging cohort of startups is dedicated to more effectively meeting this large and underserved segment's financial needs, while turning profits. Our portfolio, for example, includes companies like Chime, which offers free mobile banking services; Propel, a mobile app for food stamp recipients; and Steady, which helps gig workers discover new income opportunities in their communities.

Our portfolio companies aren’t only innovating around products and services for customers. They are equally as innovative when it comes to developing business models and are highly focused on building revenue models where incentives are aligned with positive long-term outcomes for users. It’s a sound and deliberate business strategy to build trust in an industry that is still plagued by questionable practices, such as “gotcha” fees and low-quality referrals.

These revenue models are, in fact, one of the most important innovations these new entrants are bringing to market. Omidyar Network and Oliver Wyman recently released Breaking New Ground in FinTech, a research report which shows that our portfolio companies are part of a broader trend of FinTech companies using trust-based revenue models to gain traction in the financial services market for the underserved.

The driving forces behind this development are clear. Even at the earliest stages, mission-driven entrepreneurs tackling this market know two things: Trust is the cornerstone of financial services, and lack of trust in the sector is endemic. In fact, the Edelman Trust Barometer found that financial services is the least trusted of all major industries by consumers. Dig deeper, and you’ll find that consumers specifically highlight revenue practices like hidden fees or unwanted selling as major factors in creating that mistrust. Revenue models, clearly, are both a critical and an overlooked piece of the trust equation.

Despite that, the kind of revenue models that erode trust and confidence continue often to be the models of choice in much of the traditional financial services sector—and, unfortunately, even among some new entrants into the business.

This is beginning to change, as a new generation of innovators is taking a closer look at the competitive landscape and rejecting the status quo. The research found that a growing cohort of financial health startups is approaching revenue models in at least three distinct ways relative to the broader FinTech landscape, particularly when serving the mass market.

First, they're not shying away from models that charge consumers directly. In fact, a greater proportion of these firms charge the consumer when compared to FinTech companies overall. What’s different is that they are going well beyond simple fee transparency—which is increasingly becoming table stakes—to creating value clarity. These companies are ensuring that consumers understand what they are getting in exchange for the money they pay—such as savings in fees and time, incremental money earned—and demonstrating how these benefits leave their users better off overall. This is a critical shift.

A second approach is rethinking third-party seller relationships, such as referrals and advertising. Instead of merely serving offers to consumers, new entrants are proactively advising consumers on what kinds of offers can help them increase their financial health. This means curating products and services that improve a users' financial outcome, rather than merely serving as a billboard for the highest bidder. By aligning company interests with consumer interests, this approach has the important effect of resolving potential conflicts between the interests of sellers and the financial health of consumers. It also transforms a simple source of revenue into a value-added channel that allows startups to meet a larger set of their customers’ needs. This often includes nontraditional financial service needs, such as increasing supplementary earnings and decreasing spending on day-to-day items like groceries and pharmaceuticals.

Finally, new entrants are using a third-party beneficiary model much more often as a revenue model. Not only are they turning to existing revenue pools like interchange (the fee a merchant's bank pays to a consumer's bank), they are developing new revenue pools from third-parties—such as employers or government—who benefit when a consumer’s financial health improves. Firms pursuing this model are refocusing the narrative from how their solutions are good for the consumer, to how solutions are good for everyone.

As these pioneering firms are developing these models, it is clear that they are not easy to create. The report offers a framework to help aspiring entrepreneurs in this process, by considering what value is created, who will pay for it, and how they will do so. It also evaluates eight payment models that are being deployed, and identifies keys to success relevant across all of them.

There are many other details to be found in the report, which examines trends based on data from 350 leading FinTechs, along with 11 case studies from frontier firms and advice from founders and investors collected during interviews and workshops with more than 50 entrepreneurs and sector leaders. It also incorporates information from focus groups and digital diaries with dozens of consumers across income ranges and geographies.

While it’s still too early to say definitively what the winning blueprint for trust-based revenue models will look like, these new approaches represent a promising development with the potential to change the marketplace and materially impact the financial health of millions of American households. In fact, the study found that using the right combination of financial health-focused FinTech products could yield the average household, with a median of $45,000 in post-tax income, at least $2,000 in savings annually.

So while identifying a responsible revenue model is no simple task—and there are no easy, off-the-shelf solutions—developing such a model is key to seizing on what is both a significant business opportunity and an important national priority. With this report, we hope to inspire entrepreneurs to invest early in developing these sustainable revenue models, so they are able to build robust businesses that both solve this enormous problem and lead to permanent change across the financial services industry.

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