What if instead of paying to acquire customers, your customers paid you?

We may not be in full-fledged Fintech Winter, but it’s definitely been getting pretty chilly out there.

After the last 12 months of drawdowns, writedowns, and shutdowns, new founders could be forgiven for souring on the fintech world and jumping on a buzzier bandwagon (cough AI, cough). That said, over the last few months we’ve been seeing an emerging set of founders jumping in with both feet attempting to unlock a $1 trillion+ opportunity of bringing traditional financial services customers into software products and making a bold claim: we’re going to get paid to acquire these customers.

It’s a wild idea, given that financial services companies spend hundreds of billions on customer acquisition cost (CAC) every year, sponsoring venues as varied as startup co-working spaces, sports arenas, and Art Basel, to sell what are largely commoditized but highly profitable products. And yet, as we’ve dug in, we think that the industry is on the precipice of a meaningful shift with a new generation of fintech-enabled software companies all leveraging a business model that we’re calling Negative CAC.

What is Negative CAC?

Negative CAC is a go-to-market and product strategy that enables companies to acquire a net new customer at no marginal cost as an extension of the paid functionality that their software delivers to existing customers. This phenomenon turns what has traditionally been the highest marginal cost driver in the market into a SaaS-fee-funded subsidy. While this is a very new concept, the early-stage deal flow of operators building on the evolving fintech infrastructure suggests that this could be a defining business model for the next generation of fintech enabled-software.

Why Now?

The B2B fintech market has been powered over the last decade primarily by transactional revenue streams that enabled vertical software platforms to expand beyond their traditional SaaS business models. At FirstMark, we were able to see this growth firsthand with our portfolio company, Shopify, which drove public market returns through its fintech revenue.

The early enablers of this transactional model include companies like Stripe, Adyen, and more recently, embedded lending companies enabled by companies like Parafin and Lendflow. In each case, these SaaS companies have been able to use transactional revenue models/financial services to effectively upsell and monetize the same software platform user. While this was a profound shift that created massive enterprise value in both the application segment and infrastructure, the model had a natural cap due to the lack of a virality component.

We see a major paradigm shift happening via this transformation towards Negative CAC, as upselling is no longer the only value pathway for SaaS customers. In a Negative CAC model, customers can also be a driver of incremental net new financial services customers. The primary reason this shift is now possible is the decrease in the friction of underwriting and onboarding new customers (thanks to new fintech infrastructure companies doing banking, AML/KYC, financials, employment data, decisioning, etc… — “as a service.”) Effectively, we’re already well into the transition from banking/financial services products being created over the course of years to the course of weeks.

Importantly, the last VC funding cycle created multiple competitors in each of these categories, resulting in the functionality at each part of the infrastructure stack being delivered in a competitive, cost-effective market, where these providers continue to innovate and improve. In the process, they’ve brought the cost of onboarding a new banking, lending, payments etc., down by an order of magnitude.

The Mechanics of Negative CAC

The Negative CAC model has two requirements:

  1. A B2B software product that generates subscription revenue.
  2. A net new end consumer (either B2B or B2C) that is acquired as a result of the SaaS customer’s usage of the product.

The model above is especially well suited to Financial Services because of the fact that the end customer rarely pays directly for the service. Yield spreads, interchange fees, origination fees, etc… effectively separate (or at least obfuscate) the customer from the value they are creating for the Financial Services Provider. Additionally, the dynamics of Negative CAC are even more quantifiable because the LTVs of the cash flow streams for assorted financial products are relatively well understood and their CACs are relatively standard throughout the traditional financial services industry. ​​

The Great Rebundling and the Next Trillion $ Market Opportunity

Jim Barksdale famously said that there are only two ways to make money in business: bundling and unbundling. The Negative CAC dynamics that we’re describing above are part of a Great Rebundling cycle in financial services. The B2B financial services that used to exist in geographic bundles, have grown into demographic bundles enabled in Fintech 1.0 (h/t Zach Perret at FirstMark’s Data Driven), and will eventually become a functional bundle where these financial services can be delivered contextually within software.

In the process, Fintech will transition from a vertical market to an enabling infrastructure that could be plugged into core B2B and consumer applications to deliver financial services contextually within software applications. This shift is going to lead to a few critical outcomes:

  1. The $4.5 trillion of revenue in the financial services industry will be unlocked by a new emerging group of application (direct) and infrastructure (indirect) providers.
  2. The hundreds of billions of dollars currently being invested in customer acquisition will instead get invested in software functionality, which will benefit both end customers and other important stakeholders in the value chain.
  3. The dynamics above will significantly increase the market for credit as the friction between capital needs and capital owners will shrink significantly

A New Era of Fintech

We have entered a new era of fintech, catalyzed by the breaking down of friction between capital and deployment. This breakthrough has made it cheaper, easier, and faster than ever before to launch banking products, resulting in substantial value creation while eliminating the need for intermediaries and reducing unused capacity in the system.

At FirstMark, we are wildly excited about the value creation in this market and are looking for more innovative companies that are employing (or plan to employ) a Negative CAC model. We are at the beginning of an incredible transformation in the Fintech sector and recently raised $1.1 Billion to invest in the next generation of iconic companies. I would love to hear from you if you are building in this space, and/or have thoughts you’d like to share with me about the Negative CAC model.

To get in touch, please email me at adam@firstmark.com.