A few years ago hardly anyone knew what a fintech is, but today they are almost mushrooming. With the PSDII, there have been many new opportunities for start-ups in the financial sector, and blockchain technology is also bringing a lot of movement and a breath of fresh air to the traditional industry.
Disruptive business models such as that of Revolut, Klarna, TransferWise, Stripe etc. have shaken up the “old” financial world and are conquering ever larger market shares. They often even receive hundreds of millions of euros from investors and VC funds.
Why it seems to be so difficult for some FinTechs to take off depends on various factors. Here are seven points that you should consider as a FinTech startup:
1. Experience: It is not uncommon for founders to be very young, which may not mean much, but they still generally lack management experience. Of course, a confident demeanor and persuasiveness helps, but even more than that, it is important to build a competent team around you and to delegate tasks.
2. Risk management: In the frenzy of the start-up phase, euphoria often prevails and glosses over some well-intentioned advice from outside. Concerns are brushed aside and risks are not taken seriously. A healthy balance of risk affinity (of course, otherwise you wouldn’t dare to found a company) and risk mitigation, i.e. risk limitation or prevention, would be optimal.
3. Regulation: FinTechs often have to deal with complex and changing regulations, which can lead to additional costs and delays.
Very few FinTechs lack technological know-how, although this often gives them a false sense of security, as they underestimate the organizational effort of a competent compliance department. It is well known that FinTechs often face compliance issues, especially in the area of money laundering and terrorist financing. It is therefore of the utmost importance that companies continually review and improve their compliance procedures to ensure they comply with applicable laws and regulations. The KYC (know your customer) process in particular is underestimated by many FinTechs.
If a company wants to “play bank”, then it has to follow the same organizational structures and rules as any other financial institution. At least that is the case in Germany and Europe. Whether customers should trust a more or less unregulated company based in the BvI or the Bahamas is up to you. At the latest since the decline of FTX, the risk should have been clear to everyone. In any case, in European countries only those companies will be able to offer bank-like services (accounts, payment transactions, transfers) that are very well positioned in organizational, legal and IT terms.
4. Funding: FinTechs often need a lot of capital to develop and scale their products and services. Without sufficient funding, they cannot implement their business models. Many young entrepreneurs are often overwhelmed with how to pitch correctly, how to get to the right investors or to get to investors at all, or they simply lack the power of persuasion. Investors not only look at the figures, data and facts, but also pay particular attention to the charisma of the founder/founding team.
5. Marketing: If FinTechs cannot successfully market their products or services and cannot generate sufficient demand, they will have problems realizing their business models. A marketing strategy is therefore just as important as the corporate strategy itself. It is essential to deal with your target group. Only those who know their target group can address them in a targeted manner.
6. Scaling: In order to successfully expand products and services to a larger number of customers, the business model must be scalable. Scalability refers to the ability of a system to increase its performance or capacity in proportion to demand. An example in FinTech could be that an online banking platform is scalable when it is able to efficiently process more customers and transactions without sacrificing performance or availability.
7. Partner: Especially in the FinTech area, the two most complex areas imaginable come together: the financial world with all its challenges in the regulatory area and the tech world with its high-tech processes. In the case of young FinTech startups, the founders often come from the tech world and have an enormous understanding of technology, but on the other hand they lack experience in the financial sector. It is therefore always advisable to build a team in such a way that it contains competent people from both areas. Mergers and partnerships are also advantageous, because hardly any company can master the enormous challenges alone.
The competent team at 1st Level FinTech Consulting will be happy to advise you if you have any questions in the FinTech sector.