The fintech "front-end" and "back-end" conundrum

The fintech "front-end" and "back-end" conundrum

What are fintech front-end and back-end technologies?

In typical technology and software discussions, a "front-end" component of software is one that a user interacts with (i.e., a user interface), while a "back-end" component is one that manipulates or stores the data that powers the software. While these concepts come from software development, they're also quite useful in financial technology ("fintech"): a fintech front-end is a customer-facing aspect of a financial technology offering, whether that's a personal savings mobile app or a business credit lending portal. A fintech back-end is the set of capabilities, such as bank data integrations or money movement capabilities, that makes a fintech front-end operational.

In this post, we'll explain why most fintech startups end up spending too much time maintaining their fintech back-end even when they identify their fintech front-end as their company's most strategic priority early on.

Fintech "front-ends" and "back-ends"
Fintech "front-ends" and "back-ends"

Previously, in our article on the modern lending tech stack, we covered a similar set of concepts. We noted, for example, that a modern lending fintech (think Affirm or Klarna) needs to develop a few core competencies: Customer Acquisition & Underwriting, Servicing, Back Office, and Collections capabilities, for example. We referenced a Bain Capital Ventures diagram on these capabilities, which we've reproduced below.

The modern lending technology stack (Source: Bain Capital Ventures)
The modern lending technology stack (Source: Bain Capital Ventures)

In our previous post, we focused on the main players across the typical fintech's available universe of vendors. In this post, we'll stay at a higher level and explain how fintechs can think about front-end and back-end technologies in the context of competitive differentiators, cost savings, and buy v. build decisions.

How fintechs (and other startups) should think about fintech front-ends

One of the most important developments in fintech over the past 10 years has been the rise of embedded lending and the addition of financial features into non-financial companies (e.g., SaaS companies that layer on a payments offering). These offerings help non-financial companies increase revenue per customer, increase retention, and expand into new lines of business.

In the article "Fintech Scales Vertical SaaS," a16z estimates that the fintech business model can help SaaS companies increase revenue per user by 2 to 5x. And the success of offerings like Shopify Capital, Stripe Capital, Square Capital, and PayPal Credit underscores the ways in which leading fintechs are adding lending on to their existing offerings.

Over the rest of this decade, embedded finance is expected to grow at over 20% annually, to almost $800 billion by 2029. In short, "every company will be a fintech company."

But as the size of the opportunity has become more obvious, so too has the competition.

The result is that the difficulty of fintech customer acquisition will continue to increase. Consumers will be offered credit at online checkout (e.g., Affirm), workers will be offered credit through B2B software vendors (e.g., Gusto Cashout), and SMBs will be offered credit through their online storefronts (e.g., Shopify Capital). And fintechs will have to sink more and more resources into optimizing their front-end just to remain competitive.

There's an insight in Zero to One on competition and monopolies that's instructive here: an Indian restaurant in Palo Alto may believe that its competition is other Indian restaurants in the area, but its competition is actually every other restaurant in the city.

Similarly, a fintech focused on offering credit to a niche market (movie-lovers, for example) might believe that its competition is other fintechs in that niche, but its competition is actually much more expansive: every legacy financial institution, every vendor offering embedded credit, and every other fintech with any overlap in their target market.

The rapid growth of embedded finance will usher in a new wave of credit providers, but it is also likely to drive up the cost of customer acquisition for all players in the space. The companies that figure out cost-effective, performant methods for marketing, underwriting, originations, and servicing are the ones that will dominate the market.

Mastering the fintech front-end is the do-or-die challenge for any fintech that seeks to scale.

How fintechs should think about fintech back-ends

So if the fintech front-end is existential, why do so many startups (both fintechs and embedded finance entrants) end up spending so much time building and maintaining their fintech back-end?

We've talked to hundreds of fintechs about how they've approached the build-out of their fintech front-end and back-end, and a common theme is that they end up spending far more time on their fintech back-end than anticipated—even when they know that their front-end is the key to their business' growth.

There are three reasons for this:

Many "fintech back-end" vendors are not plug-and-play. Because of the complexity of financial operations and the still-evolving fintech ecosystem, most fintech providers that touch payments or that require integrations with external systems (e.g., accounting software) still require a high degree of configuration or implementation time.

Some "fintech back-end" vendors fail to scale alongside customers. Embedded finance is a fast-growing space, but only a few embedded finance players have shown the ability to operate at scale. The fintech infrastructure capabilities at publicly traded fintechs (e.g., PayPal, Square) have been built over time, but aren't yet commercially available.

Startups underestimate the difficulty of funding operations and management. The last and biggest reason that fintechs end up spending more time than anticipated on their fintech back-end is that they underestimate the complexity of capital and funding management. From concentration limits to draw requests, setting up debt capital management often requires fintechs to learn a whole new set of skills.

Understanding that the fintech front-end is a businesses' competitive differentiator is important, but it doesn't, on its own, guarantee success. Fintechs that seek to optimize their fintech back-end must partner with fintech back-end vendors that have a proven track record of implementing quickly and reliably and innovating over time. Otherwise, they'll end up devoting too many internal resources to building and maintaining their fintech back-end, to the detriment of their growth.

Want to learn more?

Finley is debt capital management software that forms a core part of the "fintech back-end" for today's top startups. Today, Finley manages over $2 billion in debt capital for high-growth fintechs like Ramp, Parafin, and Cherry. If you're interested in learning more about software that can help you streamline your debt capital raise and management, just schedule a demo or take a self-guided product tour of Finley. We'd love to chat!