The dominant business model across B2B and B2C fintech companies is pay-as-you-go (PAYG), in which companies earn revenue every time some activity occurs, such as the sale of a good or underwriting of a loan. For instance, SpotOn, Stripe, and Square charge a percentage fee of the payment volume that they process, while E*trade and Interactive Brokers charge a flat fee for each options contract traded. In the not-too-distant future, as nearly every company becomes a fintech company, most fintech companies will incorporate some degree of PAYG, sometimes referred to as usage-, consumption-, or transaction-based pricing.

PAYG’s defining characteristic is the alignment of cost and value. PAYG companies charge customers for only what they use, which means customers pay for only what they need. In favorable market conditions, this can be a boon, as PAYG companies are set up to quickly capture increases in activity. This alignment is more worrisome in a down market because as soon as customer activity contracts, revenue responds in line. Because PAYG fintech models have more inherent revenue volatility than subscription models, we’ve increasingly found ourselves in conversations with other investors and analysts who suggest that PAYG companies are uncertain, risky, and low quality businesses. We find this view short-sighted and want to lay out why we believe the benefits of aligning cost and value—low barrier to adoption, fast and high rates of expansion, and strong customer retention—help PAYG fintech companies build businesses for the long term.

The dominant business model across B2B and B2C fintech companies is pay-as-you-go (PAYG), in which companies earn revenue every time some activity occurs, such as the sale of a good or underwriting of a loan. For instance, SpotOn, Stripe, and Square charge a percentage fee of the payment volume that they process, while E*trade and Interactive Brokers charge a flat fee for each options contract traded. In the not-too-distant future, as nearly every company becomes a fintech company, most fintech companies will incorporate some degree of PAYG, sometimes referred to as usage-, consumption-, or transaction-based pricing.

PAYG’s defining characteristic is the alignment of cost and value. PAYG companies charge customers for only what they use, which means customers pay for only what they need. In favorable market conditions, this can be a boon, as PAYG companies are set up to quickly capture increases in activity. This alignment is more worrisome in a down market because as soon as customer activity contracts, revenue responds in line. Because PAYG fintech models have more inherent revenue volatility than subscription models, we’ve increasingly found ourselves in conversations with other investors and analysts who suggest that PAYG companies are uncertain, risky, and low quality businesses. We find this view short-sighted and want to lay out why we believe the benefits of aligning cost and value—low barrier to adoption, fast and high rates of expansion, and strong customer retention—help PAYG fintech companies build businesses for the long term.