Unlocking Profitability: Bottoms-Up Cost Modeling in Fintech

Recently, I've been speaking with a lot of Fintechs, and one truth is clear: understanding every single nuance of transaction costs is crucial. Whether negotiating contracts with acquiring banks, maximising transaction-level profit, or simply doing reconciliation, a granular understanding of the transaction cost structure is the cornerstone of their financial strategies.

The Power of Bottons-Up Cost Modelling

Bottoms-up cost modelling helps you drive profitability and inform critical decisions at the most granular level.

1. Granular Insights: Bottoms-up modelling allows you to build a cost structure from the ground up, based on individual transactions and events.

   
   

2. Flexibility: As your business evolves, so do your cost drivers. Bottoms-up models are inherently more flexible, allowing you to quickly adapt to new fee structures, payment methods, or business lines.

   
   

3. Predictive Power: By understanding costs at a transactional level, you can better forecast how changes in customer behaviour or product mix impact your bottom line.

   
   

4. Reconciliation: Bottoms-up models serve as an excellent check against the data you get from payment processors.

   
   

5. Customer-Centric View: In an era where customer profitability is king, bottoms-up modelling gives you a clear picture of costs at the individual customer level.

The Building Blocks

I'll dive deeper into the "how" in the next pst, but here are some key components to consider if you're building a bottoms up cost model at a fintech:

• Transaction Types: Categorise your transactions. A P2P transfer might have different cost implications than an international wire.

  
  

• Fee Structures: Map out all the fees associated with each transaction type. This might include interchange fees, scheme fees, or processing costs.

  
  

• Volume Tiers: Many costs in fintech are tiered based on volume. Your model should account for these breakpoints.

  
  

• Fixed vs. Variable Costs: Distinguish between costs that scale with transaction volume and those that don't.

  
  

• Time Dimension: Some costs may vary by time of day, day of week, or season. Build this flexibility into your model.

By embracing bottoms-up cost modelling, you're building a foundation for strategic decision-making. In our next post, we'll explore practical steps and provide more advice on how to set it up yourself.

Stay tuned, and in the meantime, start thinking about the unique cost drivers in your business. The insights you uncover might surprise you.