Best business models to choose for fintech startups in 2024

The fintech industry in 2024 has witnessed unprecedented growth, solidifying its status as a pivotal player in the global financial ecosystem. From the bustling streets of New York to the financial hubs of London and Dubai, fintech innovations are not only reshaping how businesses operate but are also redefining consumers’ relationships with their finances. 

According to EMR, the global fintech market attained a value of approximately USD 194.1 billion in 2022 and is expected to grow in the forecast period of 2024-2028 at a CAGR of 16.8% to reach USD 492.81 billion by 2028. 

A surge in digital transactions, the popularity of mobile banking, and the rise of blockchain are just a few hallmarks of this fintech evolution. Additionally, the trend of a cashless society and the need for instantaneous financial services have only intensified the demand for innovative fintech solutions. 

With this immense growth comes a corresponding increase in competition. Today, the fintech startup market is a bustling ecosystem, brimming with entrepreneurs who are eager to revolutionize financial services. As of May 2023, there were over 11,000 fintech startups registered in the Americas and over 26,000 globally. 

Source: Expert Market Research

Yet, with all the potential that the fintech industry holds, it’s essential to remember a foundational truth: the longevity and success of a fintech startup largely hinge on the chosen business model. This decision encompasses the startup’s value proposition, target market, scalability, and most important — monetization. 

The Simon Kucher research shows that profitability in fintech startups is not as prosperous as it may seem. According to their analysis, in 2022, roughly 400 Neobanks worldwide served close to one billion clients. At the same time, less than 5% of these challengers have reached breakeven. 

Source: Simon Kucher

In this guide, I will shed light on the most promising business models for fintech startups in 2024. My goal here is to help you make informed decisions, positioning your startup for sustained growth and success in an industry that shows no signs of slowing down.

Step-by-Step Guide to Determine a Suitable Business Model for Your Fintech Company

So, you’re here with a brilliant startup idea. It’s innovative, it’s fresh, and you believe it can change the market dynamics. But how do you fit it into a business model that ensures your startup’s profitability?

Let’s delve into a step-by-step guide to help you make an informed choice about the right business model for your startup. Get ready to take notes!

Understanding your market and customer needs

First things first, who is your customer? Dive deep into market research to understand your target audience. This isn’t just about demographics; it’s about psychographics, behavior, needs, and pain points. Your startup should solve a specific problem or address a particular need, and you should clearly understand which problem or need it is to create a profitable business.  

Exploring regulatory environment

The fintech industry, whether in the US, UK, or UAE, is often heavily regulated. Ensure you are familiar with both international and national regulations that might affect your business operations. As an example, open banking has varying regulations across regions. A business model that works in Canada might not be feasible in Switzerland based on regulatory constraints.

Analyzing technological infrastructure

Your technology stack isn’t just about building an app or a platform; it’s about scalability, security, and user experience. Ensure that your chosen business model aligns with the technological infrastructure you have (or plan to have). For instance, if you’re considering an API monetization model, you’ll need robust, secure, and scalable APIs to handle potential demands.

Evaluating funding and capital

Different fintech business models come with varying capital intensities. While some models might require significant upfront investments, others might be leaner. Understand your financial position and your potential to raise funds, and then choose a model that aligns with your capital strategy.

Planning partnerships and collaboration

Collaboration can be a game-changer in the fintech world. From partnering with banks for data access to collaborating with tech companies for integration, these alliances can profoundly influence your business model. For example, if you’ve secured a collaboration with a major bank, models like API connection fees or transaction fees might become more viable.

Core Fintech Business Models in Fintech for 2024

Now, let’s discover what business models in fintech are and how established companies monetize their products or services in one or another way:

Interchange fees

In the simplest terms, an interchange fee is a charge that a merchant’s bank (acquiring bank) pays to a cardholder’s bank (issuing bank) when a merchant accepts cards (credit or debit) as a form of payment. It’s a key component of the card payment ecosystem and serves to balance the benefits between the merchant’s bank and the cardholder’s bank. 

Interchange fees are a very popular business model for neobanks, as they comprise 70-90% of car processing fees. Below, you can see an approximate scheme of how neobank transactions work. Take into account that interchange fees can vary. On average, interchange fees are around 0.3-0.4% of the transaction amount in Europe and 2% in the US.

Here is how it works in action:

1. Transaction initiation: A customer initiates a transaction using a credit or debit card.
2. Fee deduction: The issuing bank deducts the interchange fee from the amount it pays the acquiring bank.
3. The merchant receives payment: The acquiring bank then deducts its own fees before depositing the final amount into the merchant’s account.

Interchange fees are determined by various factors:

1. Credit vs. debit: Credit cards typically have higher interchange rates compared to debit cards.
2. Rewards programs: The costs of reward schemes are offset by higher interchange rates, and they are quite favored by users.
3. Online vs. offline: In-person transactions are generally more secure than online ones.
4. Consumer vs. commercial: Business or corporate-linked cards usually bear higher interchange rates than personal cards.
5. Merchant Category Code (MCC): Each merchant is assigned a specific code by the major card networks, known as the Merchant Category Code (MCC). Hence, interchange rates can vary based on where the card is used, such as at supermarkets, retail shops, gas stations, or other merchant types.
6. Card networks: There’s a variation in rates among card networks. For instance, Visa and Mastercard tend to have more competitive rates, whereas AMEX generally charges more.
7. Network partner programs: Visa and Mastercard partner programs like VPP (Visa Partner Program) and MPP (Mastercard Partner Program) often give specific retailers interchange rates that are much lower than the networks’ published interchange rates.
8. Issuing bank size: Big banks fall under the Durbin Amendment, which limits interchange rates for consumer debit transactions. This restriction doesn’t apply to smaller banks. Consequently, partnering with smaller banks can be more profitable for fintechs due to the higher interchange revenues.

Real-life business model examples:

• Visa & Mastercard: These giants don’t directly set interchange fees but recommend rates. Banks that issue Visa or Mastercard-branded cards typically use these rates, adjusting for their operating region and local regulations.
• Square: A fintech company offering payment solutions for merchants. While it provides simplicity by charging flat fees for card transactions, interchange fees still play a role in its cost structure, with Square having to navigate the rates set by traditional card networks.
• Stripe: Another of the major fintech examples in the payment gateway landscape. Like Square, Stripe faces the nuances of interchange fees, often passing these costs, combined with their service charges, onto businesses that use their platform.

Subscription Fees (SaaS) 

The SaaS model in fintech is a straightforward proposition: instead of a one-time purchase or pay-per-use model, customers commit to periodic payments — monthly, quarterly, or annually — to access a fintech service or platform. It’s akin to subscribing to a magazine or a streaming service, but in this context, for financial tools and services.

Real-life business model examples:

• Robinhood: Gold premium subscription service offers features such as margin trading and instant deposits for a monthly fee.
• Betterment: Offers a premium subscription service with personalized financial advice and guidance from certified financial planners for a yearly fee.
• Revolut: Offers both free standard cards and paid packages. Paid plans include cashback on card payments, priority customer support, discounts on international payments, everyday insurance, and other benefits. 

Transaction Fee

At its essence, the transaction fee model is about charging users or businesses a set fee (or a percentage of the transaction amount) for processing or facilitating their financial transactions. This fee can be a flat rate, a sliding scale based on the transaction volume, or a combination of both.

Real-life business model examples:

• PayPal: charges fees for various payment services used, including international transactions and business account transactions.
• Wise: This platform, specializing in international money transfers, prides itself on transparent fees, often significantly lower than traditional banks.

Trading fees

Trading fees are costs associated with the buying or selling of financial instruments like stocks, bonds, or other securities. These fees are either a fixed amount per trade or a percentage of the total volume of the trade.

Real-life business model examples:

• eToro: A global trading platform known for its social trading feature, where users can mimic the trades of successful investors. While it offers commission-free trades on stocks, it has a different fee structure for other assets like cryptocurrencies and CFDs.
• Interactive Brokers: Catering to professional traders and investors, Interactive Brokers offers sophisticated trading tools and a tiered fee structure based on volume, making it a favorite for active traders.

API connection fees (API monetization)

As the digital ecosystem expands, the ability for applications and services to communicate seamlessly becomes vital. Here, Application Programming Interfaces (APIs) come into play, acting as bridges that allow different software programs to interact. Within the fintech space, monetizing these APIs offers lucrative fintech business models. Instead of building functionalities from scratch, third parties can simply leverage these APIs to access predefined functionalities or data.

Certain fintech firms generate revenue by levying fees on businesses that utilize their APIs. The pricing strategies for companies offering financial APIs can differ, but some common methods are:

1. Charging for each API request. This approach is suitable for scenarios like account linking, where an account needs to be connected just once, fulfilling the API’s purpose.
2. Imposing a recurring monthly charge for sustained API connections. Akin to the subscription-based model, this strategy is ideal for APIs that require continuous data updates between the bank and fintech applications rather than a singular API interaction.
3. Billing for fundamental usage, often termed a ‘platform fee.’ Here, the API supplier determines a fee for each API request, but there’s an agreement that the client will incur a minimum charge regardless of the number of API requests.
4. Applying a proportional fee for every transaction. This is applicable for APIs focused on payments. Here, the API provider oversees the money transfer and bills their client based on a fraction of the overall transaction amount.

Real-life business model examples:

• Plaid: As a data aggregator, Plaid connects various financial accounts and allows third-party apps to access banking and other financial data. Whether it’s for personal finance apps, money transfer services, or investment platforms, Plaid’s API is at the core, often charging for its usage.
• Yodlee: Similar to Plaid, Yodlee provides financial data aggregation. It enables third-party platforms to fetch transactional and account data, enhancing their offerings.
• Truelayer: Offers various APIs, such as Data API (for accessing financial data) and Payments API (for initiating payments). Each API usage comes with associated fees.

Third parties/referral fees 

Third-party or referral fees involve earning a commission for referring users to another platform or service. When a customer uses the fintech app as a conduit to access another service and subsequently signs up or makes a transaction, the fintech app gets a kickback. These kinds of fintech business models bank on strong partnerships and affiliations with other services.

The underpinning factor that makes third-party/referral fees viable is trust. Users must believe that the fintech app genuinely has their best interests at heart and isn’t just pushing services that offer the highest commission.

Real-life business model examples:

• Credit Karma: A personal finance company that offers free credit scores, credit reports, and credit monitoring services to its customers. The company earns advertising/referral fees by promoting credit cards, loans, and other financial products to its users.
• Mint: A budgeting and personal finance app that helps users track their spending and manage their finances. The company earns advertising fees by promoting financial products, such as credit cards and savings accounts, to its users.

Interest

​​The interest model is straightforward: 

Financial institutions, including some fintech platforms, borrow money at one rate and lend it at a higher rate. The difference between these rates, known as the spread, is where they make their money.

For instance, a fintech startup offers savings accounts at a 1% interest rate and provides personal loans at a 6% rate. The 5% difference is their revenue, minus operating costs.

Real-life business model examples:

• SoFi: Initially started as a student loan refinancing platform, SoFi has expanded into various financial products. By offering competitive interest rates on their loans while paying interest on funds in their SoFi Money accounts, they’ve tapped into the power of the interest model.
• Revolut: While primarily known as a digital bank, Revolut offers interest on certain account balances. By investing deposited funds elsewhere and earning a higher return, they generate revenue.
• BNPL Affirm: Generates revenue on the loans it issues to consumers. Although the company does not charge fees, it does charge interest on its POS loans. The APR can range from 0% to 30%. While the average for an Affirm loan is 18%, approximately 43% of loans are issued at 0% APR. Applicable rates depend on the agreement with the merchant and the credit quality of the buyer. Affirm states that the average loan size is $750, although it offers loan facilities up to $17,500. 

Inactivity fees 

Inactivity fees, as the name suggests, are charges imposed on users who don’t engage with a platform or service for a predetermined period. This might sound counterintuitive — why charge someone for not using your service? But, it’s a strategy that’s deeply rooted in the mechanics of the fintech sector.

A major fintech platform sees thousands, if not millions, of sign-ups. Not all these users will be consistently active. Charging an inactivity fee ensures that even dormant accounts contribute to the revenue stream. From another angle, inactivity fees can serve as a nudge, urging users to re-engage with the platform, making them active revenue generators once again.

Maintaining dormant accounts can cost fintech platforms in terms of storage, security, and system resources. Inactivity fees can offset some of these operational costs.

Real-life business model examples:

• Revolut: This fintech giant with a digital banking platform, at one point, had inactivity fees for users outside the EEA (European Economic Area) who did not use their Revolut card for 12 months. The purpose of this fee was to manage the costs of maintaining accounts that weren’t generating revenue.
• eToro: Charges inactivity fees on accounts that have been inactive for 12 months or more.
• Interactive Brokers: Charged at some point an inactivity fee of $20 per month on accounts that have less than $2,000 in equity and have been inactive for 12 months or more.

Investing customer balances 

Investing customer balances involves utilizing the funds users deposit or maintain in their accounts to earn returns. While this model might sound a lot like the traditional banking system’s way of using deposits for loans, the fintech flow has brought innovative spins to it.

For example, John keeps $10,000 in his digital wallet or account. Instead of letting these funds stagnate, fintech platforms can use a portion or all of it to invest in secure assets, earn interest, and sometimes share some of these returns with John. It’s a win-win — the company grows its revenue, and the customer potentially enjoys higher interest rates than traditional banks offer.

This business model can work not only for neobanks. For example, the Starbucks app boasts an impressive 31 million active users as of 2024. Customers can add funds to their accounts using Starbucks gift cards and by connecting Apple Pay or payment cards to the app. 

Starbucks’ rewards program became hugely popular, holding $1.8 billion in customer cash as of April 2, 2023. If Starbucks was a bank, that would make it bigger than 90 percent of institutions covered by the US FDIC by deposit size. 

Contrary to banks, which must maintain cash reserves to prepare for potential mass withdrawals, the coffeehouse chain only needs to stock up on coffee and snacks. So Starbucks is investing customer balances to earn interest. 

Other real-life business model examples:

• Chime: This neobank, famed for its no-fee model, offers a high-yield savings account. They effectively use the aggregated customer balances to invest and provide users with above-average interest rates.
• Wealthfront: Known for its robo-advisory services, Wealthfront’s Cash Account moves user funds into partner banks and mutual funds, which then lend it out. In return, users receive interest, often higher than the national average.

Fees for late payments

At its core, fees for late payments serve as a mechanism to ensure timely repayment from borrowers. These fees are typically applied when a customer fails to make a due payment on loans, credit cards, or other financial services by the stipulated deadline.

At the heart of this model is the compensation for potential opportunity costs. When customers delay payments, it can strain the liquidity and financial health of the institution. Late fees ensure that the company is compensated for these hiccups.

Real-life business model examples:

• American Express: One of the prominent players in the credit card industry, American Express, often known as Amex, charges late fees when cardholders do not make at least the minimum payment by their due date. 
• Afterpay: A leading buy-now-pay-later (BNPL) platform, Afterpay allows customers to purchase items and pay for them in four installments. While they don’t charge interest, they do levy a late fee if customers fail to make their scheduled payments on time.

What You Need to Know about Fintech Companies Landscape in 2024

As we delve into 2024, the fintech landscape is undergoing transformative shifts. In light of recent conversations with my colleagues from DashDevs who have years of experience in building and launching fintech products from scratch, here’s an overview of what every startup founder should keep in mind:

Prioritizing Cost Savings Over Growth

The post-2008 era witnessed fintechs largely prioritizing growth, backed by low borrowing costs, contained inflation, and subdued wage growth. However, in the face of ongoing inflation, there’s a clear pivot towards prioritizing cost savings. Companies are expected to emphasize fintech business solutions that enhance financial health, operational efficiency, and the adoption of state-of-the-art technologies.

Mergers and Acquisitions Take Center Stage

The slowdown in growth paves the way for mergers and acquisitions (M&A) to become a strategic maneuver in the fintech arena. Companies with fragile balance sheets or those poised financially to increase their market share may particularly look to M&A. The market might witness a blend of consolidation for the sake of scalability and economic sustainability as private and public companies make strategic acquisitions to boost competitive stances.

Compliance Comes to the Fore

As fintech innovation progresses, the emphasis on regulatory compliance and internal controls becomes paramount. With rising scrutiny and penalties associated with non-compliance, institutions, both traditional and fintech, will need to ensure adherence to the highest regulation standards. This commitment to compliance, particularly around fintech-bank collaborations, crypto, and P2P platforms, will safeguard consumers and ensure a robust financial ecosystem.

Real-time Payment Innovations

The advancements in payment technology are redefining transaction experiences for both businesses and consumers. Tap to pay speeds up the checkout process, with transactions often completed in seconds. Simplified, rapid, and seamless transaction experiences are now a baseline expectation, and we’re set to witness more innovations in this domain, especially benefiting populations in emerging markets.

Embedded Finance Expands Its Reach

Embedded finance, which allows non-financial firms to seamlessly incorporate financial services into their offerings, is slated to see further adoption and innovation. From construction to open banking, this form of integration offers vast potential for streamlined services and improved consumer experiences.

Conclusion

The choice of the right business model is not just about immediate revenue streams; it’s about building a foundation that can weather market shifts, capitalize on emergent opportunities, and foster lasting relationships with customers and partners. Every model we’ve discussed holds its unique potential, and each comes with its own intricacies. From my experience, adaptability in revenue stream management isn’t just an advantage; it’s a necessity.

When it comes to bringing fintech visions to life, the prowess of specialized fintech development teams is invaluable. In a domain where precision meets innovation, selecting teams with a proven track record in fintech like DashDevs can be the difference between a product that merely ‘works’ and one that ’leads.’

Over the last 12 years, DashDevs team launched 20+ fintech products, built 80+ mobile applications, and developed our own product, Fintech Core — a white-label, modular source-based solution that facilitates the creation of web and mobile apps for banking and digital payments.

Ready to take the leap and craft your success story in fintech? Let’s discuss your vision. Book a consulting call with us.