How to Cut Costs and Boost Profits in the FinTech Sector

FinTech, or financial technology, is a booming industry that uses cutting-edge technologies like artificial intelligence (AI), blockchain, data analytics and cloud computing to transform and improve financial processes and services. FinTech companies offer innovative solutions for various financial needs, such as payments, lending, investing, insurance, wealth management and more. They challenge the traditional financial institutions and create new markets and opportunities.

However, FinTech companies also face significant challenges in terms of cost optimization, which is essential for their profitability and sustainability in a highly competitive environment. Cost optimization means strategically controlling and reducing expenses, improving financial efficiency and maximizing the return on investment. Inefficient operations can result in high costs, unhappy customers, low competitiveness and slow economic growth.In this article, we will examine the main types of costs that FinTech companies have to cope with, the strategies they can employ to optimize them and the future trends that will influence the cost optimization landscape.

The Cost Structure of FinTech Companies

FinTech companies have different types of costs depending on their business model, target market, product portfolio and technology stack. According to Toptal, some of the main cost categories are:

• Operational Costs: These are the costs of running the essential backstage operations that keep the main business functions smooth and secure, such as handling transactions, assisting customers, updating systems, stopping fraudsters and managing risks. These costs are crucial for ensuring cost-effectiveness and customer satisfaction. Operational costs can vary depending on the volume and complexity of transactions, the quality and availability of customer service, the reliability and security of systems and the effectiveness of fraud and risk management. For instance, Revolut, a digital banking platform that delivers banking, payments, investing, budgeting and crypto services, has operational costs associated with handling millions of transactions per day, offering round-the-clock customer support in various languages, sustaining its cloud-based architecture and adhering to anti-money laundering rules.

  
  

• Technology Costs: These are the expenses related to the infrastructure that enables the delivery of FinTech services, such as cloud platforms, software licenses, hardware devices, cybersecurity tools and network connectivity. These costs are often high for FinTech companies as they invest heavily in innovation and security to provide seamless, reliable and secure financial services. Technology costs can vary depending on the type and scale of technology used, the level of customization and integration required, the frequency of updates and maintenance needed and the degree of protection against cyberattacks. For example, Stripe, a global payment platform that enables online businesses to accept and manage payments, has technology costs related to using cloud platforms such as AWS, software licenses such as Ruby on Rails, hardware devices such as card readers, cybersecurity tools such as Stripe Radar and network connectivity such as internet service providers.

  
  

• Human Resource Costs: These include salaries, benefits, training and recruitment expenses related to hiring and managing skilled talent. This type of costs is a key driver for FinTech companies as they need to attract and retain finance and technology experts who can develop, implement and maintain cutting-edge solutions. Human resource costs can vary depending on the number and quality of employees hired, the level of training and development provided, the turnover rate and retention rate of employees and the compensation structure and incentives offered. For instance, Acorns, an investment app that helps users save and invest their spare change, has human resource costs related to hiring and managing over 200 employees, providing online courses and training programs, offering referral bonuses and stock options and maintaining a low turnover rate.

  
  

• Regulatory Costs: These significant expenses are related to complying with the legal and regulatory requirements of the jurisdictions where FinTech companies operate. Regulatory costs include compliance monitoring systems, legal and regulatory filings, audits, fines and penalties. FinTech companies need to adhere to complex and evolving regulations that aim to protect consumers, ensure financial stability and prevent money laundering and terrorism financing. Regulatory costs can change based on the range and difficulty of regulations, the regularity and rigor of compliance audits performed, the quantity and harshness of fines or sanctions enforced and the assets and proficiency required to comply with regulations. As an example, to obey the insurance laws and regulations in different states, Coalition, an insurance app that provides cyber insurance and security tools for businesses, faces regulatory costs. These costs include using compliance monitoring systems such as Plaid, filing legal and regulatory reports with authorities, undergoing audits by regulators and insurers, adhering to regulations and dodging fines or penalties for non-compliance.

  
  

• Hidden Costs: These are the less obvious expenses that can accumulate over time and impact the bottom line. Hidden costs include customer acquisition costs, system downtime costs, inefficiency costs, opportunity costs and reputation costs. FinTech companies need to be aware of these hidden costs and take measures to avoid or minimize them. Hidden costs can vary depending on the effectiveness of marketing strategies used to acquire customers, the availability and reliability of systems and services, the level of operational efficiency and productivity, the potential revenue lost due to missed opportunities and the impact of negative feedback or reviews on brand image and customer loyalty.

  
  

  For example, ZestFinance, a lending app that uses machine learning to provide fair and transparent credit, has hidden costs related to acquiring customers through online channels such as Google Ads or Facebook Ads, experiencing system downtime due to technical issues or cyberattacks, losing efficiency due to manual processes or errors, missing opportunities due to limited market reach or product range and damaging reputation due to customer complaints or lawsuits.

  The Cost Optimization Strategies for FinTech Companies

  FinTech companies have a range of options to fine-tune their costs and boost their bottom line. Some of the popular strategies are:

  
  

• Leverage automation, AI and machine learning: These technologies can help FinTech companies improve their efficiency, enhance their customer experience and reduce their labor costs by automating repetitive tasks, streamlining workflows, providing personalized recommendations, detecting anomalies and optimizing decisions. For instance, FinTech companies can use automation to speed up transaction processing, AI to provide tailored financial advice and machine learning to prevent fraud losses. A recent example of a FinTech company that leverages automation, AI and machine learning is SpdLoad, a FinTech app development company that uses these technologies to create custom FinTech solutions for its clients. SpdLoad uses automation to reduce development time and costs, AI to provide data-driven insights and machine learning to improve user experience and security.

  
  

• Implement lean principles: Lean principles are a set of practices that aim to streamline processes, eliminate waste, increase efficiency and deliver value to customers. By applying lean principles, FinTech companies can identify and remove non-value-added activities, reduce errors and defects, simplify complexity and increase agility. They can use lean principles to reduce paperwork, minimize rework, standardize procedures and empower employees. A recent example of a FinTech company that implements lean principles is Revolut, a digital banking platform that offers banking, payments, investing, budgeting and crypto services. Revolut applies lean principles to simplify its processes, automate its customer verification, outsource its card issuance, use cloud computing to scale its infrastructure and use data analytics to monitor its performance.

  
  

• Outsource non-core support activities: FinTech startups can reduce expenses by outsourcing non-essential services to external providers. Specialized firms that focus on specific functions can offer accounting, legal, marketing or IT support at lower costs and/or higher quality. Outsourcing allows FinTechs to access top-tier capabilities without having to build in-house teams for non-core activities. This allows them to concentrate resources on their core products and innovations that drive value for customers. A recent example of a FinTech company that outsources non-core support activities is Square, a financial services company that provides payment solutions, point-of-sale systems, e-commerce platforms and business tools for small businesses. Square outsources some of its accounting, legal, marketing and IT services to external providers. For instance, Square uses Stripe as its payment processor, AWS as its cloud provider, Zendesk as its customer service platform and Mailchimp as its email marketing tool.

  
  

• Adopt RegTech solutions: RegTech is a subset of FinTech that focuses on using technology to automate compliance processes. FinTech companies can adopt RegTech solutions to reduce their regulatory costs by automating data collection, reporting, validation, analysis and audit. RegTech solutions can also help FinTech companies stay updated with regulatory changes and avoid fines or penalties. FinTech companies can utilize RegTech solutions to monitor transactions for suspicious activity, generate reports for regulators and verify customer identity. An example of a FinTech company that adopts RegTech solutions is Coalition, an insurance app that provides cyber insurance and security tools for businesses. Coalition uses RegTech solutions to automate its compliance processes, such as data collection, reporting, validation, analysis and audit. Coalition also uses RegTech solutions to stay updated with regulatory changes and avoid fines or penalties. For example, the company uses Plaid to verify customer identity, Stripe Radar to monitor transactions for fraud and AWS Config to audit its cloud infrastructure.

  
  

• Effective HR management: Using effective HR management practices, FinTech companies can optimize their human resource costs. These practices include remote work arrangements that can save on office space and travel expenses, continuous training programs that can improve employee skills and performance, strategic hiring processes that can find the best talent for the job and performance-based incentives that can motivate and reward employees. These practices can help FinTechs boost their productivity, enhance their employee engagement and retention and reduce their turnover and recruitment costs. A recent example of a FinTech company that implements effective HR management practices is Acorns, an investment app that helps users save and invest their spare change. Acorns adopts various HR management practices that enhance its employees’ productivity and satisfaction. For example, Acorns allows its employees to work remotely from anywhere, saving them time and money on commuting and office space. Acorns also provides its employees with online courses and workshops to improve their skills and performance. Moreover, Acorns uses referrals, assessments and interviews to find and hire the best talent for each job. Furthermore, Acorns rewards its employees with stock options, bonuses and recognition based on their achievements and contributions.

  
  

• Partnerships: FinTech companies can form partnerships with other entities to share resources, technology, expertise and customer bases, reducing their costs and increasing their reach. They can partner with banks, telecom operators, retailers or other FinTechs to offer complementary services, access new markets or leverage existing infrastructure. ZestFinance, a lending app that leverages machine learning to offer credit that is transparent and fair, is a recent example of a FinTech company that collaborates with other entities. ZestFinance forms partnerships with banks, telecom operators, retailers and other FinTech entities to share resources, technology, expertise and customer bases, reducing its costs and increasing its reach. For example, ZestFinance partners with Baidu to offer credit in China, with Ford Credit to offer car loans in the US, with JD.com to offer e-commerce loans in China and with LendUp to offer payday loans in the US.

  
  

• Use cloud computing: Cloud computing is a model of delivering IT services over the internet, where users only pay for the resources they use. FinTech companies can use cloud computing to avoid upfront infrastructure investments and reduce their technology costs by scaling up or down their resources according to their demand. Cloud computing also offers benefits such as flexibility, reliability, security and innovation. Finch, a consumer finance app that combines checking and investing in one account, is a recent example of a FinTech company that benefits from cloud computing. Cloud computing helps Finch to host its applications and data on the cloud, access software and hardware resources on demand, protect its systems from cyber attacks and try out new technologies. Finch uses AWS as its cloud provider, which provides it benefits such as scalability, reliability, security and innovation.

  
  

• Leverage open-source software: Open-source software provides invaluable benefits to FinTech companies looking to optimize costs. By leveraging freely available open-source applications, startups gain access to innovative tools that can be customized, integrated, and shared. This promotes seamless compatibility across systems and enables transparency and adaptability. By tapping into these resources, FinTechs can focus their efforts on developing their core solutions rather than building foundational platforms from scratch. A recent example of a FinTech company that employs open-source software is Stripe, a global payment platform that enables online businesses to accept and manage payments. Stripe uses open-source software to build its platforms, integrate with other systems, access new features and customize its solutions. Stripe uses open-source software such as Ruby on Rails, React, PostgreSQL, Redis and Kubernetes.

  
  

• Implement RPA: Software robots or digital workers can copy human actions and do tasks automatically. This technology is called robotic process automation (RPA). FinTech companies can automate boring, fixed and low-value tasks such as typing data, matching data, checking data and approving data by using RPA. This can help them spend less on labor and work better. For example, paying bills, opening accounts, scoring credit and helping customers are some of the tasks that FinTech companies can automate with RPA. Coalition is one of FinTech companies that uses RPA. Coalition uses RPA to automate invoice processing, account opening, credit scoring and customer service. Coalition uses RPA tools such as UiPath, Automation Anywhere and Blue Prism.

  
  

• Use data analytics: Data analytics transforms raw data into valuable insights that can guide decision making. It involves collecting, processing, analyzing and visualizing data to reveal patterns, trends, opportunities and risks. FinTech companies can leverage data analytics to enhance their performance and profitability by optimizing their resource allocation, minimizing their wasteful spending and maximizing their return on investment. For instance, Acorns, an investment app that helps users save and invest their spare change, uses data analytics to fine-tune its pricing strategies, target its marketing campaigns, improve its customer retention and manage risks. Acorns uses data analytics tools such as Google Analytics, Mixpanel, Amplitude and Segment.

  Future Trends

  The cost optimization landscape for FinTech companies will continue to evolve as new technologies, regulations, customer expectations and competitive forces emerge. Some of the future trends that will shape the cost optimization landscape are:

  
  

  • Greater adoption of AI, automation, blockchain and remote work: These technologies will enable FinTech companies to further improve their efficiency, enhance their customer experience and reduce their costs by automating more tasks, streamlining more workflows, securing more transactions and enabling more flexible work arrangements.

    
    

  • Greater focus on sustainability practices: FinTech companies will need to adopt sustainability practices to reduce their environmental impact, comply with green regulations and meet the growing demand for sustainable finance. Sustainability practices can also help FinTech companies optimize their costs by reducing their energy consumption, waste generation and carbon footprint.

    
    

  • Greater innovation and differentiation: Constant innovation is crucial to create new value propositions, offer new solutions and differentiate themselves from the competition. Innovation can also help FinTech companies optimize their costs by creating new revenue streams, improving customer loyalty and enhancing operational efficiency.

Conclusion

FinTechs experience fierce competition and need to optimize costs to succeed. They can cut expenses and grow profits by adopting technological innovations, simplifying operations, following regulations, and creating novel business models. They can gain a cost advantage and a profitability surge by innovating quicker than competitors. Cost optimization through operational excellence and forward-thinking strategy is the key to becoming a market leader in FinTech.

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