These companies and other digital finance firms earn revenues, in part, through merchant, instant access and trading fees. Acquiring a large base of customers is paramount, especially for the smaller and niche companies.
Fintech Companies Have Unique Advantages Over Traditional Banks
Thanks to their proficient use of cloud computing digital finance companies typically innovate more quickly than banks.
Digital finance tools are mobile native (downloaded directly to smartphones or tablets and operating largely independent of the web) with simplified user interfaces. They are generally less expensive than the similar tools traditional banks may offer.
According to management consulting firm McKinsey, digital finance companies operate at 70% of the cost of traditional banks due mostly to their lower costs of acquiring and serving customers.4 They also rely less on interest income than traditional banks.
Millennials are “digital natives,” and many prefer easy-to-use, personalized financial services. Digital finance tools allow millennials to conduct transactions with one swipe or tap. This demographic is a key driver of digital financial technologies and the companies behind them.
Digital finance tools can help close the financial services gap for those without conventional bank accounts. The FDIC and Federal Reserve have estimated that 20% to 25% of U.S. households are unbanked or underbanked.5 These households typically lack access to basic checking or savings accounts and often incur excessive fees to access their financial resources.
Case Study: PayPal Holdings and Venmo
Founded in 1998, PayPal operates technology platforms for digital money transfers. Figure 1 shows how the company has grown, more than doubling the number of transactions from 2017 to 2020.
The company acquired Venmo in 2013 to add to its stable of digital finance services. Venmo uses peer-to-peer networking technology to simplify money transfers within a social network through a mobile app or within Venmo’s website. Venmo doesn’t charge users to send or receive money except when they use credit cards.
Venmo became popular in 2015 when it launched an aggressive marketing campaign encouraging people to “pay with Venmo” instead of cash or credit cards. Its increasing number of users helped Venmo become more successful and add ancillary services. It now offers a debit card through MasterCard and credit card through Synchrony Bank.
We think the Venmo narrative of starting with a single, differentiated product and expanding its customer base and services is potentially the path to long-term success for PayPal. Other companies in the digital finance industry could follow a similar roadmap.