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@healthbjk does a wonderful job summarizing my prior thread on BaaS in terms of network builders vs. on-ramp style API providers and also accurately points out that on-ramp providers can build differentiation over time.
I want to unpack this in a follow-up thread... https://twitter.com/healthbjk/status/1341079910282973184
I want to unpack this in a follow-up thread... https://twitter.com/healthbjk/status/1341079910282973184
The virtue of on-ramp providers is that they can get a lot of traction in the market quickly because they are streamlining a process that already exists. The demand is already there.
The challenge is translating that traction into product differentiation & a sustainable moat.
The challenge is translating that traction into product differentiation & a sustainable moat.
But it can be done!
As @healthbjk points out, Stripe is THE example.
Stripe built a huge of base of customers by streamlining payment acceptance over the internet.
Then it used the data created by those customers to create highly differentiated services (Radar, Capital, etc.)
As @healthbjk points out, Stripe is THE example.
Stripe built a huge of base of customers by streamlining payment acceptance over the internet.
Then it used the data created by those customers to create highly differentiated services (Radar, Capital, etc.)
The hard work comes after you scale up.
You find new ways to add value for your core customers using the assets that you acquire as you scale (data, most commonly).
Often these value-adds seem small to the provider, but can massively disrupt other industries in the process.
You find new ways to add value for your core customers using the assets that you acquire as you scale (data, most commonly).
Often these value-adds seem small to the provider, but can massively disrupt other industries in the process.
Compare this to network builders, who do all the hard work of building the differentiated product up front and convincing developers to build new use cases using their product.
You can see why “Stripe for X” is such a good pitch in fintech.
You can see why “Stripe for X” is such a good pitch in fintech.
And yet, in fintech BaaS, I think the Stripe route is harder.
To get to the scale necessary to create differentiated value-add services, you need to start with a BIG problem.
Your on-ramp needs to bring a lot of traffic on to your highway, so to speak.
To get to the scale necessary to create differentiated value-add services, you need to start with a BIG problem.
Your on-ramp needs to bring a lot of traffic on to your highway, so to speak.
The reason for this is that most value-add services are powered by algorithms and algorithms need lots of training data.
Stripe can do cash flow-based lending for small businesses through any SMB platform (Capital for Platforms) because they’ve seen A LOT of cash flow for small businesses flow through their platform.
They have the training data.
They have the training data.
Most on-ramp providers that I see in fintech BaaS are building API-accessible services to solve smaller problems (accessing credit data, mitigating application fraud, etc.)
Their initial addressable market isn’t big enough, which makes building value-add services on top hard.
Their initial addressable market isn’t big enough, which makes building value-add services on top hard.
Maybe these BaaS on-ramp providers will find that larger addressable market outside banking (by enabling embedded finance use cases), but that seems like a much more difficult route to scale than Stripe’s.
And then you still have to build the value-add services.
And then you still have to build the value-add services.
