By Greg Soh, a technology entrepreneur building the next-generation financial payments infrastructure for logistics companies through RoadFlex.
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The global financial technologies (fintech) industry was valued at more than $100 billion in 2021 and is expected to grow at a CAGR of 26%, despite a slowdown in deals this year. It is therefore not surprising that Y Combinator has remained one of the leading seed-stage investors in this sector for the past two years and continues to bet heavily on this sector. This trend is sending a clear signal to traditional financial institutions: New competitors have joined them at the poker table, and if they do not respond with urgency, their chips may be taken.
The fintech ecosystem comprises numerous subsectors, including crypto, robo-advisors and personal finance, insurtech and payments infrastructure. One of the most enduring trends that go hand-in-hand with the proliferation of technologically advanced payments infrastructure companies is the explosion of innovative corporate spend solutions. For these corporate spend solutions, there are three main considerations that end users look out for.
1. Access to the product. Since the 2008 financial crisis, traditional financial institutions have been more cautious in their lending policies. With the current global pandemic and rising inflation, they are now even more conservative—they are ready to open up their wallets or extend a credit line to large and successful businesses—but not to small and medium enterprises (SMEs), which ironically are the ones that need the financial support. Many startups are targeting the needs of these less advantaged groups. As an example, in the case of Brex, they are targeting startups that have little or no financial track record and would therefore find it difficult to secure a credit line.
2. Transparency. Trust and reliability are some of the most important considerations for end users in this space. This is achieved in a variety of ways, one of which is transparency. This includes keeping pricing models simple, direct and open and making sure that users are kept abreast of all their spending at all points in time.
3. Ten-times-better products at attractive prices. End users are often in search of products that are 10 times better than incumbents, and offered at reasonable prices. These products must not only have amazing user experiences with everything designed with the end user in mind (i.e., they must be faster, more convenient and more secure), but also prompt and excellent customer service.
So how do companies in this space cater to these needs and wants? The answer seems to be leveraging data.
It is probably no secret that established financial institutions do not want to finance SMEs because they are perceived to be riskier. In order for startups to give less-advantaged groups access to a credit line or loan, they therefore must do a different kind of risk assessment and more rigorous underwriting of the corporation. This includes looking at alternative sources of data or analyzing data in creative ways so that they can do Know-Your-Customer, Know-Your-Business and credit checks to minimize risk.
To provide more transparency to customers, startups in the space collect large amounts of information including merchant categories and additional data such as fuel quantity (if relevant) so that they can showcase this information to the end users. Some startups even leverage the data to provide unique insights on users’ spending behavior, or run the data through complex machine learning models (internally, this is often called risk models) so they can detect fraudulent transactions.
To be able to build and ship products that are 10 times better, startups take in large amounts of user feedback and run data analysis on feature usage to determine which features are most useful and beneficial to end users. As a specific example, many of these corporate spend solutions utilize services, such as Gong.io, that help analyze customer-facing interactions (by collecting data through calls and emails) to deliver insights for them to create great customer service experiences for end users. Here are a few best practices to keep in mind when leveraging data:
1. Really understand what the data is telling you about the situation or customer. Having an abundance of data is great, but interpreting it the right way is equally important.
2. Ascribe the right level of confidence. Many people tend to take the data they receive as ground truth. Especially when external sources are providing the data set, it is important to ascribe a confidence level to the data in the data set. If you have lower confidence, be more cautious in using the data set for decision-making.
During this process, you may encounter a few challenges, as well. While having more data available is great, there will also be more meaningless data available. Therefore, companies may have a more difficult time determining which data sets are accurate and useful. With that abundance of data, keeping it secure is also incredibly important. Most startups do not have the infrastructure to keep the data they receive secure. Keep this in mind as you move forward.
With the burgeoning amount of data available in different dimensions, leveraging data is an important edge (besides the technology edge) that can drive the corporate spend solutions space in the long run. As a technical founder of my startup, I am excited about how data can not only be used to drive business decisions, but also create a world filled with safer and better products catered to a wider audience. By doing so, it brings humanity many steps closer to one of the critical goals of fintech—democratizing finance.