8 Reasons Why Fintech Startups Fail

8 Reasons Why Fintech Startups Fail

by June 20, 2018
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Fintech startups are multiplying and as we hear a lot about the successful ones, we often forget that it is not an easy task to turn a project or idea into a successful venture, and that, no matter how disruptive or innovative it may be.

Watch out for these eight deadly mistakes fintech startups often make:

Underfunding the Startup

Underfunding is a killer and it usually strikes much quicker than the unsuspecting startup thought it would. Once a startup realizes it needs additional funding, they don’t take into account the amount of time before their company will actually begin to receive the money from the investor. The time lag can be three months to one year, and investor infusions never come in one lump sum. In the meantime, no matter how good the product, no prospect will buy from a company that is on financial life support. During the vetting process, financial institutions will demand assurance that the company is strong and viable.

“As a basic rule of thumb, you need to start raising venture capital at least six months before you need it,” according to Sean Banks, Partner of Atlanta-based fintech venture funding group, TTV Capital.

Choosing the wrong strategic investors, VCs

The financial services industry is a very particular industry where experience really matters. Fintech startups looking to raise funding from VCs must choose those with both an experience and understanding of the space. And if they decide to go with a bank or insurance company, it is crucial to think about what it takes to raise money from regulated financial services incumbents. Fintech startups must ask if regulatory approval is needed and plan accordingly.

Prior to closing an investment with an incumbent, they must ask what type of reporting they will need, what type of governance, and what type of ongoing information they will require. These organizations work under different rules, in addition to the cultural differences.

Overlooking legal aspects

Image by Sergey Nivens via Shutterstock.com

The financial services industry is heavily regulated, and certain sectors are even ultra-specialized when it comes to the legal world. This includes securities law in capital markets, laws protecting borrowers, privacy laws when applied to personal data, and more. It is crucial to cover legal aspects when developing a business plan, including thinking about proper licensing, and its related laws and requirements, notably for fintech companies developing software.

Overlooking compliance

In addition to financial laws, fintech startups must remain at all time compliant. This includes anything from anti-money laundering, know-your-customer, and counter-terrorist funding (AML/KYC/CLF) measures, to the new Payments Service Directive 2 (PSD2) that came into effect in the EU earlier this year, and consumer data protection.

As Pascal Bouvier, venture partner at Santander InnoVentures, puts it:

“If you are late hiring a compliance officer and/or are late to develop a compliance rule book that you abide and operate by, you may end up dead meat.”

Thinking that growing a fintech startup is the same as growing any other tech startup

General laws of growing a startup cannot be applied uniformly to fintech startups simply because the concept of money is very particular. It is primordial for a fintech startup to understand psychological behaviors around money, credit, savings, payments, both in retail and institutional levels: individuals do not think the same way about their money as banks and regulators do. Startups must study these cautious behaviors closely. Also Marketing works much different than for example in E-Commerce. We monitor here all the time that Fintech Startups do not figure out a smart way to do marketing for their fintech product and try to copy expensive E-commerce marketing strategies.

Competing solely on cost

While the promise of providing financial services or products at a cheaper price with the application of better technology is truly great, fintech startups often overlook the fact that banks have massive scale advantages. When incumbents move into action, they become dangerous competitors to startups that can easily undercut them on cost. Fintech startups must find a real differentiator, one other than just cost enabled by better technology. That’s even more crucial today as bigtechs such as Google, Facebook and Apple are entering the fintech space.

Payments is easy

While payments may be the easiest of financial services sectors to enter, it is also the most difficult to succeed in. Many startups mistake ease of entrance for easy of success and as a result, many of them fail. One of the reasons is that the sector is already so crowded, in particular now as tech giants are rolling out mobile payments platforms across the world including Alipay, Apple Pay, Google Pay and Facebook Payments. Fintech startups in the payments sector must consider the fact that they may have to sell to multiple stakeholders: users, retail or corporate, merchants, processors, banks, but also networks.

Ignoring economic cycles

Whether the economy is expanding or contracting will have an impact on a fintech startup. Building a business model in fintech off of where one is in the current business cycle is short-sighted, and it is primordial to think of credit downturns, interest rate cycles, monetary policy and start scenario planning.

 

Featured image by ilkercelik via Shutterstock.com.

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  1. #1 8 Reasons Why Fintech Startups Fail - Fintech News Malaysia 22 June, 2018, 07:54

    […] article first appeared on fintechnews.sg, Featured image by ilkercelik via […]

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