What challenges fintech start-ups face and what mistakes they should avoid to prevent business failure
The development of the fintech market is still a hot topic in the financial industry and there is no indication that this will change any time soon. Especially looking at the numbers describing this industry. The authors of the "Fintech Global Market Report 2020" forecast that the global fintech market will be worth nearly $310 billion by 2022. This financial potential is also recognised by Polish startups, which are increasingly deciding to develop their business in the area of modern finance. What challenges do they face and what mistakes should they avoid to avoid business failure?
1. Too short financing period
Quite a lot has been said about the importance of ensuring liquidity at the initial stage of fintech development, and it is not worth repeating here. However, the issue of acquiring financing is one thing, and ensuring that this support is sufficient to cross the break even point is a completely different problem.
We observe the market of fledgling fintechs and we see that such entities too often underestimate the time and, consequently, the costs of operation in the period before launching a product on the market. As a result, they are left without funding halfway through - with an unfinished product, huge marketing expenses required, cyclical operating costs and an idea that could have worked if only the issues related to the complexity of the topic and financing had been better identified at the start of the venture.
2. Too relaxed approach to technology
Let me tell you a little anecdote here. We once started discussions with a potential client who was planning a financial business. He had a business plan ready, an idea for a simple product and marketing. However, to our question, "How do you want to collect and process your customers' transaction data?" we heard the answer, spoken in a fully serious tone: "That will be handled with Excel". Well, it took us some time to make the client realise that Excel really won't do anything here.
This may be a very extreme example, but it illustrates well how fintech startups treat the back office of their product: as an addition to the beautiful "packaging" of the front-end application offered. Meanwhile, what works "in the back office" is not an addition, but rather the clue of the whole enterprise. Therefore, when deciding to develop a financial product, one should first of all take care of the technological layer, which will process data and transactions in an efficient, comprehensive and compliant with regulatory requirements manner. After all, what use is a great-looking application for modern payments if it turns out that due to technical "flaws" and "holes" it does not meet customer expectations and does not create trust? After all, it's all about money and financial data - these are not given to an untrusted partner.
3. Lack of product's MVP
This is also a strong trend I observe while working with fintech startups. Young companies want to offer the maximum of their product in the shortest possible time. But from a business perspective, especially in an uncertain startup environment, sometimes "less is more", which is why creating an MVP is so important.
Minimum viable product is a working product with minimum functionality, allowing us to test the viability of a given venture on the target group. It is worth using this solution, because it gives us an opportunity to verify the business model at a very early stage of business and - in the worst case - to protect ourselves from losing a huge amount of money, which would undoubtedly happen if we decided to release the full solution.
Often, a fintech customer prefers to use a narrow range of services, gaining trust in the new entity and, over time, starting to use more functionalities. In this situation, the start by launching a narrow range of services, but well thought-out and reliably operating, may be the optimal solution for a newly established business.
4. The "We do as others do" approach
If I got a few zloty every time I heard: "it works for them, we do it the same way", I would already be a millionaire today. Blindly following the competition and duplicating solutions that already exist has little to do with innovation and much more with taking the path of least resistance.
Moreover, such an approach generates considerable risk, as the business models of fintechs are significantly different, which requires lot of flexibility both in terms of product creation and the issue of communication or group of customers.
And it is precisely this flexibility that fintechs lack. Instead of following their own path, they choose solutions that are seemingly tried and tested, but are completely unsuited to the specifics of their business. The effect of such actions is very easy to predict and unfortunately not very positive. Fintechs should win against banks with their innovation and courage, willingness to take greater risks that banks cannot afford. Following the "proven" model will be just a copy, requiring building an advantage through even lower prices or even greater marketing efforts.
5. Excessive focus on apparent innovation
Do you know fintechs today that don't use terms like blockchain, cryptocurrencies, machine learning and the like in their narrative? Well, neither do I. It seems impossible today to offer a solution that does not incorporate these technologies. It is worse, however, when they play the role of mere 'buzzwords', having only marketing relevance, and do not add any value to the product. And unfortunately such tendencies are seen more and more often, and well, in the end, if these solutions are not used in the right way, it simply does not pay off.
The point is that it is sometimes better to use slightly more traditional technologies that respond realistically and safely to product requirements than to run the risk of technical errors resulting from the implementation of unproven and relatively low-value solutions, purely in the name of poorly understood following of market trends.
6. Failure of the product to comply with current regulations
Regulations governing the financial industry in Poland and around the world are one of the most underestimated aspects of fintech activity. It turns out that meeting the requirements of financial supervision and obtaining a licence (consent) to start financial activities is considered by many existing entities to be the most difficult and time-consuming task they face at the beginning of their adventure with the fintech industry.
Meanwhile, start-up fintechs fall into the trap of simply not adapting their product or service to the regulatory environment in which they operate. It happens that the planned functionalities, which were supposed to be the distinguishing feature of the service, cannot be implemented in the chosen form, because they are not in line with standards, recommendations or relevant regulatory practices. This has a number of consequences, ranging from extended launch time, potential financial losses, to the rebuilding of the business model.
7. Unconsidered choice of technology partner
The creators of fintechs are usually visionaries, businessmen and not particularly tech-savvy people. Unfortunately, this makes it all the easier for them to fall into the trap of choosing the wrong technology provider, because they are simply not able to properly verify it. Of course, in an ideal world this wouldn't be a problem - after all, a technology partner should try their best to respond to the client's needs and act as an advisor. However, if this were the case, I wouldn't have to grab my head so often when talking to clients, and I wouldn't have the classic phrase on my lips: "Dear Sir, and who has... broken this for you?".
Because unfortunately, the technological layer of the solution is the basis of a good financial product, as I mentioned above. Choosing a supplier who not only fails to meet product assumptions, but also creates a technological debt, which translates into the operation of applications and services, generates, besides frustration, only losses. Loss of time, money and, well, trust, without which it is difficult to have a good business relationship.
That is why I do not advise you to take this subject lightly. It is worth asking, checking, verifying and comparing, even if it takes a lot of time. From a fintech perspective it will still "cost" less than a quick, but problematic and wrong choice.