How does fintech make money?
The fintech industry is undergoing a Tremendous rise, shattering traditional financial models with its innovative spirit and technological prowess.
According to Plaid, the global fintech market reached a staggering $310 billion in 2022, a testament to its rapid pace of expansion.
While this figure may seem impressive, it’s important to remember that it still represents a mere fraction of the colossal $26 trillion financial services market. However, this understates the true potential of fintech’s disruptive power.
Despite its current size, the fintech industry boasts boundless potential for growth. Its secret lies in the relentless pursuit of innovation, constantly churning out new and improved financial services that cater to diverse needs and preferences.
These aren’t just incremental tweaks; they’re game-changing solutions that challenge established norms and offer unparalleled convenience, accessibility, and personalization.
From robo-advisors tailoring investment portfolios to peer-to-peer lending platforms democratizing access to credit, fintech is reshaping the very way we manage our finances.
The implications of this transformative power are vast and far-reaching. Fintech has the potential to empower previously underserved communities, streamline financial processes for businesses, and drive down costs for consumers.
It’s no surprise that investors are taking notice, pouring billions into promising fintech ventures, fueling the industry’s explosive growth.
While the future of fintech remains unwritten, one thing is certain: its impact on the financial landscape will be profound and irreversible.
As it continues to evolve and mature, we can expect even more groundbreaking innovations to emerge, transforming the way we think about and interact with money.
So buckle up, because the fintech revolution is just getting started, and it’s poised to reshape the financial world as we know it.
And that brings us to the question, how does Fintech companies make money?
How does fintech make money?
1. Fees and Commissions:
This is the bread and butter of many fintech companies. Think of them as small charges, like tolls on a financial highway. They can come in various forms, like:
Transaction Fees: Every time you send or receive money through your fintech app, a small fee might be deducted. This is how platforms like Opay, offering Owealth with amazing daily interest and Paga keep the lights on.
Loan Interest: Fintech lending platforms connect borrowers with lenders, and they often earn a commission on the interest paid by borrowers. Think of it as a matchmaking fee for your financial needs.
A good example of a Fintech lending platform in Nigeria is fairmoney, FairMoney Microfinance Bank is among the most downloaded fintech app in Nigeria with over 10 million download.
With over 10,000 daily loan disbursements, 587k reviews, 4.2 star ⭐⭐⭐⭐ rating and over 5 million users enjoying banking, savings, and investment services.
Subscription Charges: Some fintech services, like wealth management apps or premium budgeting tools, require a monthly or yearly subscription fee for access to advanced features. It’s like paying for a gym membership to keep your finances in shape.
A good example of wealth management app is risevest, which gives It’s user’s access to a carefully selected portfolio of global investments, across US stocks, US real estate and fixed income assets.
In return, it allows you to Earn up to 15% or more investing in high-quality US assets. With over 500k download, 4k reviews and 4.2 rating.
With over 600k user’s and over $42 million paid out to user’s in 5 countries.
2. Partnerships and Integrations: It’s a team effort in the fintech world! Many platforms partner with traditional banks and other financial institutions to offer their services. For this collaboration, fintech companies might receive a referral fee like opay referral program or a share of the revenue generated through the partnership. Think of it as a bonus for playing well with others in the financial sandbox.
3. Data Monetization: In today’s digital age, data is king! Fintech companies collect and analyze user data to understand their financial habits and preferences. This valuable information can be used to personalize services, target advertising, or even develop new products. But don’t worry, reputable fintech companies always ensure data privacy and security are top priorities.
4. Advertising: Some fintech apps, especially those offering free basic services, might display targeted advertisements to generate revenue. These ads are often based on your financial behavior and interests, so you might see offers for loans or investment products relevant to you. Think of it as a personalized shopping experience within your financial app.
5. Value-Added Services: Beyond the core financial functions, some fintech companies offer additional services like insurance, bill payments, or even healthcare packages. These add-ons can generate additional revenue streams and create a more holistic financial ecosystem for users. Think of it as a one-stop shop for all your financial needs.
Example of Fintech companies and how they make money in real life
Let’s start with mobile money.
1. Mobile Money:
Companies like Paga, OPay, and PalmPay have become household names in Nigeria, transforming the way Nigerians send and receive money.
They primarily earn through transaction fees, charged for sending and withdrawing cash.
Some platforms like opay also offer additional services like bill payments and airtime top-up, earning commissions on each transaction.
2. Microloans
Access to credit can be challenging for many Nigerians. But that’s a thing for the past.
Fintech companies like Branch, fairmoney, palmpay and ALAT bridge this gap by offering microloans through mobile apps.
These loans have shorter repayment terms and higher interest rates (sometimes lower interest rate depending on the type of loan you are applying for) compared to traditional banks, but they cater to a previously underserved market, earning revenue through interest payments on the loans.
3. The Robo-Advisor:
Investing used to be a complex game reserved for the elite. Platforms like Risevest and Bamboo make it easy for anyone to invest in stocks, bonds, and mutual funds, all through their phones.
They typically charge a percentage of the assets under management (AUM), earning more as their user base and investment amount grow.
4. Insurance
Fintech is also transforming insurance. Companies like Luno and Revo offer micro-insurance plans for things like health, travel, and even smartphones, accessible and affordable through mobile apps.
They generate revenue by charging premiums on these plans, making insurance more accessible and relevant to everyday life.
5. Digital Banking:
Fintech companies like Kuda and Vbank are challenging traditional banks by offering fully digital banking experiences.
They earn revenue through various means, including transaction fees, interest on loans and savings accounts, and partnerships with other financial service providers.
Other Fintech companies and their revenue model
Startups like PiggyVest and Cowrywise are focusing on financial education and wealth management, while others like Bitmama and Bundle are making inroads into the world of cryptocurrency. Their diverse revenue models include subscription fees, commissions on investments, and transaction fees within their platforms.
How is fintech profitable?
Transaction Fees: Remember those charges you incur when sending money or paying bills? That’s one way fintech companies generate revenue. Compared to traditional banks, fintech platforms often boast lower fees, making them attractive to Nigerians seeking cost-effective financial solutions.
Interest Income: Lending and borrowing are core aspects of fintech. Platforms like peer-to-peer lending connect borrowers with investors, earning income by facilitating these transactions and collecting interest on loans.
Peer-to-peer lending platforms like LendingClub and Prosper connect borrowers directly with lenders, cutting out the middleman and offering competitive interest rates. The platform earns a fee on each transaction, providing a sustainable income stream.
Subscriptions and Premium Services: Some fintech companies offer premium features like advanced budgeting tools, investment insights, or priority customer support. These subscriptions can be a recurring source of revenue, especially for platforms catering to financially savvy users.
E-wallets like Apple Pay and Venmo have become ubiquitous, offering convenient and contactless payment options. These platforms often charge transaction fees or subscription fees for premium features, contributing to their bottom line.
Crowdfunding platforms like Kickstarter and GoFundMe allow individuals and businesses to raise capital from a large pool of online investors. These platforms typically charge a percentage of the funds raised, making them a valuable source of revenue.
Data Analytics and Partnerships: Fintech companies collect and analyze vast amounts of user data. This data can be valuable to other businesses, creating opportunities for partnerships and revenue generation through data sharing or targeted advertising.
Value-Added Services: Beyond core financial services, some fintech companies offer additional services like insurance, wealth management, or e-commerce integration. These value-added services diversify their income streams and attract new customer segments.
Investment and Acquisitions: Early-stage fintech companies often rely on venture capital funding to grow and innovate. As they mature, they may become profitable, attracting further investment or even acquisition by larger financial institutions.
For those venturing into the digital currency realm, crypto-trading platforms like Coinbase and Binance offer a space to buy, sell, and trade cryptocurrencies. These platforms earn revenue through transaction fees, spreads between bid and ask prices, and other service charges.
How does fintech payment work?
Now, let’s see how a typical fintech payment works:
- Initiating the transfer: You open your favorite mobile app, choose the recipient, and enter the amount you want to send. Easy, right?
- Behind the scenes: Your app sends a secure message to the payment processor, a company that acts like a middleman between you and the recipient’s bank.
- Validation and verification: The processor checks your account balance and ensures you have enough funds. It also verifies the recipient’s information to make sure the money goes to the right place.
- Funds on the move: If everything checks out, the processor instructs your bank to deduct the amount from your account.
- Delivery time: The funds are then sent to the recipient’s bank, who deposits them into their account. Depending on the type of payment, this can happen instantly or within a few hours.
But wait, there’s more! Different types of fintech payments use different technologies:
- Mobile wallets: These apps store your money electronically on your phone. You can use them to pay for goods and services, send money to friends, and even withdraw cash at certain ATMs.
- Bank transfers: This is the classic way to send money between bank accounts, but fintech apps have made it much faster and easier.
- Online payments: When you shop online, you often use a payment gateway, a secure platform that processes your credit card or debit card information.
How much money can you make from fintech?
Fintech Jobs and Salaries:
| Job Title | Average Monthly Salary (NGN) | Factors Influencing Earnings |
|---|---|---|
| Software Engineer (Fintech) | 450,000 – 1,500,000 | Experience, skills, company size |
| Product Manager (Fintech) | 500,000 – 1,000,000 | Experience, industry knowledge, proven track record |
| Data Analyst (Fintech) | 350,000 – 750,000 | Technical skills, domain expertise, problem-solving abilities |
| Marketing Manager (Fintech) | 400,000 – 800,000 | Marketing expertise, brand awareness, campaign success |
| Business Development Manager (Fintech) | 450,000 – 1,200,000 | Sales skills, network, client relationships, commission structure |
Owning a Fintech Startup:
| Startup Type | Potential Revenue Streams | Challenges & Risks |
|---|---|---|
| Mobile Payment App: | Transaction fees, user subscriptions, premium services | Competition, regulatory hurdles, user acquisition |
| Lending Platform: | Interest on loans, fees, data analytics services | Loan defaults, market saturation, managing credit risk |
| Wealth Management App: | Investment fees, commissions, subscription fees | Building trust, attracting high-net-worth individuals, market volatility |
| InsurTech Platform: | Premiums, policy fees, data-driven insurance products | Regulatory compliance, customer education, building a strong risk management framework |
FAQ
So, how DO fintech companies make money?
There are many ways Fintech companies make money, but here are some common methods:
- Transaction Fees: Every time you send money, pay a bill, or top up your airtime through a fintech app, they might charge a small fee. These fees add up, especially with frequent transactions.
- Subscription Fees: Some platforms, like wealth management apps, offer premium features with monthly or annual subscriptions.
- Interest on Loans: Fintech companies can offer loans directly or partner with banks. They earn interest on these loans, just like traditional banks.
- Interchange Fees: When you use your debit or credit card for transactions, a small fee (interchange fee) is charged to the merchant. Fintech companies that process these payments can earn a portion of this fee.
Are there any FREE fintech services?
Absolutely! Many fintech apps offer basic services like account opening, money transfers, and bill payments for free. They might rely on advertising or premium services for income.
What about mobile money platforms? How do they make money?
Mobile money platforms like M-Pesa and Airtel Money earn revenue through various channels:
- Cash-in/Cash-out Fees: Small fees are charged when you deposit or withdraw cash through an agent.
- Transaction Fees: Sending and receiving money through the platform comes with a transaction fee.
- Merchant Payments: Businesses using the platform for payments pay a processing fee.
- Interest on Loans: Some mobile money platforms offer microloans and earn interest on them.
Do fintech companies make money from my data?
Yes, but not in the way you might think. While some companies might use anonymized data for market research or product development, they cannot sell your personal financial information without your consent.
Is using fintech safe?
Safety is paramount! Reputable Nigerian fintech companies are regulated by the Central Bank of Nigeria (CBN) and other authorities. They have to follow strict security protocols to protect your data and money. Always check for regulatory approvals and user reviews before trusting any platform.
How does fintech benefit Nigeria?
Fintech promotes financial inclusion by providing affordable and accessible financial services to underserved communities. It also boosts the economy by creating jobs, driving innovation, and increasing financial literacy.
Can I invest in fintech companies?
Yes, if you’re an accredited investor, you can invest in publicly traded fintech companies or participate in venture capital funds that invest in startups.
Can I Make Money Using Fintech?
Absolutely! Some apps offer cashback rewards for using their services like fairmoney, while others provide investment opportunities like earning interest on your savings like piggyvest. Research different platforms and choose those that align with your financial goals.
Will Traditional Banks Disappear?
Not likely! Fintech and traditional banks are evolving together. Some banks are embracing technology by launching their own digital platforms, while fintechs are partnering with banks to offer wider services. It’s about choice and convenience for the customer.
What about those “free” mobile apps? How do they make money?
Free apps often rely on a combination of the above methods. They might charge transaction fees for specific features, offer premium upgrades, or partner with other businesses within the app for commissions.
Will fintech replace traditional banks?
Not entirely. Fintech and traditional banks can coexist and complement each other. Fintech offers innovative solutions and convenience, while traditional banks provide stability and a wider range of services.
Where can I find more information about fintech in Nigeria?
There are plenty of resources available! Check out the websites of the CBN, the Nigerian Fintech Association, and individual fintech companies. You can also find informative articles and blog posts online on platforms like DigiWallet.
