Being an equal part investor and entrepreneur allows me to gain insights into how both sides function. I wouldn’t call it a privilege but it’s something I’m very proud of and happy to be able to do. So when a fellow colleague in either capacity asks what are fintech startups and what’s all the fuss around them, I get uncharacteristically excited.
The reason why is because fintech is an amazing opportunity, both to create something and diversify a portfolio. The total value of fintech deals globally in the first half of 2019 was $22 billion. There are a lot of opportunities, such as fraud prevention and detection technology that banks are really interested in, if that’s your cup of tea. In fact, there are more and more cases where fintech startups start out small and end up with market capitalizations in billions.
That’s because consumers are adopting fintech, and fast at it but they’re not the only ones. The more traditional players such as lenders, insurers, and asset managers are also buying fintech big time, if only to stay relevant because machines are slowly taking over.
So, as the title ponders, that would be one reason why you should care. If you’re looking for advice and tips on how to create a fintech startup, you should care at least for the next five minutes or so – as long as it takes you to read all the way to the bottom of this post.
Fintech is a lot of things
Let’s start with the fintech startup definition so we know the framework with which to work within. Fintech (short for financial technology) is the application of new tech-based products and services in the financial industry. As one might imagine, such a broad definition covers a lot of ground, from mobile banking to the use of artificial intelligence and blockchain to compliance and regulatory issues. The bottom line is there is a lot of fintech going on around here.
Consider this: if you’ve ever purchased something through your smartphone or simply checked your bank account, you are already part of this multi-billion dollar industry.
In other words, this is a new generation of financial technology that has various applications, both in terms of consumers and businesses. Strictly speaking from an investment point (which exploded in the past couple of years), fintech is allowing businesses to easily trade or manage their investments through machine learning algorithms, for instance.
The best part of it is that traditional companies and banks are in on it too, adopting various fintech products and services for their own purposes.
So, where to begin?
How to build a fintech startup
I’ll definitely put aside an entire post for this topic but for starters, here’s a guideline of sorts:
- Pinpoint a domain or a niche. Maybe you want to offer payment services, or do something with insurance, or make a potent solution combining savings and small investments. As I mentioned, this is a huge industry and you need to be crystal clear what is the market you’re aiming to disrupt.
- With any form of finance involved, you can bet your ass there tons of regulation around it. Hence, it’s imperative to know the regulations so you can safely operate first on a local level, then globally. Rest assured – there will be dozens of legal issues to resolve.
- Your next step is to focus on your strategic/competitive advantage. From an end-user perspective, fintech generally revolves around two things: Improvements in the consumer experience and disruption to existing business models.
I’d start by figuring out which of the two groups make more sense, and then think of what I can offer that is fairly unique and/or of high relevance and importance. Otherwise, I’m risking walking the same path that others have trodden and accomplishing nothing.
- From there on, it’s the usual startup building process: surround yourself with the right team, both talent and technology-wise.
- Build an MVP (minimum viable product) to test the grounds. When it comes to the life cycle of a fintech startup, I can’t describe it any better than this Financial Times piece. It’s pretty much the usual phases:
Concept -> Validation -> MVP -> Launch -> Growth
- Finally, move on to securing an investment.
Traditional companies are placing less focus on strategic partners and more on downright acquisitions, which sort of shorten the fintech startup’s lifespan. There are two reasons why these companies are concentrating on acquisitions:
- easier and faster integration of the new technology
- securing a competitive edge by preventing competitors from benefiting by doing the same and leveraging the same technology.
We are witnessing the evolution of finance
That would be my short explanation on what are fintech startups and why there is so much buzz around them. I have one more thing to say.
As with any industry that’s experiencing huge growth, there are risks and uncertainties that accompany it. These are perhaps even more evident when there’s a lot of money involved, and as a result, regulation has struggled to stay afloat of innovation.
For instance, P2P lending platforms provide a significantly higher return compared to bank deposit accounts. Then, there are data privacy concerns with increasingly digital financial services, as well as the way cross-border transactions are processed because there are different countries involved. Let’s not forget about competitiveness – everybody wants a piece of the action.
There are some question marks to be answered and some grey areas that need to be blackened or whitened. These challenges will likely continue to amass as the future of finance becomes strictly digital.
Yet, the benefits far outweigh any cons and challenges stand in the way of success in this industry. As opposed to banks and other traditional companies, fintech startups exude a high level of flexibility that allows them to operate fast when it comes to implementing new services based on shifting market demands. The evolution of finance is happening under our noses, and I firmly believe 2020 will be yet another year in which the fintech industry catches the attention of both entrepreneurs and investors.