Fintechs are one of the hottest trends in the tech industry today. It seems as though everywhere you turn, there’s a new startup trying to get you to open a digital account or use their app to pay for goods and services. These companies are riding the wave of the digital revolution and seek to revolutionize the way we think about, handle and experience our money. And so they should!
The pace of change in the banking industry has been relatively slow when compared to other sectors that have already been disrupted by the digital revolution. What many considered to be an antiquated system rife with red tape is now ripe for change as customers’ preferences and expectations are changing.
Still, finding success in this space is challenging. Even if a fintech startup begins with a good chunk of funding, the risks are high. According to the Wall Street Journal, about 75 percent of venture-backed startups fail. Fast-forward five years and there’s a fifty-fifty chance the business will survive.
Despite the demand for disruption in the financial sector, the odds aren’t in fintech startups’ favor. And it’s easy to see why.
As with all startups, there’s the issue of funding, competition, customer behavior, expectations and more. But fintechs have the added complication of legal compliance, understanding the financial sector and digital boundaries. These factors have caused even the most promising fintech startups to fold. And they won’t be the last to go down in flames.
But these barriers haven’t scared off motivated VCs. In 2018, fintechs across the globe raised a record-breaking $39.57 billion. That was an increase of 120 percent over the previous year.
So, with all this fintech money floating around, failure should be far less likely, right? Wrong.
Here’s how fintech startups fail, and how you can protect your company from failure
Not enough capital
No matter what type of business you’re in, if you don’t have enough money, you’re going to fail. It’s business 101.
Unfortunately, underfunding runs rampant in the tech industry, particularly in the fintech space. Equipping these companies with the tools, manpower and legal finesse they need to get up and running is expensive. You want to have all the best tools for the job, and attracting top talent to realize your vision is quite expensive. Take into consideration the need for extensive legal counsel to remain compliant with the many rules and regulations governing the financial industry and you’ve easily spent several hundred thousand dollars before you’ve gone live and gained a single customer.
Having capital up front is important, but it better be enough to cover your startup costs, plus keep you in business for the next six months, if not a year, until you have proof of concept and a gaggle of paying customers.
Take your time and do your research before going down this road. Create a business plan, taking every cost into account (and then some) to ensure you raise plenty of cash to keep the business going long after you go live.
Even if you have a top-notch investor in your corner, their funds probably won’t come in one lump sum overnight. It can take as long as a year for these investors to begin paying on their commitment, so be prepared and get the money before you need it.
Investors are an important part of starting a fintech company. Get the right one that delivers far more than money, and you’ll propel your company to its highest potential. Get the wrong one, even if they’re flush with cash, and it could mean failure.
Choosing the wrong partner
Money is important, but who’s giving it to you is, too. The investors you partner with aren’t just writing a check, they’re lending their name and often their skills and expertise to help you get your business off the ground. Choose the wrong one, and you could make a fatal mistake.
There are a few directions you can go with investors. You can choose to use a VC firm or angel investor, or you can get funding from an existing, proven company like an established bank or insurance provider. No matter which way you go, you need to seek an investment partner with experience in the financial field.
Experience in a startup’s business sector is not always necessary, but when it comes to fintechs, it’s important. The investor will need to help you navigate the financial industry, and their background and understanding in this sector are critical to your success.
You’ll also need to establish ground rules with your investor. If an existing company is backing you, you’ll need to find a way to mesh with their established culture. If you’re dealing with an individual, talk about how involved they want to be, what type of reporting they expect from you and the type of governance they envision for the company.
Establishing these expectations upfront will save you a great deal of grief in the future, and increase your chances of success.
Forgetting who they are
Not all startups are created equal. This notion rings even truer when it comes to tech startups. But none are more nuanced than fintechs.
Many fintech startups make the mistake of setting up their business as if they were just like any other tech startup. They aren’t and they shouldn’t. Not only do these fledgling companies have all the typical challenges of starting a business, but they have the challenging task of understanding money on an intuitive level.
If a fintech wants to succeed, they need to grasp the psychology of money. What people think about it, how they spend it, what their fears are around it and more. But even that’s not enough. They’ve got to understand all these things on an organizational level as well, because customers think about these issues in a completely different way than banks do.
Marketing a fintech startup properly is a unique proposition, as well. Once again, fintechs cannot take their identity for granted and do everything just as any other startup would. People aren’t going to respond to an Uber advertisement the same way they would a Venmo marketing pitch. A sophisticated understanding of your customers and your market is crucial to getting this right.
Underestimating the competition
Competition is an interesting thing. On one hand, there are so many tech startups flooding the marketplace that it would be easy to assume there are a lot of competitors and you’re entering a crowded space. The other extreme is simply assuming that because you’re a fintech company, you’re the newest, hottest thing on the block and nobody can touch you, your product or service.
Both schools of thought will lead to failure.
There is competition, and while it may not be extremely fierce in your particular sector, it is out there. And you certainly can’t assume you’re starting the Facebook-equivalent of a fintech.
The bottom line: There are other players in this space, but with a bit of preparation and a killer product, the other guys shouldn’t matter too much.
Long before you prove your concept, you’ve got to research the competition. Find out who else is in your space, what they’re doing, how they’re doing it, and make sure you’re offering something unique and valuable. Duplication is the opposite of what you want in the fintech sector.
This is easily done by reading trade publications and doing a bit of online research, but if you really want to get a feel for the space you’re entering, consider taking an online course in fintech. A class will take a deep dive into today’s fintech market, so you can learn about what’s already out there and what consumer needs have yet to be met.
Not understanding customers
Understanding the way consumers view money cannot be overstated. If you can’t grasp this, you can’t succeed as a fintech startup.
You need to know how every person, in every demographic, saves, spends and understands their money. For example, when it comes to mobile apps for personal banking, 20-somethings are seeking financial management tools, while 30-somethings want better debit card rewards and interest rates. Meanwhile, consumers aged 40 and up are only concerned about interest rates.
This small sample demonstrates just how much age can impact consumers’ motivations when it comes to spending, saving and investing. But age is only one variable. Gender, education level and socioeconomic status, among other things, weigh heavily on people’s financial psyche.
Demographics aside, some people just aren’t interested in using digital financial products. This may sound sacrilegious to the dedicated techie, but it’s true. Don’t think just because a tool is digital, people will want to use it.
From the consumer’s perspective, using a fintech product takes understanding and, in some cases, a great deal of research on their end. If the tool has to do with their money, they’ll want to take the time to understand how it works. But some consumers simply don’t want to put in the time and effort needed to learn how to use a new fintech product.
These folks are happy using their existing banking and financial services in the way they always have. It’s the, “if it ain’t broke, don’t fix it,” school of thought. The statistics speak to this: only 33 percent of consumers use a fintech product, with the bulk of that being those who use a payment or money transfer service.
Usage of fintech services has grown year over year, and that growth isn’t expected to slow down any time soon. But just because your company is set to replace a seemingly archaic financial task, like depositing a check, with a digital replacement doesn’t mean that people will be banging the door down to use your product.
Humans are creatures of habit, they like what they know and their behaviors can be easily predicted with a bit of background information. Use this to your advantage. Learn and know your customers to be successful in this space.
Skirting the rules
Complying with rules and regulations is important. Ignoring the letter of the law, no matter how great your product or service, can lead to a swift, sudden (but not painless) death for your fintech. A solid, well-planned legal strategy can prevent this from happening.
Fintechs are in a unique position because not only are they subject to the laws governing information technology (sometimes called cyberlaw), they have the added complication of complying with the endless amount of red tape that binds the financial industry.
Cyberlaw involves legal informatics and dictates the digital dissemination of information and software, information security and electronic commerce. Fintechs are also subject to anti-money laundering, know-your-customer, anti-terrorist funding related regulations, payment services security and more.
But that’s not all. As we live in a globalized economy, and many fintech products exist in several versions in several countries, fintechs should expect a different set of rules in every operational jurisdiction.
For example, if doing business in Europe, you’ll need to be compliant with the EU’s Payments Service Directive 2. When doing business in the U.S., you’ll need to operate within the confines of the Information Protection and Security Act.
The law, much like technology, is a living, breathing thing that’s in a constant state of change. It’s being continuously adapted to meet the needs and demands of modern life, and so it should. You’ve got to remain agile when it comes to legal compliance. Just because something is legal today, doesn’t mean it will be tomorrow. It’s almost impossible to keep up with the changes, unless you’re an attorney. So, plan to spend a lot on legal fees when establishing your fintech. Work these expenses into your business plan and weigh your options. Maybe an in-house counsel makes sense? Or perhaps you’d prefer to work with a firm?
It doesn’t matter how you do it, just do it. Seek the advice of a qualified, experienced attorney in all matters when starting your fintech. Fail to do so, and you may be setting your business up to fail, as well.
Not knowing when to bail out
Ever hear of PointCast? If you haven’t, you’re in the majority.
During the dot-com bubble in the 1990s, this company was projected to be one of the most valuable tech companies in the U.S. In 1996, it boasted annual revenues of $5 million ($8 million today).
During its run as a tech behemoth, NewsCorp was reported to have offered the founders $450 million to own the company. Unfortunately, its founders took a bit too long to deliberate the deal and NewsCorp took it off the table. Three years later, they accepted an offer from Launchpad Technologies to sell the PointCast for $7 million. Ouch.
In case you’re wondering, PointCast’s product was a news screensaver that displayed stories across several reporting platforms.
This is a cautionary tale for all startups (not just fintech businesses) to understand. Sometimes, you’ve just got to take the deal.
You may be a purist with intentions to organically alter the way we handle money, but sometimes, without an acquisition from a big player, like a bank or an insurance company, your dreams will die with your company.
Don’t put success in a box. It doesn’t just mean growing your business from the ground up and having complete ownership over it until it peaks. Sometimes, success is knowing when you’re in over your head, you’ve reached your peak or you need to allow your business to grow in a new direction.
It may not have been the direction you originally envisioned, but what’s the alternative? Closing up shop and never being heard from again? No, thanks.
You may also believe your company is worth far more than a big company is willing to pay for it. You may or may not be right on that, but your arrogance may be your demise. An inflated opinion of your fintech could make the difference between selling out and closing up shop.
When you’re starting a business, it may feel like it’s you against the world, and in a lot of ways, it is. That feeling may be even more pronounced when starting a fintech. But it doesn’t have to be that way. Understand what you’re up against, know the common pitfalls and avoid them. Dig your heels in, do your research and failure should be the furthest thing from your mind.