Highway to Hypergrowth
How fintechs can use business process as a service to scale successfully
Known for their swift innovation, fintechs are constantly evolving and reinventing themselves. Those that focused on lending are moving rapidly into the deposit and investments space – and vice versa. For example, SoFi, Chime, Robinhood, and Bread have all recently announced new consumer banking products. On the upside, soaring valuations can accompany this kind of growth. On the downside, it presents fintechs with some major challenges. Here's how to tackle them.
Fintechs often start with a core, monoline business model. But they don't end there. Instead, there comes an inflection point – often when there's been a significant capital injection – after which they seek to grow vertically (into new segments or geographies) or horizontally (into new products). This kind of rapid growth brings significant risks, which fintechs need to take proactive steps to mitigate.
Fintechs typically face five key challenges as they grow:
1. Regulatory complexities: With rapid growth, fintechs can underestimate important regulatory requirements, or worse, miss them entirely. For example, requirements for explaining pricing and deadlines for responses to queries or complaints vary from product to product and geography to geography. But awareness of these variations is not enough. Instead, fintechs need to make changes – both upstream in customer-facing processes and downstream when reorganizing operations – to accommodate them. Such changes are not always immediately apparent, posing a regulatory risk.
2. Reputational risk: Customers expect seamless omnichannel experiences. In the startup phase, fintech customers are often OK with a 'beta' experience. However, as the customer and product mix expand – and channels become less digital-only – fintechs may not adequately prioritize their experience strategy for their non-digital channels. That can turn customers off and damage a fintech's reputation. When launching new products and processes, many fintechs encounter more exceptions to business rules than they expect. For example, when a fintech launches a new lending product and customers begin submitting loan applications to its automated underwriting system, surges in 'refer decision' responses are common. This type of exception requires a human underwriter to take a second look at the loan and perhaps underwrite it manually. In most cases, fintechs do not have the staffing capacity to manage such a surge. That's a big reputational risk, especially in new product sales.
3. Compliance of new processes: With growth into new products or segments comes the need to quickly deploy new processes, with the appropriate controls. Established banks face the same challenge. Some traditional enterprise banks have even tried to offer new products using the know-your-customer process for an existing product. Such approaches could expose fintechs to costly fines from regulators.
4. Delays and cost increases: With all this complexity, deploying new processes securely, robustly, and quickly may prove difficult. Poor planning and design upfront will inevitably cause delays down the road. And plugging gaps with contractors on day rates can rapidly and exponentially increase costs. Though big banks might be able to afford such a stopgap solution, fintechs don't usually have the same margin for error.
5. Technology: Building in-house technology to support new processes and products is often prohibitively expensive. At the same time, finding third-party systems is risky. Integrating and testing them is riskier still. Assessing best-in-class technology and deploying it on the cloud or on-premise can become very complex and time-consuming. And it requires dedicated specialists to manage it.
A cloud computing service model that allows a partner to execute certain processes end-to-end for the fintech addresses these challenges. Lending administration, product origination, payroll management, and accounting are all examples of fintech business processes that are ripe for such a solution. The model, known as business process as a service (BPaaS), focuses heavily on process automation, which reduces the chance of manual errors. But it can also include manual activities, such as call answering.
For fintechs, BPaaS can provide a highway to hypergrowth because it delivers four key benefits:
1. Confidence: There's confidence in the tried and true. BPaaS solutions are prebuilt, usually on top of deep operational expertise. Well-defined processes are reused, avoiding the risks that come from designing processes from scratch. Established processes, which are well understood by operations teams, also have a lower degree of compliance risk.
2. Speed: It takes time to identify, assess, and select technology. A BPaaS model relies on already established and validated technology ecosystems. So fintechs don't need to spend time on these activities. It also eliminates the need to establish and manage multiple vendor relationships. Prebuilt solutions are also easier (and therefore faster) to implement because they've usually been deployed multiple times before.
3. Future-proof operations: The past decade has witnessed rapid change in technology and consumer behavior. Fintechs need the scalability to handle the unanticipated – for example, volume surges or unexpected exceptions. A BPaaS model affords this as well as access to best-in-class technology and innovation. The multi-tenant, cloud-hosted infrastructure enables fintechs to take advantage of enhancements developed for other operations. And technology is easier to upgrade or diversify, which frees up the fintech to focus its core business of serving clients.
4. Economics: Especially during periods of business growth, capital expenditures or major upfront investments can mean less cash flow for the rest of the business and impact short-term operations. BPaaS allows fintechs to shift from capital to operational expenditures, freeing up resources and creating opportunities. At the same time, there are various commercial models, such as per transaction or per user, which fintechs can select. BPaaS enables fintechs to access economies of scale. For example, technology deployed on a multi-tenant cloud will be cheaper than in a dedicated instance.
Huge growth in a short amount of time is exciting for a fintech. But without a sustainable model underneath, there's no guarantee of success or even survival. Taking the right steps to create a foundation that supports growth will help fintechs expand and scale at pace and come out of hypergrowth a winner.
This article first appeared in The Fintech Times and was authored by Alex Bray and Joe Nixon, global practice leads for fintech strategy, Genpact.