Last week we introduced the concept of full stack vs. partial stack for fintech innovators. Part One of this report defined the two different options, talked about the pros-and-cons, and outlined some ways to accelerate the full stack implementation timeline. You may have noticed a bias towards the full stack approach.
This week in Part Two we’ll share our rationale for the full stack model, which we believe is the only road to market disruption. This position is based on increased value from two areas. First, the increased profits from transaction-based revenues (such as interest and commissions). And second, the proprietary customer insights you glean from owning the customer relationship outright and controlling the entire user experience. In order to disrupt you must own your relationship with your customer. This requires a full stack solution, which means your company must invest in the process of becoming a regulated entity.
Let’s quickly review the differences between full stack and partial stack.
Full Stack Vs Partial Stack
Partial stack is less complex. You sell or license your technology to a regulated company like a bank or broker-dealer. Your product becomes an ingredient in a bigger program. You don’t interface directly with the end-user. And you don’t need to become a regulated entity. Without the regulatory requirements it’s faster, easier and less expensive to launch and maintain.
Full stack is more complex, and it requires specialized expertise. A company, typically a traditional bank or brokerage firm, interfaces directly with their customer providing an end-to-end experience. This direct customer relationship requires them to be a regulated entity. If you’re a fintech startup that delivers a service to your customer; then you’ll likely fall into the full stack category, and you’ll likely need to become a regulated entity. The launch timeline is longer, and the program is more expensive to maintain. However, the revenue potential is greatly increased.
These descriptions are simplified for the sake of illustration, so it’s important to understand each option in the context of your own individual situation to determine the best approach for your new product or service.
Fintech Partial Stack – Pitfalls
Research studies tell us millennials do not like traditional banking services. In fact, American Banker found that 92% of millennials plan to choose a bank based on the availability of digital services. This attitudinal shift presents a growing problem for traditional bankers as older millennials are already starting to buy homes and save for their children’s college education.
It doesn’t take a formal gap analysis to see that US banks are lagging behind consumer needs and wants when it comes to digital banking services, like real-time payments processing. Fintech startups are filling these gaps by offering faster, cheaper, more appealing alternatives.
Banks have collaborated with fintech companies for years as they attempted to bundle traditional and digital services and technologies. Often with mixed results. This mutually beneficial relationship model is changing. According to a recent study published in Business Insider Intelligence (conducted by IDC and SAP), “While a third of global banks continue to view fintechs as collaborators, nearly a quarter now see them as acquisition targets.” The study goes on to say that an additional 25% of global banks believe they are in competition with fintech developers, “They represent a possible threat. We compete against them.” In other words 50% of all global banks look at fintech and see a threat or an acquisition target.
One former fintech founder who sold his technology to a bank spoke about his new role as a member of their executive team, “I continue to have a leadership role and spend a significant part of my time with regulators, investors, founders, and financial institution executives from around the world.” This is not an unusual story. It makes us wonder if he gave up his best shot at financial services disruption when he decided to sell to a traditional bank, insteading of staying fully focused on the next most disruptive product innovation.
There’s another downside to selling your cutting edge technology to a large, bureaucratic organization. The original vision gets bogged down in corporate committees and the practicalities of a major systems integration. Your forward thinking concept ends up diluted, unrecognizable, or quietly buried in an attempt to quash competition and protect market share.
Disruption doesn’t happen in a lab. Disruption happens in the marketplace. So we would argue that selling a creative concept to a big bank does not promote innovation. You must be willing to invest in the full stack option in order to protect your product vision and provide your customer with the superior user experience that differentiates your company and disrupts the product landscape.
Becoming a Full Stack Company
Going full stack is a more complex process than partial stack, but many times the return on investment will be positive. It’s important to conduct a cost/benefit analysis with long-term revenue projections based on your unique situation. You’ll likely find tangible value from transaction-based revenue streams like interest income and commissions. In addition to the value from customer insights gained from owning the entire user experience.
It helps to work with an outsourced compliance expert if this is new territory for your compliance team. Outsourced consultants can support your team with enhanced capabilities, insights and guidance. Or they can take over the entire process, so your team stays focused on their launch task list.
What’s the Best Compliance Stack for Your Fintech Startup?
Only you as a fintech innovator can answer this question for your product concept, your unique set of variables, and your short and long-term objectives.
If you’re weighing the pros and cons of partial vs. full stack for your fintech startup?Reach out today for a Complimentary Consultation.