Have FinTechs come down with a case of 'over-specialisation’?

The English language has become a casualty of rapid innovation in technological services. The deluge of neologisms we’ve introduced is an embarrassing occupational hazard of working in this space - the word ‘tech’ can be prefixed with almost anything!

But all this coinage serves a purpose – to identify the niche target segments served by these companies. There is no dearth of FinTechs, EdTechs, FoodTechs, HealthTechs, and even PropTechs, CleanTechs, GreenTechs and FemTechs today.?

That’s how hyper-focused players have become.?

And that’s the case even for sub-sections within these broader categories. FinTech alone boasts of segments served that cut across retail and business lending, SMEs, investors, insurance. Players continue to zero down their focus on smaller customer niches distinguished by gender, profession, sexual orientation, etc.

Here’s the thing though - the underlying product largely remains the same across these subcategories, it’s just the use cases overlaid and marketed on top of these financial services that tell them apart.?

These companies could be down with a case of pinkwashing, greenwashing, wokewashing - what have you. Or, they could really be adding value by solving tough problems. If so, to what extent?

Let’s argue why such tailored services are a good idea:

Community creation

Laser-sharp focus on a single group can lead to the creation of a community populated by like-minded individuals. As opposed to geographically distributed communities served by incumbents, these communities tend to be bound by their unique banking needs.?

A tightly knit customer base with shared interests is ripe for strong organic growth as the pace of adoption within the community is fast, often due to word-of-mouth awareness. Moreover, communities tend to be aligned with a common mission, which results in lower customer churn and better retention.??

Benefits of smaller TAMs?

When FinTechs focus on specific groups, the size of their target markets automatically shrinks. This may be counterintuitive from a perspective that prioritises the volume of customers acquired, but building for smaller segments makes a lot of business sense.?

Let’s take a step back and look at what happened when FinTech started to verticalise (a phase that preempted this explosion of hyper-specific financial services). The example of early-mover payment providers in the West like Klarna and Mollie will help illustrate my point. These cropped up to serve what was then a niche segment (e-commerce), and then doubled down their focus on the category by offering additional services like back-office payment administration to the same clients.?

Verticalisation of FinTech serving smaller total addressable markets encourages higher engagement, creating an opportunity to cross-sell products on the platform. Moreover, focused groups also allow for sharpened messaging and naturally create network effects. Combined, these attributes can eventually lower the cost of customer acquisition.

Indicator of perfect product-market fit

Arriving at a perfect (or near-perfect) product-market fit is rarely a fluke. Once the product goals are set, a hypothesis must be developed detailing customer expectations, competitor research, own product analytics, and insights from the internal team. Players often come up with multiple hypotheses, so prioritising from among this list based on the effort required, impact expected and confidence in the hypothesis is a natural next step.?

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The product then moves into the experimentation stage, followed by an analysis of the market traction and uptake from customers. This process is iterated multiple times over a long period to identify the product or a version of the product that is best received by the market.

The level of focus that goes into creating a?niche FinTech offering can only come from repeating this process and honing the product.?

Push to financial inclusion?

Many of these FinTechs were developed to focus on underserved and marginalised customers from?LGBTQ, African-American and disabled communities. For instance, US-based Daylight provides financial services to queer families. It has developed into an end-to-end platform for all the financial needs for persons from these communities. It issues debit cards with their preferred names even if it doesn’t match their legal documents.

Closer home in India, there are examples of FinTechs offering bespoke financial services to specific groups like gig workers. KarmaLife, for instance, works with platforms to provide gig workers in their employ on-demand earned wage access, credit lines and personal loans.

These groups, largely excluded from the coverage of traditional players, could potentially turn such FinTechs into their primary financial service providers.

Hyper-specific FinTech - the ship of Theseus?

Niche FinTech service providers are bringing more to the table than just shiny packaging that captures the current zeitgeist. In many ways, it makes business sense to drill down on a clear-cut customer segment or product offering.?

But circling back to the point I made earlier – if the underlying product remains the same, does specialisation count for anything? Purists would answer this question with a firm ‘no’.?

We have seen?verticalisation?pay off spectacularly before. In many ways, the phenomenon of niche financial services for all kinds of communities emerges from the very same trend. If this is any measure to go by, these companies stand to win from the benefits of network effects, market consolidation, and user stickiness.?

One could also argue that there are generalists within FinTech as well as traditional financial services providers that have created products for these niches. Are they any less successful than specialists? After all, they have the advantage of diversification across customer segments. But it’s not an either-or question. Diversification in terms of the variety of products offered can often protect specialists.

Another pertinent question is this – is there a scope for even distribution of such financial services across?all?communities where they are required? Or will players flock around a handful of niches with promise and the prospect of good returns? For instance, in India, FinTechs offering services tailored for small businesses, women, or even the queer community, are easily sighted. But what about FinTechs catering to other marginalised groups like backward tribes, castes, transgenders, etc.? And even if they exist, will they ever percolate down to tier 3 and tier 4 towns where they’re needed the most?

Conclusion?

Building a sharpened product for a specific audience that addresses a long-neglected gap is never a bad thing – that’s where we’re all trying to get. And when it fits the market requirements, eases customer acquisition and retention, and has the potential for revenue generation, it becomes a win-win for everyone. However, to be successful, the underlying product must be resilient. Customer experience, packaging and marketing are there only for support. I will end this with an adage that my colleague Mayank often throws at me: “Good marketing makes bad products fail faster.”?

What do you think of this debate? I’d love to hear your thoughts.?

?Written by?Rajat Deshpande?