Technological advancements over the last decade have transformed the financial services industry. Bank branches and insurance agents have moved from the street corner to the palm of our hands as loans and policies can now be secured entirely through apps. Cryptocurrency trades on exchanges that didn’t exist ten years ago, buy-now-pay-later services have embedded credit directly into online checkout, and homebuyers can complete entire mortgages without visiting a physical branch. This transformation has inspired much research on how FinTech firms use technology to revolutionize the delivery, quality, and experience of financial services.
In this paper, the authors examine FinTech firms from a new angle. As the authors show, FinTech firms differ from traditional financial firms not only in their use of technology, but also in how much they invest in attracting customers. The authors use Gemini to identify FinTech firms based on the text of their 10-K SEC filings, and data from Compustat to capture sales and marketing expenditures among US-based financial firms from 1997 to 2022. They begin by documenting the following:
- FinTech firms spend three times more on sales and marketing than non-FinTech financial firms, and this investment builds valuable customer capital: the intangible asset a firm builds through sales and marketing, including brand recognition, customer trust, and customer data .
Why do FinTechs invest so heavily in customer capital? The authors begin by ruling out two potential explanations:
- First, the authors consider the possibility that FinTech firms simply operate in segments of the financial sector where sales and marketing expenditures are higher. But even within industries like insurance and capital markets, FinTech firms outspend traditional firms. The insurance industry is particularly striking. InsurTech firms spend 40-60% of revenue on sales and marketing, compared to much more modest spending by non-FinTech insurers.
- Next, the authors consider the role of age. Perhaps FinTech firms spend more because they are younger. (As of 2022, the median FinTech firm is 23.5 years old, compared to 72 years for the median non-FinTech financial firm.) Across all age groups, however, FinTech firms outspend traditional firms on sales and marketing. Even FinTech firms that have existed for 30-40 years, including WisdomTree Inc, Rocket Cos Inc, and Fleetcor Technologies Inc, spend six times more than traditional financial firms of the same age.
So, what explains the outsized expenditures? As the authors show, substantial investment in customer capital is an instrumental component of the FinTech business strategy. This is true for the following reasons:
- FinTech firms must establish trust and credibility outside of traditional cues. Trust and credibility are central for financial firms. Banks and other incumbents have long used branches and prominent office locations as signals of permanence and credibility. FinTech firms, by contrast, operate almost entirely online and therefore cannot draw on these traditional, location-based trust cues. Instead, they build credibility through sales and marketing, which serve as the online analog of securing “prime real estate.” Rather than paying for a branch on a busy street corner, FinTechs pay for prime web traffic to signal permanence and trust in a fully digital setting.
- FinTech firms focus on downstream segments of the financial marketplace. Bank-FinTech partnerships have become a defining feature of the sector, with banks frequently outsourcing customer acquisition and customer service operations to FinTech partners. FinTech firms, as the farthest downstream producers in these industries, invest heavily in customer capital in order to lease this capital stock to upstream financial firms, primarily traditional financial intermediaries.
- FinTech firms operate platform-based business models. Firms using platform-based business models, in which profits come from connecting two different types of users, tend to spend more on customer capital, likely because of the value in conveying dominance. Users are more likely to use the more popular platform. The authors find that 75% of FinTech firms operate a platform business model, compared to only 16% of non-FinTech financial firms.
- FinTech firms place a higher premium on customer data. Customer data is a prominent source of value for FinTech firms, enabling price discrimination and product quality improvements downstream, and earning favorable terms in upstream transactions as well. The authors find that 51% of FinTech firms highlight this strategy in their business descriptions, compared to only 8% of non-FinTech financial firms.
Customer capital is emerging as a central asset in the financial services industry, with FinTech firms positioned as its primary builders. The median value of customer-related intangible assets equals 41% of annual sales for FinTech firms compared to just 3% for non-FinTech financial firms. As traditional financial institutions increasingly partner with FinTechs to reach customers, understanding who builds and owns customer capital may prove central to understanding the industry’s future.