Top 4 Profitable Business Models in Financial field
Entrepreneur
Description: An Entrepreneur is either a company or an individual that creates and sells companies. The individuals who create and sell companies are either “serial entrepreneurs” or active early-stage investors. Entities that create and sell companies are incubators, venture capital firms, and innovative companies. The measure of success in this category is maximizing ROIC – Return on Invested Capital.
Examples: This business model is very rarely pursued by public companies as a business model.
Advantages: Potentially, a successful entrepreneur can get fantastic returns on their investment of time and capital.
Key Challenges: Risking significant equity assets in starting and growing a venture, overcoming barriers of entry; companies can be illiquid, the possibility of bankruptcy.
Financial Trader
Description: A Financial Trader buys and sells financial assets without significantly altering them. Financial Traders mainly buy and sell stocks and securities. Financial Traders invest in a wide range of private or public companies and securities.
Examples: Vanguard, Goldman Sachs, JP Morgan Stanley.
Advantages: Financial Traders can achieve high profitability by recognizing undervalued or overvalued assets and employing an appropriate trading strategy to exploit these opportunities.
Key Challenges: Financial Traders can suffer huge losses due to a systemic financial crisis. The majority of Financial Traders cannot achieve better-sustained returns than the overall market.
Financial Landlord
A Financial Landlord lends liquid financial assets (cash) to a customer under certain conditions that the customer promises to fulfill. There are two major subtypes of this business model.
a. Lender
Description: A lender provides cash to a customer on the condition that, within a predetermined timeframe, the customer agrees to pay back the amount borrowed plus a fee (interest). In a sense, a Lender rents money to a borrower. Often the Lender
Examples: Bank of America, Wells Fargo, Lending Tree.
Advantages: A Lender can hedge its risk in lending to a borrower by requiring the borrower to pledge collateral (or other terms) to protect against a potential loan default by the borrower. If a borrower meets all of its loan obligations, the Lender will earn a predictable stream of cash flows.
Key Challenges: Lenders must be experts in determining the credit worthiness of a borrower. There is generally a high level of competition among companies that use this business model. Interest rate risk can erode profits. This is a highly regulated industry and its regulatory framework could be a significant barrier of entry for a new market entrant.
b. Insurance
Description: Insurers provide their customers' conditional financial reserves in exchange for a fee (premium). A customer cannot have access to these monies unless the customer sustains a predetermined category of loss.
Examples: AIG, Farmers.
Advantages: Steady and predictable cash flows.
Key Challenges: Risk management – catastrophic events and natural disasters can overwhelm an insurer. Also, this industry is heavily regulated and could present a significant barrier of entry for a new market entrant.
Financial Broker
Description: Financial Brokers match buyers and sellers of financial assets. This business model includes insurance brokers, large stock brokerage firms, and large investment banks that underwrite IPOs.
Examples: Etrade, Charles Schwab, Ameritrade, Goldman Sachs.
Advantages: Market participants can be highly profitable; there are huge opportunities for economies of scale using this business model.
Disadvantages: The success of this business model requires network effects – the more people who use the platform increases the overall value of the platform. This can be exceedingly difficult to establish for a new market entrant.