Fintech has been a focus of mine lately, largely because the industry is so exciting and ripe with opportunities. Financial services are seeing more change in the past few years than in the last 100 years, with insurgent startups leading the disruption.
However, the transformation effort continues to be a painful one. There are numerous fintech startup challenges (as one might with a merger of finance and technology) as emerging technology becomes more widespread. I could spend an entire day describing every meaningful challenge but I’d rather focus on how to deal with them. Preparation is the name of the game and you play it like this:
Accept legal regulation wrangling as a daily activity
I’m tempted to label regulatory issues as fintech’s Achilles heel as it’s one constant vulnerability every startup in the industry has to carry. The regulatory regime is anything but easy and it covers A LOT. The explosion in usage of fintech solutions and subsequent emerging technologies brought a wide array of fintech startup risks to the fold, with regulators and supervisors responding in multiple stages.
From the development of international standards to the implementation of growingly elaborate national rules and guidelines, everything between technology risk and cybersecurity to anti-money laundering requirements needs to be in check. Not only do you need to show you are in compliance with the increasing volume of fintech-related regulation but also that you have examined and accounted for various present and emerging risks.
Fintech startup success largely rests on adopting a proactive response to potential challenges and issues that evolving regulation and supervision might yield. My advice? Have a dedicated regulation expert who will be your go-to person when it comes to developing, implementing, and monitoring proper regulation strategies and activities.
Also, have legal counsel close by because chances are, you’ll need it. Fintech raises all kinds of legal questions, some of which are yet to be resolved, especially in cases of cross-border operations where multiple legal and regulatory frameworks come into play.
Fintech startup competition is tough as they come
As much as fintech has disrupted the way consumers and businesses use financial services, traditional players like banks and financial brands haven’t crumbled, nor will they. These incumbents have the resources and budgets that give them the edge in the head-to-head battle.
In fact, thanks to their assets, they can develop, partner with, or even buy out fintech businesses. As far as fintech startup challenges go – these are big boys, and they don’t come any bigger.
And they’re not your only competition. As the industry is getting crowded, your peers will have something to say too. Think long and hard about how and if you will be better than the competition. You need to differentiate, have something that makes you a better/superior option. You can be more agile in serving a segment not addressed by competitors or have a product/service robust enough to face them directly or just be present where they aren’t.
Whatever you choose, whether it’s in B2C or B2B space, it needs to show you have a unique and valuable service that has the power to change customer behavior.
The matter of scalability
As I’ve previously written, you need to think ahead if you want to scale smoothly. Scaling a fintech startup is more demanding because it covers more aspects of the business. The challenge is to grow while maintaining innovation and agility that were the initial drivers of success.
Naturally, a significant part of the solution will rely on the technology side. You have to use it to stay connected with your customers to keep addressing their evolving needs and challenges. The good news is that technology is imprinted into the fintech startup’s DNA from the get-go, enabling faster and easier adoption and implementation of new concepts.
You also need to beef up the human element. Startups quickly outgrow the core team that has been there from the start. They often fail to realize they need a different set of skills and capabilities from those they already possess. It’s vital to hire bodies that share your vision but also have relevant financial, technological, and/or business expertise (plus the regulation/legal thing discussed earlier).
Fintech companies have the whole disruption thing nailed down and while that is a major boon, it’s not enough. The industry is still changing and will likely continue to do so for the time being, so your ability to adjust will be vital. This is a multidisciplinary effort, hence it might be wise to hire a mentor – someone skillful and experienced who can guide your startup through growth.
Also, pay attention to the local vs international aspect. Limited funding and resources but also lack of direction have been the main factors of fintech startup failure rate, with many unable to advance from the local level. For scalability purposes, you should incorporate the global angle from day one so you don’t get stuck on the way, scrambling to fulfill numerous international and local requirements, whether it’s compliance, legislation, and so on.
Data will be a special concern
To be more precise – the security and privacy aspect of it. Greater reliance on technology, outsourcing business-critical processes to third parties, and generally all-around more interconnectedness have increased risks when it comes to operation, control over third-party data, and cybersecurity.
Because you will be in charge of highly sensitive and confidential information, this is all the more important matter to address.
Here’s an interesting and downright scary fact: 98 of 100 most prominent and well-funded fintech startups are vulnerable to phishing, web and mobile application security attacks. And I’m not even mentioning the piss-poor compliance results for the main website.
With hackers increasingly getting sophisticated, there will always be some risk involved. The key is to mitigate it as much as possible. Besides tightening your security and privacy procedures and infrastructure, you might want to consider using machine learning and artificial intelligence.
AI can help fintech through behavioral biometrics solutions that monitor both customer and device interactions and improve security and authentication by being proactive or preventative, as well as being reactive. On top of that, AI and ML can handle time-consuming and routine processes so your security team can focus on more important tasks.
Being thoroughly prepared for your fintech startup challenges means having the power to question the status quo. Make no mistake – this post covers only some of the major hiccups that occur on the path to fintech success. It’s an increasingly complex market that will require all your creativity, expertise, and decisiveness to stick to the plan. No obstacle is insurmountable but it will require your very best.