Where to Compete in the Payment Value Chain
The African FInTech payment value chain can be seen as having four primary components: payment networks, banks, processors and fintechs
Each aspect of the value chain has its own key success factors.
Scale is key to a successful payment network. The value of a network grows as it increases it endpoints and transaction volume. That takes time and significant capital as well as the need to compete with well-established players.
Banks hold the keys to access and permissions in their markets having gained the required licenses and permissions to issue payment accounts by central banks and payment networks. Becoming a bank will enable a fintech to gain more of the value chain and potentially go to market more quickly without a bank approval, but the cost and time to do this is significant.
Processors have invested in technology and business development that is designed to address a specific set of customers, products and markets. It is tempting for a fintech to try to replicate that capability to gain more of the value chain revenue. That can make sense, but only if the fintech has the scale and can achieve a competitive level of operations and match the operating efficiencies and technical capabilities of established processors.
FinTech attempts to enter the market by competing in multiple parts of the value chain can lead to increased costs and delayed market entry. It also can take the fintech away from a focus on their business: building a profitable, sizable, growing, engaged customer base.
Rather that looking horizontally across the value chain, fintechs need to go deep, vertically building out their capabilities to refine and improve their customer use cases, acquire and grow customer relationships. Then based on their customer and market knowledge adjust their pricing and business models to optimize the relationship between margins, growth and profitability.
Once a fintech has demonstrated they are successful in truly understanding their customers and markets, and have shown they can replicate that success in more that one market or customer set or product, then they may consider a horizontal expansion.
Green Dot is a public company in the US that followed the vertical first approach. They were one of the first prepaid companies. Initially focused on building a proprietary load network Green Dot learned from its mistakes and successes and started to adapt and evolve its business model.
It opened its proprietary load network to all players. Next they added a processing platform, first via a partnership and then by acquisition. In parallel Green Dot continued its customer focus landing Wal-Mart as a customer. Then they acquired a bank license and became a public company.
Green Dot provides an example of a vertical first expansion and some guidance to African fintechs, although it must be viewed through the lens of the African markets. Green Dot was able to get one bank license to access over 300 million customers in the US. In Africa, they would need up to 54 bank licenses. Still, Green Dot is a company worth examining.
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