The impact of technology on the financial industry has been powerful. Traditional financial institutions, such as banks, have discovered that new technologies are indeed disruptive. This epiphany has forced age-old financial institutions to develop their own tech capabilities, and to stay ahead of the game, many have partnered with fintech startups or acquired promising new companies.
However, the shorthand, “fintech,” has become a buzzword, encouraging budding entrepreneurs to believe that they can simply hitch their ventures on to the bandwagon in order to make a quick buck. As with any endeavor, this isn’t the case. New businesses, especially in an emerging industry such as fintech, require careful planning and thought. Here are seven things that you need to consider before launching a fintech startup.
Regulations are why financial services can be a tough industry to break into. Laws have been put in place in order to safeguard financial systems from abuse. In addition, the amount of compliance that is required of institutions often involves the need for accountants and lawyers.
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However, fintech has ushered in new ways of viewing and handling money and has become a gray area for regulation. This is something that has been drawing the attention of lawmakers, especially in fintech companies’ charter applications to be “special purpose national banks.” This isn’t as straightforward as it seems since some fintech services such as peer-to-peer lending operate using new models.
In addition, these regulations may vary per market depending on the state, country or region in which you seek to operate. In Europe, there’s the impending implementation of the Revised Payment Services Directive (PSD2). While this directive actually opens up the market for fintech in Europe, know that venturing into fintech will require you to know and fully understand these regulations and comply to whatever the territory demands.
2. Competition from institutions
While banks have acknowledged the disruption fintech has created, this doesn’t mean that they will just accept defeat and step aside for the new guys. It isn’t exactly banks as institutions that are under threat as much as it’s the way we do banking.
Banks still hold the assets, and many of them have the capability and clout to either partner up with fintech companies or buy them out. In fact, this is already happening. Bank of America is investing $1.5 million in fintech efforts in Charlotte, N.C. In Europe, Santander has started a fund to develop fintech startups. As a venture, you have to decide if you’d be determined enough to take on the big guys on or if you’d rather explore greener pastures.
3. Customer trust
Security has come to the forefront of all tech ventures today. Data breaches and cyberattacks are still rampant. With the nature of the information fintech companies handle, they are becoming an optimal target for cybercriminals. Getting attacked and having customer data stolen is a surefire way to lose customer trust quickly.
Customer trust is key in the financial industry and it is becoming a rare commodity these days. A survey by the National Association of Retirement Plan Participants in 2016 indicates that only 8 percent had faith in their financial institutions.
Many will be skeptical of any new services and most people would be wary of the risk sending out financial information or handing over their money to fledgling fintech services. The challenge lies in putting safeguards in place and convincing prospects that your system is robust and secure enough.
4. The need for a strong team
This might seem obvious, but fintech isn’t exactly an area where there are turnkey tools and free scripts one can use to come up with an app or service. This isn’t like some other tech ventures where barriers to entry are relatively low. Financial, technological and business expertise are all required to develop fintech. Then, there are compliance requirements that may require you to bring in legal help.
Building a strong team means that you must attract talent in various areas of competence, as it truly is a multidisciplinary effort. Fintech is still in a state of flux, at least in the foreseeable future, so the ability to deliver or change direction quickly is essential.
5. Unique and valuable service
The fintech industry is starting to get crowded now that many pioneers have done enough for new ventures to follow. Still, a key entrepreneurial question to ask is if your venture will be able to offer something unique and high value.
All segments related to money are fair game for fintech. We can now see fintech startups enter personal finance, budgeting, payments, lending, investments and insurance. All are trying to find solutions to consumers’ problems and offer new ways to do things. The danger for startups is to be a "me-too." Copying can be a bad strategy, especially if there are already similar services that are established in the niche.
That said, there are verticals worth considering. Many of fintech’s early adopters are millennials who want to integrate their financial matters with their mobile lifestyles. Stock trading app Robinhood's users have an average age of 26. This may mean that other age groups are untapped markets for now, even if communicating a novel value proposition to older and more traditional age groups may come as a challenge.
6. Technology choices
There are also a number of new technologies that are hyped in fintech. Machine learning and artificial intelligence are now figuring in the area of investments in the form of robo-advisors. This data and algorithm driven approach to investing is even challenging age-old financial wisdom. Banks are also experimenting with using chatbots that would allow customers to check account information within Facebook Messenger.
Other hot ticket technologies in fintech include blockchain and distributed ledgers. Blockchain, the technology powering the digital currency Bitcoin, is a decentralized way of exchanging value online. It is arguably the biggest threat to banking.
As a startup, you may have to bet on technologies that would power the service. On the plus side, technologies such as machine learning and analytics engines are now being offered as a service by cloud platform providers like Microsoft Azure and Google Cloud Platform, which lowers the barrier for development. However, these technologies have yet to fully mature. You should be prepared for growing pains and hiccups when using them.
Forming a tech startup isn’t cheap. If your venture isn’t a partnership between experts who can develop the entire product and business development, then be prepared to shell out a good sum for talent. As traditional institutions try to assimilate fintech talent for themselves, startups would surely face competition in the hiring.
There are also the typical capitalization and operating expenses associated with starting a business. What further increases the expense for fintech startups are integrations with traditional institutions such as banks and brokerages.
Still, many are optimistic since funding for fintech is at a high. Global venture capital investment was $17.4 billion in 2016. However, this excitement only means that competition for funding is also increasing. VCs are getting more selective, seeking out companies with truly game changing offerings, thus making your value proposition all the more important.
Focusing on Innovation
Fintech isn’t for everybody. It demands expertise, creativity and frankly a lot of grit to launch a startup in a volatile and competitive industry. There are arguments highlighting the supposed disconnect between the slow-changing realm of finance and the fast-changing world of technology. The pressure for tech companies to deliver huge results rapidly can also be immense. Still, if you believe that you will be able to solve financial issues for your users through innovative means, go ahead. Fortune favors the bold. Just be smart with how you do it.