Distribution is almost always challenging for startups; incumbents have the distribution advantage. This is especially true in fintech: First, it’s difficult to get potential customers’ attention — how often do you actively think about your banking services? And then there’s a high level of inertia too — do you really want to go through the trouble of setting up a new account? Or complete a lengthy application process for a new loan (or brokerage account, insurance, IRA, etc.) provider?
As such, distribution is often prohibitively expensive for fintech startups. But there’s a lever these startups can “pull” to quickly and cheaply generate (vs. “push”) customer demand: target customers at inflection points. An inflection point is a trigger event in a person’s life, whether it’s a milestone (e.g., graduation), a point in time (e.g., immigrating to the U.S.), or even a micro-moment (e.g., making a first huge purchase). Fintech companies that identify and target customers with relevant offerings at these inflection points can acquire customers at a much lower customer acquisition cost (CAC). Those customers might not proactively be looking for a new financial product — but they are more open-minded about trying one, if presented with a better alternative.
Targeting customers at an inflection point is not just a marketing campaign — it’s an optimal market entry (and even scaling) strategy.
Generally speaking, customers at inflection points are served by but are dissatisfied with their current financial products. Either some event happens in their lives, or time simply passes to the point where their dissatisfaction threshold becomes so high that they’re finally open to switching products (otherwise inertia would win).
Enter the new startup, at just the right point in time.
But market timing alone isn’t everything — the startup also has to: 1) create awareness of the better alternative they’re offering; 2) provide a superior product; and 3) cultivate multiple touchpoints to build a trusting relationship with the consumer. Startups that achieve this trifecta can move from “land” to “expand” by concentrically offering more products … thus beginning to scale.
The best inflection points occur early in a customer’s life, when it’s easier to become that person’s primary provider of financial services. Such early-lifestage customers probably haven’t been with their current provider for a long time (so they’re easier to switch) and haven’t yet adopted many of the products they’ll need in the future (easier to upsell).
There are several examples of fintech companies targeting customers at inflection points. Earnest and SoFi both target college graduates and offer student loan re-finance.
Take SoFi, which began by capturing the “HENRY” (“high earning not rich yet”) demographic soon after college/graduate school graduation, when many students are saddled with six figures of debt. SoFi offered loan re-financing at much better rates, for example, to medical students (who appear high risk on paper but in reality are low risk due to their future earning potential).
SoFi then expanded into offering other relevant, later-stage services, such as mortgages, to this same (previously untethered) customer segment. The company might never have stood out in the crowded mortgage space if it had tried marketing a new mortgage to those same customers as a first product. Doing so after building this relationship (which itself was built on an inflection point) allowed SoFi to not only enter, but to stand out in, this crowded space.
Recently, the company also launched investing services. Most consumers begin their financial lives with all their deposits in a bank account earning at best a few basis points, which works well until they begin to amass enough savings to make them feel they should begin investing, too. This is the point at which those people begin to feel dissatisfied with their existing solution (of just keeping cash in a bank account) and are open to an alternative (like SoFi’s investing service).
It’s not all inflection points behind SoFi’s early successes, however. The inflection point merely provides the momentum; the product itself also has to be superior (SoFi offers better rates, better customer service, and so on). Furthermore, SoFi differentiates itself from existing financial institutions by offering other services like job placement and special loan and resource programs for entrepreneurs.
Inflection points aren’t just big, obvious life moments like graduations and mortgages though — they can occur at a micro-scale, too, as with large purchases. For example, what happens when a millennial just out of college needs to buy a mattress? Fintech company Affirm (an a16z investment) captures customers at such moments and, more interestingly, at the point of sale.
Since people are likely to encounter Affirm at multiple merchants — anytime they’re trying to make a big purchase where financing may be needed — Affirm builds its customer relationship by directly integrating into merchants’ check-out flow. A customer buying a mattress at Casper.com, for instance, can simply enter a few pieces of information and be underwritten, on the spot, for an installment loan (a process that is far easier than existing options). After catching customers at these micro-moments, Affirm then builds trust during the life of the loan through transparent fees and timely payment reminders. That relationship then becomes a springboard to much more.
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Of course, anyone can adopt an inflection point strategy … and that includes incumbents. Since the battle between startups and incumbents comes down to “whether the startup gets distribution before the incumbent gets innovation”, the challenge for startups is to quickly expand beyond the initial inflection point to offer other products — scaling in both trust and reach — before the incumbent leverages their distribution advantage to catch up by offering better products of their own.
This means one of the only ways for startups to win once the incumbent “gets” innovation in fintech is to have already built a strong enough brand of their own so that they have other customer acquisition channels open to them (beyond the initial product offered at the inflection point). And that can then lead to scale.
What if the next major bank began by targeting the inflection-point opportunity presented by foreign workers entering the U.S. on H1-B visas? The majority of these expats likely have great credit histories in their home countries and have come to the U.S. for relatively high paying jobs, but starting fresh with no credit history in America means they are unlikely to qualify for critical financial products such as an auto loan or a credit card with a limit over a few hundred dollars. Several startups are already using international data sources (e.g., reputation and standing of their school abroad; cash flow patterns in the foreign bank account) to underwrite and offer better credit options to these foreigners. Once they address the immediate credit need, there’s ample opportunity to expand into other banking products and thus scale into becoming the next major bank.
Sounds like a huge inferential leap, but it’s not unlike how Bank of America began, when Amadeo Giannini, the son of an Italian immigrant from San Jose, California, founded the Bank of Italy in 1904. Banking in that era was the preserve of the wealthy, so Giannini disrupted things by serving Italian immigrants based on character (e.g., the “hard-working” “laborer” in San Francisco’s North Beach) as opposed to relying on the tradition then of underwriting existing familial wealth. He coupled this approach with an uncanny knack for providing people access to capital at critical junctures — for example by aggressively loaning out money right after the San Francisco earthquake of 1906, when other banks were being cash-flow cautious. Bank of Italy grew to such a scale that it then expanded its product suite through acquiring other banks.
Today, the Bank of America — once the Bank of Italy — is the second largest bank-holding company in the United States. But it started small, with an inflection point.