How does fintech make money? 9 business models explained

Fintech companies make money in many different ways—some more complex than others. Learn about the different fintech business models, including Plaid’s.

October 03, 2022

Tom Sullivan Pic
Tom Sullivan

Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.

The fintech industry makes money in many different ways. For the most part, fintech’s methods take an innovative approach to traditional financial business models. Fintech business models add a layer of expanded financial access, capability, and freedom—providing compelling new experiences that draw consumers in.  

Fintech business models have worked well but still haven’t scratched the surface of the greater financial services industry—and still have a lot of room for growth. The global fintech market is expected to reach around $310 billion in 2022, which is about a 25% growth rate from the previous year. Yet, the global financial services market is expected to reach nearly $26 trillion in 2022, dwarfing the faster-growing fintech market. 

In this article, we’ll explore the most popular ways that fintech companies make money and dive into the different business models they use. We’ll also discuss Plaid’s business model and how Plaid makes money. 

How fintech makes money—9 leading fintech business models 

Please note that there are hundreds of ways that fintech companies make money. This article aims to explain the most popular methods, but there are always going to be lesser known—or even brand new and undiscovered—ways that fintech companies are able to generate revenue. 

The following are 10 of the most popular business models that fintech companies use to make money.

1. Interchange fees

When a credit or debit card is swiped, the merchant is charged a percentage of the transaction in fees. Typically, this number is around 3% but varies depending on several factors like card network (Visa, Mastercard, etc.), merchant category, and purchase size. This is much more expensive than other payment rails like ACH or cash, but merchants tolerate this fee from companies like Visa and Mastercard because the transaction instantly settles, providing peace of mind that they are indeed getting paid for these cashless transactions. 

Around half the card swipe fees—or 1.5% of the total transaction—goes to ‘interchange fees’ that (mostly) go to the card issuer. In the case of fintechs, card-providing companies like Chime and Varo in the B2C space and Ramp and Divvy in the B2B space all earn money on interchange fees. In fact, it’s the main revenue driver for fintech companies that offer debit cards. 

That’s why many of these companies are able to operate at no charge to their customers (Divvy, for example, doesn’t charge customers anything for as many corporate cards as they want). The business model is to attract customers with the best cards and features so they can capture the most spending—and generate the most interchange revenue. 

Interchange is one of the leading revenue generators in fintech. Unit, an embedded financial services provider, claims that more than 75% of fintech companies derive most of their revenue from interchange fees—making it the most important revenue driver in the industry. 

2. Subscription fees

As a tried and true business model in the tech and software industry, subscription fees have been around for decades. Commonly referred to as SaaS (software-as-a-service), companies using this model charge monthly or yearly subscription fees to their customers on a recurring basis in order for them to use their product. 

This is a common revenue driver for software products in the fintech industry. One area subscription fees are prevalent is with personal financial management apps that help people save, create a budget, or make any kind of financial plan. Some of these apps offer a ‘freemium’ model where some features are included for free, but users must pay a subscription fee to unlock more features. Examples in the fintech industry include YNAB, Tiller, and Qube Money.

→ New to fintech? Check out our article, “What is fintech”, to learn more about the six main types of fintech and how they work.

3. Payment processing and funds transfer fees

When money moves, either from a consumer to a merchant or from a friend to a friend, there’s often a fee involved. Fintech companies have found countless ways to build businesses around these fees—while adding convenience and even making the fees cheaper in some instances. While there are many different types of payment and funds transfer fees, we’ll focus on a couple of the most popular ones here.

Credit Card Processing Fees

When a merchant uses fintech companies like Square or Stripe to accept credit card payments, they pay around 3% of the transaction in fees. Square, for example, charges 2.9% + $0.30 on each online credit card transaction.

Some of these fees go to the issuing bank as interchange fees (mentioned above), another part goes to the card network (usually Visa or Mastercard), and the rest goes to the payment processor (Square or Stripe in this example). The portion of the fee that goes to the payment processor is the processor fees (usually $0.05) and the acquirer markup fee (around 1%).

These transaction fees are the main revenue generator for payment processing companies. Several fintech companies in this category are becoming market leaders as they make adding credit card processing easier for merchants. Square alone generated $4.38 billion in transaction-based revenue in 2021, up 43% from 2020. 

Transfer fees

Peer-to-peer money transfer apps like Venmo and PayPal let consumers send money back and forth to each other for free. They’re able to do that because they use the ACH network for those bank-to-app transfers, which have extremely low fees when compared to credit card transactions. 

The way these companies make money is based on what happens once money is received in the app. Consumers who’ve used Venmo or PayPal may have noticed that they have two choices on how to move money from the app to their bank account: The typical 1-3 business days (for free), or the instant transfer (for a small percentage fee). As of 2022, PayPal and Venmo both charge 1.75% for instant transfers, with a maximum fee of $25. 

Getting money faster is always appealing, especially when it’s sorely needed. Fintech companies allow consumers to choose whether they care more about speed or foregoing the fee.

→ Need to reduce the risk of ACH payment fraud and returns? Plaid Signal provides an instant risk assessment and enables you to customize payment flows based on the likelihood of an ACH return. 

4. Trading fees

While some fintech companies are able to avoid charging trading fees (more on that later), many do. For fintech cryptocurrency and stock trading platforms, trading fees are one of the main revenue drivers. 

The cryptocurrency trading platform and wallet app Coinbase makes money in several ways, with transaction fees being the most obvious one that its users frequently encounter. The app charges trading fees based on a tiered structure, with flat fees ranging from $0.99-$2.99 for transactions under $200. If a transaction is over $200, then they charge a 1.49% fee for bank account payments or 3.99% for debit cards. 

While this isn’t a revolutionary new business model (stock trading fees have been around a while), fintech apps that charge trading fees usually provide value in other areas such as wider access to stocks and cryptocurrencies, convenience, and speed.

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5. API connection fees

Application programming interfaces (APIs), are the backbone of fintech. In a nutshell, they allow different software programs to talk to each other and share data. In the fintech world, financial APIs create connections that foster new and exciting possibilities, including:

  • Instantly connecting bank accounts to apps for new account funding

  • Securely providing a fintech app with a user’s transactions history so the app can offer insights and advice

  • Banking-as-a-service APIs that enable non-financial companies to offer financial services

  • Seamlessly connecting fintech apps with accounting systems like Quickbooks so users can reduce data entry labor and close the books faster

Some fintech companies, including Plaid (more on this below), make money by charging business customers for using their APIs. Fee structures for companies that provide financial APIs vary, but some examples include:

  • Charging per API call. This works well in models such as account connection, where new accounts only need to be connected once and the API has done its job. 

  • Charging a monthly fee for ongoing API connections, similar to a subscription model. This model works well for APIs where an ongoing refresh of the data between financial institution and fintech apps are desired, as opposed to a one-off API call. 

  • Charging for baseline usage, also known as a ‘platform fee’. In this case, the API provider sets up a per API call fee, but with the understanding that their customer will pay a baseline fee no matter how many API calls they make. 

  • Charging a percentage fee per transaction. This works in API-based payment use cases. In this case, the API provider facilitates the movement of money and charges their customer a percentage of the total transaction.

6. Advisory fees/robo-advisory fees 

Investment companies that run portfolios like mutual funds and hedge funds typically charge a small percentage of the total portfolio in fees, which are known as ‘advisory fees’. Fintechs like the automated investment company Wealthfront run the same business model, but instead of a human running the fund, they rely on artificial intelligence (AI)—also known as ‘robo-advisors’ hence the term robo-advisory fees. 

With AI advisors rather than humans, they are able to charge just 0.25% advisory fees, which is just ¼ of the industry standard of 1%. By making algorithmically-driven decisions and focusing on low-cost to no-cost investment vehicles like exchange-traded-funds (ETFs), Wealthfront is able to keep costs low. 

7. Third parties/referral fees

A common business model in the fintech world is to bring in customers with free value, then show financial product offers like personal loans and credit cards. If a customer of the free fintech product then signs up for the credit card offer, the fintech company gets paid a referral fee. This is also known as a third-party business model since the fintech company brings in another party to create revenue. 

Credit Karma is a classic example of this in the fintech world. By offering services like free tax returns and access to credit scores, they’re able to draw a high volume of customers to the platform. In exchange for free tax return services, users are sent recommendations for financial services like credit cards. If they see a product they like and move forward with it, Credit Karma gets a referral fee. 

Many fintechs are able to make a profit this way because they generate value for their users. If there is enough free value (like free tax returns) customers won’t mind being exposed to advertisements for third-party products.

→ Want to help your customers improve their financial health? Plaid’s transactions API provides up to 24 months of categorized bank transaction history that helps guide users toward investment and savings goals.

8. Payment for order flow

Ever wonder how fintech stock trading platforms like Robinhood let their users make trades for free? The answer is a process called payment for order flow (PFOF). 

In PFOF, stock brokerages get paid to send their customers’ orders to market makers. Market makers want to buy orders because they are able to profit from the difference between bid prices from buyers and asking prices from sellers. They usually only pay brokerages fractions of a penny per share, but at a high volume that can add up to a significant source of revenue. 

In fact, Robinhood was able to generate $202 million in transaction-based revenue from PFOF in Q2 2022, which was about 64% of the company’s total revenue. Fee-free trading has helped bring a large influx of new investors into the market. It was one of the main drivers (along with stimulus checks) for the pandemic investment craze that led to 15% of US investors getting their start in 2020—and helped Robinhood become a household name. 

9. Interest

A classic financial business model, interest rates are also a common way fintechs make money. While it’s not always the main revenue driver, fintech companies that draw customers in for other services can offer loans that generate interest as an add-on product. 

Coinbase, for instance, has a program that lets customers borrow up to $1 million against their cryptocurrency holdings and charges a relatively low-interest rate of 8.75%. For people that don’t want to sell their holdings but want to access some of their profits, this is an alternative way to cash out without letting go. 

Other fintech platforms have credit card add-ons for customers that use their everyday services. Venmo, for instance, has a credit card that offers cash back like a normal credit card but pays out the cash to the Venmo account. It lets users choose to earn cash back in cryptocurrency instead of dollars. 

Fintechs that earn money on interest aren’t doing so in the same way that traditional financial institutions have historically done. They’re inventing new use cases (like Bitcoin lending) that provide consumers with innovative tools to access capital and earn rewards.

How does Plaid make money?

Plaid makes money by providing businesses with API-based products in exchange for a fee. These products enable things like checking account balances to ensure there are sufficient funds before a transfer, authorizing bank accounts for new account funding, or verifying a new user’s identity—all of which are done at the direction of the user.

Plaid’s main role in the fintech ecosystem is to allow users to connect fintech apps that they want to use to their existing financial accounts—and provide enriched data to help fintechs create features. Plaid’s network covers connections to over 12,000 financial institutions and 6,000 fintech companies. Also, Plaid is free for consumers. Businesses pay for Plaid, not consumers. 

It’s important to note that Plaid does not make money by selling consumer data to third parties. In fact, Plaid only shares personal financial data with permission from consumers. All of the API connections Plaid makes are done at the direction of the user, and personal financial data is never shared without permission. 

Plaid makes money in three main ways:

1. One-time-use products: Some of Plaid’s products, like Auth and Identity, only need to be used one time in the new customer onboarding process to connect accounts and verify identity. Plaid charges its customers a one-time fee for each successful request made using these APIs. 

2. Per-use products: Other types of Plaid products, such as Balance, may be used repeatedly. In the case of Balance, at the direction of the user, a fintech company might check their balance to ensure they have enough funds to make an automatic recurring payment before it happens. Plaid charges its customers each time they make one of these repeated, real-time requests, but the fee is much lower than for the one-time-use products. 

3. Subscription products: Another type of Plaid’s products create a repeated connection between financial institutions and fintech apps. One example is Transactions. Personal financial management apps use Transactions to access a transaction history for an authorized, connected account so it can help users get a clear picture of their finances for things like savings and budgeting. For products like this, Plaid charges a subscription fee where customers pay per connected account per month.

Lastly, Plaid provides a free version for developers to test out products and integrate them with their own. 

Fintech business models create more financial freedom

Fintech has been successful not just because of how it makes money, but because of the value it provides to consumers. One of the reasons that 88% of US consumers have now adopted fintech is because of the flexibility and freedom it enables. 

Fintech has expanded access to financial services to historically underserved communities, helped people better understand their finances, and made it easier for consumers to invest, save, and budget. Not only has fintech expanded access, but it’s also made finances an easier part of life to manage. In fact, eight in ten fintech users say it seamlessly integrates into their everyday lives. 

Fintech companies have managed to come up with some innovative business models, and they’ve also made life better for just about everyone who uses their products in the process.

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