In times of social distancing, most people spend more time at home. One option of spending your evening on your couch is to watch the short series Bad Banks. In the second season, the investment banker Jana Liekam and her team of trusted accomplices move to Berlin to take over a sustainable robo-advisor. The viewer is pulled into the power struggle between the incumbent Deutsche Global Invest with its fintech incubator in Berlin and the rivalling robo-advisors fin21 and Jana’s Green Wallet

Fig. 1: Google searches for the term “fintech”

Both pop culture and Google search trends speak a clear language: fintech and its smaller cousin insurtech have been a phenomenon in the startup world. In the last couple of years, my hometown Berlin has seen a surge of neobanks, robo-advisors, payment solutions or scoring providers appearing out of nowhere. In a move formerly unheard of, bankers have relocated to the German capital to build the next big thing. And with Finance Forward the fintech community even has its own magazine and conference.

In our new world we pay with credit cards issued by Revolut, N26, Penta or Oxygen, get consumer credits on Smava’s loan marketplace or deposit our money all over Europe with Raisin. Even the process of lending and underwriting, perceived as the incumbent’s core business, has been revolutionized by companies like auxmoney, finiata and Monedo. How did all of this happen?

Opportunities for fin- and insurtech startups

A very smart thinker in this field is a16z’s general partner Alex Rampell. In a 50min long conversation with Frank Chen, he speaks about his views on this topic. He recognizes three successful strategies fin- and insurtech startups have used to enter the juicy markets of incumbents: positive selection, better (and/or more) data and behavioural change.

Let’s assume you want to start an insurance company. In a simplified view, the price of the insurance is calculated based on the average claims. A good example would be car insurance in which a group of people pay the same fee. Naturally, some people in this group will tend to be better drivers than others and cause less damage.

Positive selection

Positive selection takes advantage of this imbalance. People that are on the better-than-average side of the distribution may feel treated unfairly. They do have to pay the same as everyone else, although they invoke fewer costs. Smart insurance companies may take advantage of this and offer better rates to these people and these people only. An interesting example is the insurance company Friday. Note that it is not a startup in the strict sense as it is part of the Swiss Baloise Group. However, Friday’s main USP is their pay-per-kilometre model. If you drive just a little, you may have been in the better-than-average bucket of a traditional car insurer, but now you have the option to pay much less.

Better (and/or more) data

Your credit scoring or underwriting is just as good as your statistical model. These models in turn strongly depend on the quality and quantity of your data — the more you know about your clients, the better you can estimate the risk. Quite a few companies entered into the industry via this path. Examples are Monedo using masses of digital data to provide loans to the previously unbanked or newer companies like Myos or fulfin providing growth financing to small Shopify or Amazon sellers after analyzing their sales numbers instead of their credit histories. An interesting insurtech with this strategy is Descartes Underwriting, focusing on complex risk modelling as a service to large insurers.

Behavioural change

The most interesting entry point is to encourage behavioural change. It allows entering a market that is deliberately ignored by others. Think of someone, who will not get a loan by a bank because he has a bad credit history. Who would dare to give money to people that are not creditworthy? However, if one could make sure by some means that these borrowers pay up, a new and untapped opportunity appears. An example of this strategy is the peer-to-peer lender LendingClub. It started out as a social networking service bringing lenders and borrowers together based on affinities and social relationships. LendingClub's theory was that people are less likely to default on individuals in the same peer group. After initial success and despite a few scandals that lead to the resignation of its CEO, LendingClub has outgrown its initial target group and moved towards a broader offering.

Better tech and/or UX

There also has been a battle-tested way to disrupt the old economy which I will add to the discussion as my plus one: solid, flexible technology and a good UX. Core banking startups like Mambu, for example, enable banks to develop their platforms in a fast and flexible way and banking-as-a-service providers like solarisbank and their Estonian competitor modularbank are forming the backbone of many a fintech. So-called neobanks like Revolut and N26 are popular amongst the young and digital because of their slick UX, fast signup and simple features like N26’s spaces. Similar things are bound to happen in the insurance space. Companies like Popsure or Clark broker the same insurances you get everywhere else, but offer comfort features like a central app to report claims or an overview of all your insurances.

The end of proven strategies

Less and less new financial startups are entering the space as demonstrated by Fig. 2(a) in which we see a decline in the numbers of new fintechs during the last years. Meanwhile, investment in the space is rising steeply (see. Fig. 2(b), investment in fintechs per year). It does not seem to be only a subjective feeling that the market is saturating and maturing. On the adjacent playing field of insurtech there are still some opportunities up for grabs, but the dynamics at play are very similar.