Introducing our New Guide to Interchange Revenue
Revenues in Financial Features: a Complete Guide for Tech Companies

March 24, 2021

In our announcement of Unit, we explained how the line between fintech companies and non-fintech companies continues to blur. More and more tech companies are starting to offer financial features to their audiences. Those features help them offer more value, increase user loyalty and create game-changing revenue streams.

If you’re a decision maker in an established tech company, and you’re getting started with planning your financial feature roadmap, this post is for you. First, we’ll explain why financial features are now becoming so common in tech products. We will continue to share our revenue projection tool (unit.co/economics) to help you quickly understand the revenue potential for your company, and then take a deep dive into the five revenue streams you should consider. Finally, we will discuss how your infrastructure can help in monitoring and optimizing your revenues.

Why Now?

Amazon is currently executing on dozens of initiatives in financial services. Shopify now derives 60%+ of its revenues from merchant solutions (mostly financial services). Apple Pay now boasts 500m users worldwide. Drivers are raving about the Lyft Direct banking app.

Those success stories belong to very large companies, but our engagements with 250+ companies of all sizes teach us that financial features are on their way into hundreds of products in different verticals. Here are the reasons the trend is accelerating.

You’ve built the flywheel: distribution-software-data-trust. It hasn’t been long since Marc Andreessen wrote his seminal post on software eating the world in 2011. The effect of COVID-19 on the adoption of software in every single industry has been remarkable.

You may be one of thousands of tech companies that have been building relentlessly for a vertical. You’ve been giving more and more value through software, earning more trust from your customers and getting to know them in every sense of the word: their mindset, their problems and their data.

These are extremely valuable assets that software companies are learning to leverage. As the flywheel of distribution-software-data-trust keeps spinning, companies launch financial features to give even more value and tap into new revenue streams.

The infrastructure is finally here. In our previous post on making sense of banking infrastructure, we explained how the cost of launching financial features went from $2.1m down to <$50k. The availability of platforms like Unit helps non-fintech companies build on one API and Dashboard and launch any combination of financial features: accounts, cards, payments and lending. Even full banking experiences that include all of those elements can be launched in <6 weeks.

Success stories and competitive dynamics. Companies like Shopify did not suffer from a failure of imagination when it comes to financial features. They launched them early (2016, in the case of Shopify Capital) and over time proved that customers crave more value and better experiences. As even more success stories surface, we will see the continued adoption of financial features. We will also see companies adding financial features quickly to catch up with their competition.

Introducing Unit’s Revenue Projection Tool

As a16z explains well in its post Fintech Scales Vertical SaaS, financial features can drive a dramatic 2-5x increase in the revenue per user for vertical software companies.

To help companies think through the upside in financial features, we’ve created a free revenue projection tool. The idea is simple: enter your key assumptions into a spreadsheet and we’ll show you how your fintech revenues grow over three years across the key revenue streams discussed below.

The tool is available at unit.co/economics. Here it is at a glance:

The Five Revenue Streams in Financial Features

To explain the five revenue streams in financial features, let’s use an example throughout this post.

Say you are the CEO at Lando, a company that serves 40,000 landlords who own an average of four apartments each. Currently, Lando offers those landlords a great product that includes tenant screening, contract signing, communication with tenants and even automatic rent reminders to tenants over email. But it doesn’t offer any financial features.

Lando has been spinning the flywheel of distribution-software-data-trust for several years. It is loved by landlords who use it, but so far it hasn’t offered any financial features. In a recent survey, 45% of its customers indicated that they would be open to keeping funds in Lando instead of in their traditional bank accounts.

In Lando’s case, the benefits to the customers are very compelling: instead of holding four bank accounts for your different properties, you can get four accounts within the Lando Dashboard. Those accounts will help keep track of all rent streams, track your expenses for each property and help you see the aggregate picture- all in one place. Instead of manually marking rent as paid, all rent would be marked as paid automatically.

Here are the five revenue streams that Lando should consider: (click to enlarge in a new tab)

Let’s explain those revenue streams one by one, and how Lando should think about each one of them.

1. Interchange Revenues

Lando could help landlords save their rent income on the platform and spend funds from a Lando-branded debit card. This is a good deal for the landlords: all card spend will be classified automatically and even attributed to the right property. Relevant benefits, such as high cash-back for Home Depot purchases, may work particularly well in this case.

Interchange is the portion of spend that the card issuer (Lando, in this case) gets after cardholders use the cards to spend. In the absence of meaningful interest rates, interchange is the most obvious way to monetize in fintech. Banks, neo-banks (e.g. Chime) and even tech companies that issue for internal purposes (e.g. Instacart) all generate very meaningful revenues from interchange. Under the default assumptions in our revenue projection tool, your company will derive as much as 75% of its direct fintech revenues from interchange.

Let’s discuss the numbers. Interchange is calculated per transaction and varies according to many variables, including whether the card is used offline or online, the merchant category (hotels, restaurants etc.) and even what arrangement a specific merchant (e.g. Walmart) has with its payment processors. But here are two simple assumptions you could make to get a sense of the expected interchange:

  • Business debit cards generate an average interchange of ~2.2% from spend
  • Individual debit cards generate an average interchange of ~1.3% from spend

Of course, an important assumption you’ll find in our revenue projection tool is the % of account balance which is spent monthly with cards. This variable will vary wildly between use cases, but our clients typically model 30-60% for consumers and 10-40% for businesses.

Last note on interchange: you may know the idea of “cash-back” on spend as a consumer. Like your bank, Lando can use any portion of the interchange as a cash-back reward to the landlords and incentivize them to use the card more. The rest will go to Lando itself.

2. Interest Revenues

Interest paid on balances is perhaps the most obvious revenue stream in banking: simply park funds in a bank and let it pay you at the end of the month. But low fed rates since 2008 have kept banks’ rates close to 0%, making it almost irrelevant for monetization purposes. As of Feb 2021, the fed rate stands on 0.25%.

This may or may not change soon, but writing it off as a potential revenue stream may be a mistake. The fed interest rate was 5% as recently as 2007. If it picks up again from its current level to 1.5% or 2%, Lando’s revenues from holding deposits can be very significant. In fact, our revenue projection tool shows that interest revenues can be larger than interchange revenues if the fed rate goes up to 2%.

As with interchange, Lando can use any portion of the interest towards incentivizing its customers to keep funds within the platform. In the case of business-savvy landlords that would park large amounts of cash within the product, it can be a very compelling selling point.

3. Payment Revenues

Just like banks, Lando itself can get revenues from payment fees. Building a banking experience means offering payments in the form of ACH, wire, checks and bill pay.

One example for a common type of payment would be “pulling” rent from a tenant via ACH Debit. This will happen an average of 4-5 times per month, in line with the number of properties that the customer owns.

If Lando itself pays $0.15 for an ACH Debit, and decides to bill the landlord $0.50 for this payment, each ACH payment will net Lando a revenue of $0.35. When those payments occur in the hundreds of thousands across the customer base, every month, this revenue stream can become meaningful.

Within fintech circles, there is a saying that “all payment fees eventually go to zero”, but this is unlikely for Lando given its customer base. There is a very good chance that landlords will be prepared to pay even more than $0.50 for a process that saves them time every month. The same applies to bill payments or outgoing wire transfers.

In our revenue projection tool, the factors that determine the total revenues from payments are the frequency of such payments and the markup that Lando chooses to apply for every type of payment.

4. Financing Revenues

Financing means giving your customers funds today and expecting them to pay them back in the future, potentially with an added fee or interest. We believe that financing represents the most lucrative monetization opportunity in financial features alongside interchange, but it’s much more nuanced than interchange.

Lando has many reasons to get ambitious about financing, because it knows a lot about the business of the landlords that use it: their properties, their rent income, the tenant stability and even the delinquency of every rent payment.

Lando can offer a range of financing options to those landlords:

  1. A cash advance to compensate for a delayed rent payment that costs $40
  2. A loan for a home renovation project at a 7.5% annual interest rate
  3. A mortgage for your next property, backed by your existing properties

Those loans can generally be paid instantly from incoming rent payments, since Lando has programmatic control over the accounts it manages for landlords.

Lando has the potential to become an extremely successful financing solution for its vertical of landlords, even if its customer base is only in the tens of thousands. In many cases, we expect platforms like Lando to create innovative financing options that banks don’t even offer. Lando’s first unfair advantage is that banks aren’t specialized enough to think about those niche financing needs. But more importantly, the second unfair advantage is that banks don’t get anywhere near the quality of data that Lando has on its customers.

The numbers around financing revenues will obviously depend on the financing volume and terms. But it will also vary wildly based on the type of financing, the competitive advantage you have and even the applicable regulatory definitions. While our revenue projection tool doesn’t currently cover financing revenues, we encourage you to contact us to discuss the applicable revenues for your use case.

5. Software Revenues

Software revenues are the last (and often most overlooked) type of revenue associated with financial features. As the features become an important pillar in your software, you may choose to offer them at an extra cost.

For example, Lando may choose to offer all of its financial features as part of a package called Lando Premium, which costs $49/month- above a regular Lando subscription at $29/month. Alternatively, it may let landlords get access to financial features for one property, see the value in those features, and ultimately pay $9/property/month if they want to extend the experience to additional properties.

Positive Effects on CAC and LTV

The five revenue streams above are not the only benefit companies stand to get from offering financial features. Our work with established companies reveals that they always expect to get two more critical benefits:

  1. Reduced customer acquisition costs (CAC): financial features will make customers choose you more quickly. Shopify, for example, uses Shopify Capital as a way to encourage people to sign up for a 14 day trial (see landing page). Lando can launch similar campaigns, emphasizing that it solves the banking pains of landlords – and expect a reduced CAC as a result.
  2. Increased customer lifetime value (LTV): financial features will make customers stay with you longer thanks to the value they get from those features. In the case of Lando, landlords will definitely think twice about switching to a cheaper competitor who can’t match the financial features. For many of them, going back to managing multiple bank accounts for multiple properties would not be worth it.

Revenue Trade-Offs to Consider

Here are two interesting trade-offs you should consider when thinking about the revenues above:

Trade-offs between revenues and adoption

We’ve already mentioned how Lando can choose to pay a portion of its interchange revenues and interest revenues to its end-customers. Every piece of economics that Lando chooses to give to its customers will create an incentive for them to adopt the financial features: grow their balances, spend more with their Lando card and encourage their tenants to pay via the platform.

Lando can go even further and choose to sponsor end-customer benefits, offering high cash-back, high interest (higher than what Lando itself gets paid) and free payments (lower than what Lando pays). While those incentives can significantly improve adoption, they need to be monitored closely. A good general practice is to restrict sponsorship to promotional periods, or use data to prove that sponsorship generates positive net returns.

Trade-offs between software revenues and all the other types of revenues

If Lando charges an extra $20/month in software, it can afford giving 100% of the interchange as cash-back, offer payments at cost and still, it would end up with a great revenue stream from subscriptions. In other words, we expect to see companies experimenting with a range of pricing strategies, including:

  • High-margin software + low-margin financial features
  • Low-margin software + high-margin financial features
  • Medium-margin software + medium-margin financial features

How Can Your Infrastructure Help?

As you think about revenue streams and trade-offs, keep in mind the requirements they create for your infrastructure, mostly around flexibility and visibility.

Unit, for example, helps you keep track of your revenues with a special account: your Revenue Account. Every piece of revenue, from daily interchange to payment markups, will be automatically credited to this account. The account and all of its transactions are accessible from the Home page within the Unit Dashboard, and even programmatically over API.

Unit also gives you the flexibility to specify unique pricing for any group of customers (including sponsorship), adjust the pricing dynamically, understand how different cohorts behave (e.g. customers that signed up for a promotional offer) and even respond programmatically to transactions in order to offer benefits to your most active customers (e.g. higher cash-back when their balance is above $1,000).

Summary

We hope that this guide helped you think more clearly about the revenue potential in your financial feature roadmap.

We started by discussing the main reasons for the growing popularity of financial features within tech products. We shared a revenue projection tool that could help you estimate your company’s revenue potential, and then took a deep dive into the five revenue streams in financial features:

  1. Interchange
  2. Interest
  3. Payments
  4. Financing
  5. Software

Like many other decision makers in tech, you may be asking yourself what’s the right financial feature roadmap for your company, and how you can drive maximum revenues and adoption around it. If you’d like see how Unit can help and discuss the best practices for your case, contact us to book a demo or request sandbox access.


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