Fintech Spotlight: Beyond Freemium, Create a Free Service and Sell a Product

Using free services as a platform to sell other financial products, a group of fintech startups are leveraging this model

Shaking up the tech world this month has been the story unfolding around Zenefits. A provider of HR software, Zenefits allows firms to aggregate company payroll, benefits and insurance information within one platform for efficient monitoring of the data. Companies would then upsell their non-paying clients of the free software with insurance services. The business model, which is expected to generate $60 million in 2016, experienced exponential growth, leading Zenefits to ‘unicorn’ status as they closed $500 million in funding with a $4.5 billion valuation last year.

However, like many other fast growing startups, the company’s growth came at the expense of shortcuts. In Zenefits case, according to reports emanating recently, the firm encouraged sales staff to use technological tools to circumvent training requirements to become certified to sell insurance. The revelations led to the company’s founder and CEO Parker Conrad being replaced with former Yammer CEO David Sacks, as well as 250 employees (about 17%) being laid off.

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Freemium, similar but different

While the Zenefits story is that of a Silicon Valley darling falling apart, a deeper look reveals a business model that is yielding strong results for companies such as Zenefits and others. At the heart of Zenefits is a free platform to help businesses handle their HR needs. Subtly different to the popular ‘freemium’ model which offers free tools and requires payment for premium services, Zenefits revenues arrive from insurance sales that while being aligned, are different from the core free platform.

Another fintech unicorn that is successfully providing free services and pocketing revenues from aligned businesses is Credit Karma. Operating in the credit score sector, Credit Karma offers an online and mobile app for users to generate free credit scores. Users can than evaluate their debt figures to review if they are overpaying on interest. Credit Karma monetizes their offering by recommending partners’ products with superior yields. Like Zenefits, Credit Karma’s underlying technology is a free platform to help users monitor information with monetization an offshoot of this service.

Elsewhere, while they didn’t achieve unicorn status, another fintech company marketing a free financial app to potentially hook users to other services is BillGuard. Allowing users to connect card and bank transactions, BillGuard helps users manage their finances, view where they are spending money and report fraudulent merchants. Eventually being purchased by Prosper Marketplace, the P2P lender has plans to upsell loans and investments to BillGuard’s customer base using their free app in a similar, but different market.

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BillGuard’s acquisition is similar to that of personal finance app, Mint, which was purchased by Intuit for $170 million in 2009. Offering assistance to users to track spending and find areas to save money, Mint now operates as a funnel for Intuit’s tax and accounting services as well as online lending.

Differentiating yourself

An area topic within Finance Magnates lately has been the increasing competition between fintech startups. Beyond just competing to grab market share from traditional banks, they are now finding themselves going up against each other. Services such as robo-advisory, mobile payments, currency transfers and especially online lending are experiencing increased public awareness for their products, which has also spawned new entrants. The direct offshoot of this competition is higher marketing costs to convert new customers.

As a result, simply showing up to the party with a great product isn’t a guarantee of success. To compete, firms require methods to distinguish themselves. Some companies such as TransferWise and SoFi are doing this through unique advertising and social campaigns. While those campaigns put companies in front of potential users in a memorable way, the ‘free service’ model is proving its worth among fintech customers.

Specifically in the finance sector, the free service model appears to be a match. Partially explaining the success is that trust is a top factor for among customers for choosing service providers. As such, proving value to users before even pitching them a product can increase potential conversion rates when eventually serving up the paid product.

Fintech Spotlight is a new column on Finance Magnates devoted to reviewing innovative financial technology companies and sector trends.

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