On affinity-focused fintechs, the future of BNPL and more

An interview with the co-founders of VC firm Fiat Ventures and sister arm Fiat Growth

Of all the venture capital funding invested in 2021, around one in every five dollars went to fintech. But this boom now seems behind us, as global fintech funding activity returned to pre-2021 levels.

Worse, fintech didn’t escape the recent waves of tech layoffs, with high-profile companies like Brex, Chime and Stripe making headlines for this disheartening reason over the last few weeks.

And yet, fintech startups are still getting founded and funded this year. Of the 223 companies in Y Combinator’s summer 2022 batch, 79 fell more or less into the fintech category.

Why are founders and investors still placing bets in fintech and where? To find out more, we reached out to fintech-focused VC firm Fiat Ventures.

Fiat co-founders Alex Harris, Drew Glover and Marcos Fernandez also run its sister arm, Fiat Growth, a growth consultancy working with fintech and insurtech clients. This enables them to comment not only on sector trends from an investor perspective but also to share practical advice.

One of their key recommendations is for fintech startups to lean into customer acquisition channels whose cost is less variable or seasonal than others, but our exchange covered a wider range of topics, from financial inclusion to offline channels and more. Read on:

Editor’s note: This interview has been edited for length and clarity. Many of the linked companies are portfolio companies of Fiat Ventures or clients of Fiat Growth.

TC: What makes you say that “fintech acquisition funnels are too complicated”?

Alex Harris: Fintech products by nature have complicated acquisition funnels and enrollment flows. Some complications are unavoidable in a highly regulated environment, but superfluous complications can arise when rigorous testing is not applied and funnels include unnecessary bloat.

Even the smallest detail can generate friction. For example, in the know-your-customer (KYC) process, many fintechs will ask a customer for their entire Social Security number. In most cases, for non-credit products, only the last four digits of the SSN are needed for identification purposes. While only a five-digit difference, this can have a meaningful impact on conversion rates that can save large sums of money at scale.

Data is certainly king, but there is a time and place for data collection and personalization. Too often, a well-intentioned data team will ask personalization and demographics questions directly in an enrollment process. However, these questions can most often come in a post-enrollment survey or periodically throughout the lifecycle of a customer. Even post-enrollment, these questions need to be thought out. We regularly see data collected for the sake of collecting it, without actionable insights derived from them.

Do you have thoughts on fintechs trying to acquire users offline?

Harris: Offline acquisition is alive and well in fintech, especially in proptech. While for most of us, junk mail is an irritant, the right direct-mail piece is still very effective. Nothing says top of mind like a postcard kept on a desk until a customer takes action.

With targeting capabilities stripped away from digital channels, out-of-home [advertising] can be a lifesaver as well.

Finally, TV has taken massive leaps in the past few years. Adtech companies like Tatari solve the challenge of attribution by bridging the gap between a first touchpoint of a television ad and a last-touch conversion digitally.

For most brands, the winning approach is omnichannel and involves a thoughtful clustered approach. A direct-mail piece may arrive around the same time out-of-home is being placed in the neighborhood. Digital retargeting can be added in for good measure. These playbooks are a favorite of ours to develop.

How can a fintech lower its customer acquisition cost (CAC)?

Harris: Optimizing CAC is an ever-present challenge. As businesses shift from “grow at all costs” to growing sustainably, there are a few strategies to keep in mind:

  • Data comes first: Solid data is the foundation of any successful growth funnel. It sounds obvious, but so many businesses struggle with a single source of truth around which metrics are their north star. We often start with an audit of a client’s funnel, martech and analytics stack. If the foundation isn’t set, we quickly get it there.
  • Sit in your customer’s shoes: You need to truly understand how your customer thinks, what pain points they have and how they make decisions. Understanding why a customer is signing up for your product, being retained (or churning) and what behaviors they engage in will inform which levers you can pull to optimize CAC. Informed (with quantitative and qualitative data) rapid experimentation and iteration throughout the customer journey are key to fixing any leaks in your funnel and lowering your CAC.
  • Lean into controlled CAC channels: From my time leading paid growth at Chime in the early days, our challenge was clear: We couldn’t be at the mercy of one growth channel. For any brand, variability in costs per thousand (CPMs) and channel performance make for unstable growth in any one channel. With referral programs and affiliate partnerships, you are in control. You set the terms and the conversion event you pay out on. A massive amount of scale and CAC efficiency can come from properly constructing and growing these channels.

For direct-to-consumer fintech, is the future in niches?               

Marcos Fernandez: We anticipate more and more niche or affinity-focused fintechs to continue to be launched into the market.

The first wave of fintech innovation focused on broad consumer segments whose only alternatives were traditional brick-and-mortar banking and investment products. Early fintech incumbents like Chime, SoFi and Robinhood found a way to serve larger audiences with digital-first financial solutions.

This innovation gave way to new challenges as competition drove more alternatives, CAC increased and large incumbents launched their own digital-first products. So, fintechs became less focused on building products for the masses but rather on niches that we refer to as affinity focused.

These products have a “for us, by us” focus across demographics and underrepresented customer segments. By having a focus, fintechs not only lower their CAC but can also drive higher affinity with the brand, increasing the customers’ likeliness to adopt other products from the same fintech provider.

An example of an affinity-focused fintech is Sigo Seguros, which provides auto insurance to Latinx consumers on an all-Spanish platform and through a mobile interface. The team created unique underwriting criteria focused on better serving their consumer base. As a result, they not only have a lower CAC compared to other providers but are also driving a referral rate four times superior to the industry average.

While affinity-focused fintechs provide a lot of good, the market is already crowded. Any fintech that wants to win needs to find the right balance of niche focus, product/service experience and a strong brand their customers resonate with.

What connection are you seeing between fintech and the future of work? 

Drew Glover: I’m a big believer that the future of work sits closely with the next generation, and the relationship with money is getting younger. Teenagers are no longer just building a lemonade stand or running a paper route; they’re reselling shoes or creating their own businesses on Shopify.

Individuals used to have one or two career paths throughout their lives, often with the same employer. Today, the current workforce can expect to have anywhere from five to seven employers throughout their careers. We’re already witnessing the shift from one job to multiple “side hustles,” driving several forms of income simultaneously. We anticipate this trend to quickly expand, driven by Gen Z, providing fintech platforms the opportunity to cater to this broader change.

The team at Boost is doing just that — tackling the freelancer dilemma with a focus on the Gen Z population. They have an impactful solution that helps freelancers of all shapes and sizes track and manage their money while also planning for tax reporting.

Of the fintech startups you’ve seen lately, how many had an API component? Do you favor these?

Fernandez: We are seeing a major shift in focus with both entrepreneurs and investors for startups to offer API components. This is a big focus of ours and will be an important component to allow for every company and brand to become a fintech.

Early fintech startups had to build out their entire tech stacks. Plaid was one of the first embedded solutions that allowed for a single API integration that provided access to a long list of banking and financial institutions. All of a sudden fintechs could provide better experiences for their customers without managing dozens of APIs.

Today, APIs are also becoming important for DTC companies that want to provide white-labeled solutions to channel partners. In addition, we’re seeing embedded and API-driven services expand across intersections that we refer to as “Fintech+”. In the web3 space, Plum is a great example, providing the ability for any Web 2.0 company to securely share data across traditional platforms and web3 solutions.

Is the buy now, pay later (BNPL) hype behind us?

Fernandez: Like other early fintech subverticals that have matured, opportunities in the BNPL space are narrowing as competition drives lower margins and more options for consumers. That being said, there are still opportunities to provide services in new ways and to higher-friction service areas like healthcare and legal services.

The first wave of BNPL innovation sat largely with the Affirm, Klarna and Afterpays that were building solutions for larger swaths of the population. As this market matured, margins lowered, CAC rose and these fintechs became more dependent on partnerships to drive innovation. These early winners were almost exclusively focused on consumer goods and products.

One key challenge that all of these solutions now face is the increasingly crowded checkout page that consumers see when selecting a product. Even with the use of autofill, nearly 70% of online shopping carts are abandoned, with 46% of consumers saying it’s because of the checkout process.

We believe that the next wave of winners in the checkout space will create a one-click checkout experience while offering additional services like BNPL and rewards products. Sleek allows both quick checkout and 2% cash back to consumers in addition to their card rewards. In the future, they can also offer BNPL solutions as a feature and two to three pages ahead of the checkout page.

The second wave of innovation will be niche-focused BNPL solutions focused on service sectors. The healthcare and legal service spaces are most ripe for disruption, as there hasn’t been a clear winner yet. While some BNPL services have already tested serving these markets, the complexities behind these industries will pave a winner who can work with the many stakeholders across transactions.

Where do you draw a line between financial inclusion and exposing people to risks they might not fully understand?

Glover: This is a question that we’re constantly asking ourselves, especially with our core belief that financial technology is one of the greatest tools in promoting financial inclusion and mobility. The truth is that the line is hard to define. Even with the best intentions, some bad actors will always try and take advantage of less fortunate demographics.

There are two ways this line is drawn today in the U.S.: regulation and market competition.

First, regulators will often drive what can and can’t be offered to consumers. While these laws have the best intentions, they can sometimes also be a double-edged sword. For example, the U.S. Securities and Exchange Commission has long issued accredited investor criteria. While these laws are aimed to protect retail investors, they also limit the exposure that consumers have to some higher-performing assets.

To offset this, the SEC recently passed Regulation A and D, which has spurred the fractional ownership market. Companies can now offer retail investors access to asset classes that typically were only available to accredited investors. For example, Here offers the ability to invest in vacation rental properties and Vint offers the ability for anyone to invest in fine wine and rare spirits for as little as $100.

A second way to draw the line is by allowing for more competition in the market. As more fintechs enter the market, consumers will have the ability to select from a more competitive pool of offerings, resulting in lowered costs.

Possible Finance, a public benefit corporation, is a good example of fintech aligning the company business model with the customers’ success. It provides payday loans under a digital-first subscription model to break the debt cycle that traditional providers have created to prey on the low-income demographic.

It’s possible to do good and perform well, and we are always seeking companies who are focused on building sustainable companies while driving meaningful change.

What is your favorite unconventional quality in an entrepreneur?

Glover: I only want to invest in entrepreneurs who are coachable. It’s important to be confident, self-aware and have a growth mindset, but I also like working with people who want to learn and improve. Also with those who do not shy away from confrontation and hard conversations.

Fernandez: I always look for entrepreneurs who clearly know their gaps and have a plan to fill them. Nobody is perfect and it takes a village to build world-changing businesses. Play to your strengths and surround yourself with people who fill your gaps.

Are you open to cold emails? If so, would you like to share an email address that founders can use to send you a pitch?

Fiat Ventures: Absolutely! Please reach out to hello@fiat.vc. Let us know what you are passionate about, how you differentiate and why you will win.