SaaS → Freemium OS: A new wedge for financial services (February 2022 Fintech Newsletter)

This first appeared in the monthly a16z fintech newsletter. Subscribe to stay on top of the latest fintech news.


    SaaS → Freemium OS: a new wedge for financial services

    An operating system is a mission critical piece of software used daily to manage a business. Toast is the OS for restaurants, Mindbody for gyms, ServiceTitan for field services, and so on. As we noted in our post on Fintech Scales Vertical SaaS, many of these businesses start by selling software as a service, and layer on financial services once customer captivity is achieved. Operating systems can be extraordinarily sticky, in many cases are across the flow of funds, and possess a wide array of logical points for upsell and cross-sell.

    But why aren’t operating systems the norm across more, if not all, industries? What will it take to bring the long tail of certain categories online? The key may lie in not selling software at all. Enter the “Freemium OS.”

    Many legacy industries still face challenges in gaining adoption of operating systems where a clear wedge is necessary to break in. This could be for a variety of reasons: a long tail of small businesses with a low willingness to pay (e.g. real estate agents), inertia in moving off of paper (e.g. freight brokers), or incumbent operating systems that make a rip and replace challenging (e.g. commercial insurance agents). Offering a specialized OS for free can provide a compelling wedge by convincing otherwise unwilling customers to try a new product. And if that free product becomes a critical piece of every day workflow, there are plenty of ways to monetize over time.

    We believe this wedge can take many different forms, but one we’re fascinated by right now is a freemium model that helps working capital constrained businesses smooth cash flows. This can look different across industries: for example, if there’s significant spend and a spender (as there might be in construction), a charge card combined with software might make sense. If there’s a sales commission awaiting payout (such as in real estate), an advance might make sense. If there’s significant receivables that create working capital issues (as there might be in freight), embedded lending might make more sense. It’s not hard to see how owning the OS for a business would give a prospective lender better visibility into cash flow dynamics and future prospects, ultimately creating a secured environment to lend to its customer while also potentially offering banking, spending, and insurance services.

    That said, freemium doesn’t mean these companies are just a distribution platform for financial services. Engagement and relevance of the vertical-specific SaaS is still important. It should still drive stickiness by being an integral, tailored part of the user’s day-to-day workflow, and as a depository of critical data for their job (e.g. customer or transaction data). So, the software is still valuable, the barrier to adoption is just being lowered by making it free. Sometimes, it can also make sense to charge some de minimis amount just to drive commitment (i.e. if you’ve paid, you’ll use it) and avoid adverse selection. Ideally, over time, a company can charge for premium offerings as the customer gets more hooked into using the software, or the company goes upmarket.

    We’re excited to learn more about businesses with these characteristics building in industries that have been tough to break into historically.

    – Joe Schmidt, a16z fintech deal partner and Seema Amble, a16z fintech partner

    Envisioning a new stack for the post-bank era

    A decade ago, there was a sense that fintech companies would soon replace all aspects of consumer banking. Instead, we have seen fintechs gain tremendous traction on the customer-facing, demand side of the ecosystem (banking, payments, overall customer experience), with traditional financial institutions continuing to enable the supply side that is largely dependent on capital (deposits, lending).

    But what might the future of consumer banking look and feel like as the roles of these players continue to evolve? We see seven areas across the consumer banking stack with the potential to yield some of the biggest yet-to-be built companies in fintech.

    1. Your personal money button: An internet company (“neobank”) serves as your primary interface to access all aspects of your money for a flat subscription.
    2. Every individual is a business of one: Every account also comes with SMB functionality so you can issue invoices and accept payments to support new-found freedom and flexibility in pursuing solo business ventures.
    3. New, dynamic portfolio theory: Rather than adhering to the classic 60/40 stocks/bonds portfolio model, you have the ability to invest via self-directed stock picking (Robinhood), actively managed funds with trading updates via video from your fund manager (Titan), zero cost passive funds (Wealthfront), Defi and other private companies + funds.
    4. Lending as an auction: Lending on a “per card-swipe basis” done via auction to whatever bank will give you the lowest cost of capital. A consumer does not have to know who they are since the internet company handles it all behind-the-scenes. Loans are refinanced when lower rates are available in real time.
    5. Income streaming: Your employment history and paycheck is seamlessly integrated so you can get paid daily and borrow against it.
    6. Configurable rewards: Interchange comes back as flexible, customizable rewards – such as crypto, fractional investing, merchant discounts, or lottery.
    7. Yield chasing across countries + asset classes: Savings yields driven by Defi and a new “Stone Castle” global yield chasing network, with the option to sweep money into brokerage accounts for even higher yields.
    8. Multiplayer: Culture, community, and social become core components of financial institutions (ROSCAs, share exchanges, Partyround, DAOs).

    – Anish Acharya, a16z fintech general partner

    Building to reduce consumer medical debt

    Medical debt in the United States is a problem of staggering proportions. Fully half of Americans now carry medical debt, up from 46% in 2020, and between debt sitting with collectors ($140B), on credit card balances, and in unpaid medical bills, Americans owe a total of $1T for healthcare services they’ve already received. To make matters worse, the top drivers of medical debt are often unpredictable, unavoidable procedures, for people who simply don’t have the money to pay for them.

    Once a patient is in debt, their options are limited. Most Americans (75%!) who have medical debt choose to try to negotiate it down. This often requires scouring their Summary of Benefits and Coverage, asking for itemized bills, or inquiring about qualification for payment assistance programs, all of which can be frustrating and time consuming. While 66% of those who negotiate do so themselves, 26% use a third party service to help them. Because these services are doing all the heavy lifting outlined above, they typically charge 30-40% of the savings they uncover.

    But new legislation around transparency in healthcare could empower those negotiating medical debt. These strong regulatory tailwinds could mean there’s a big business to be built in helping consumers reduce their debt.

    On July 1, 2021, part of the Cures Act went into effect giving Americans the ability to access their health and insurance data via an API call, which companies like Automate Medical are making possible. This could empower those negotiating medical debt to grant access to their data to a negotiating company with a single click, arming that service with the information needed to better negotiate on the consumer’s behalf. On the provider side of things, the PRICE Transparency Act will require hospitals to publish their prices to the Internet, and the No Surprises Act will protect against a lot of surprise medical billing – both further empowering negotiators of medical debt.

    Startups, like Goodbill and Resolve, are already building in this space, and we see three core product primitives that will likely define category winners:

    1. Automation: Even with access to significantly more data, building an automation layer for debt negotiation is hard. Software needs to unify patients, payors, and providers, while customizing payment plans or discount rates based on each patient’s unique financial situation. While many companies may start with placing phone calls on behalf of patients, true scale in this category must involve significant and sophisticated automation.
    2. Customer choice: With more price transparency comes greater choice. New regulations allow consumers to better understand the “market rate” of a given service or procedure, and medical debt products can help steer patients towards more cost-effective options for future procedures, perhaps by integrating with players like Turquoise Health. Otherwise, the cycle of debt is likely to restart as soon as the next unexpected expense hits.
    3. Sustained customer service: Today, medical debt negotiation and resolution are largely transactional. We believe the winner in this category will find creative ways to create more of an ongoing relationship with its customers – perhaps through financing (and patient data could enable better underwriting!). Otherwise, with regulatory tailwinds attracting many new entrants to the market, exclusively transaction-based business models will face significant downward price pressure.

    – Marc Andrusko, a16z fintech deal partner and Daisy Wolf, a16z bio+health partner

    What Tap to Pay on iPhone means for payments

    This month, Apple announced its plans to launch Tap to Pay on iPhone. Once launched later this year, this product will unlock payments for the smallest end of SMBs and solo merchants. SMBs will no longer need a separate terminal and can accept payments with their existing iPhone, which lowers the cost and complexity of processing payments (even further than Square already did by removing the minimums and upfront fees, for example). It makes it easier for someone starting a business or side hustle, or a solopreneur, to get started taking payments from their iPhone. Merchants with both an online and offline presence can also see all their payments in one place (e.g. Stripe), rather than having separate payment systems for each.

    To be sure, Tap to Pay on iPhone is not the first contactless payment solution available for SMBs in the U.S. That said, past attempts failed to gain meaningful traction due to friction for the merchant or the consumer, creating a classic chicken/egg issue. For a while, there was limited mainstream consumer awareness or incentive to tap to pay. QR payment options from PayPal, Square, and others did not require a reader, however, they did require the consumer to access an accompanying payments app to checkout. Square tried Pay with Square in 2012, where consumers and merchants could connect via GPS and charge a linked card. But merchants still needed the Square point of sale (POS) and mainstream consumer awareness. Many small businesses take payments via CashApp, Venmo, or Zelle but using a credit card usually means a 3% fee.

    This time though, the timing is right – U.S. issuers have recently rolled out contactless cards in huge numbers. Plus, the early stages of the pandemic drove adoption of tapping to pay because customers and merchants didn’t want to handle cash.

    So what does this mean for the payments ecosystem?

    Stripe is Apple’s first payment partner (though Apple plans to support other payment platforms). For Stripe, this is also a great distribution play. It can now capture offline payments alongside online transactions, so Stripe has a better, more complete picture of a merchant’s transactions.

    For POS providers, like Square/Block or Toast, Tap to Pay on iPhone doesn’t necessarily mean that they are going to start losing business. First of all, Tap to Pay on iPhone unlocks merchants that are typically smaller than the current Square/Block customer and someone who may not want a register or permanent device. For larger businesses, however, it will continue to make sense to have a separate register and all the functionality and features – payroll, inventory management, shift management – that it provides. These POS providers are payment platforms with hardware on top, and they could also partner with Apple to serve the smaller end of the SMB market.

    For Apple, this product brings it one step closer to having a closed loop payments system and also makes it easier for more vertical software companies in offline industries (e.g. healthcare, personal services, beauty, home services) to bring payments online. We’re excited to see the ecosystem it enables.

    – Seema Amble, a16z fintech partner


    The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; a16z has not reviewed such advertisements and does not endorse any advertising content contained therein.

    This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at

    Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see for additional important information.


    Stay on top of fintech

    Sign up for our fintech newsletter to get the a16z take on the future of fintech.