One of the hotspots of innovation these days is in the Financial sector, otherswise called FinTech. This is the reason why it has been at the focal point for a lot of investors since the last few years. However, the path of innovation is never devoid of challenges. Fintech is no exception. If you are interested in fintech or are a fintech innovator, these are the challenges to look out for.
Governments across the world have begun taking huge interest in fintech, thanks to the global financial crisis that happened in 2009. The established banks and start-ups were asked to comply with the new regulations. This has resulted in strict regulations in the fintech sector. Fintech companies get affected by the old and new policies of the administration. Fintech companies often end up facing troubles in comprehending and complying with the regulatory environment of lending, payment and banking.
The troubles grow manifold for companies that have international operations. Such companies have to comply with different regulations in different markets. The laws that govern cross-border transactions also prove to be bottlenecks.
Online fraud is a HUGE concern for fintech companies. Security of data has to be maintained at all costs and it takes quite a lot of investments. Most fintech startups don’t create an anti-fraud strategy until being defrauded once. Lacking adequate security features and anti-fraud standards make a fintech business susceptible to loss of credibility, stability and sustainability. Fintech requires companies to be digitally innovative as well as formidable for survival.
Fintech has recently been a hot favorite with investors. And that has pulled investors from all around the globe. Many investors lack a deep understanding of how fintech industry works. Even some established venture capital firms are not an exception. The aggressive funding accompanied with lack of understanding of the sector can lead to unnecessary excess of investors and that can create some shake-ups in the sector.
The Elusive Fintech Team
Building a fintech startup can often get challenging, as it is not always easy to acquire the right talent for this sector. You need to get an agile and a well-diversified team that is well-versed with fintech industry. Getting employees who have relevant experience and skills for fintech industry is quite difficult to find in good numbers. But that should not deter you from finding and hiring the right people. Investing in the right person translates to the right ROI.
Scaringly High Costs
Though various fintech startups keep getting massive funding, yet many such startups are also struggling to justify their high costs of operation and to investors. The cost of employees adds to the cost of data and other services to increase the burn rate. Adding stock quotes and fundamental stock data onto the site also adds to significant costs. The burgeoning costs force fintech companies to work on tighter budgets and adopt lean models of operation.
Legacy Systems Prevent Integration
A lot of financial services companies have been working on old legacy software systems. Since these technologies have become an integral part of their operations, any change in the software may translate to glitches and loss of time and money. This prevents many fintech companies to adopt new technologies and stick to legacy systems. Compatibility between old systems and the new ones has always remained a concern for technologists and this goes against the need of integrating new technology in the work culture.
However, many companies don’t understand that this barrier can be too costly as their rivals may adopt new technologies and steer ahead in the competition. New technologies need to be meshed into legacy ecosystems to tap into the lucrative opportunities that lie ahead.
Fintech companies often need to market and sell their products and services to a an audience which loves inertia and sacrifices innovation. Any change in the technology can lead to potential risks for the fintech company. Fintech companies need to figure out a secure way to welcome any significant change in the technology being used, and then they can take the competition head on. The financial service professionals need to re-skill themselves too. The better and more efficient methods of doing business will help to tailwind the operations.
Many a times, the business model of a fintech startup may be brilliant, yet they are not able to convince the investors and public about their offerings. Majority of the fintech offerings tend to be on the services side and hence, are intangible. Explaining the value proposition of the business model to investors and to the media becomes a challenge. There are very few tech-savvy investors who can understand the intricacies of cutting-edge technologies. Fintech startup founders need to understand their product right to the finest detail and then develop a good story for a layman to understand. This helps in PR and marketing strategies.
Unless the investors and the media do not understand what your service or product is, they won’t give you a good coverage. And that will prevent good promotion. Since PR is a vital component of a startup’s growth, it is not difficult to gauge how much gravity this challenge holds.
Market turbulence can play spoilsport anytime. When shake-ups happen in the market, the mania on unicorns go down in the market. As a result, valuation expectations of entrepreneurs also takes a hit. Fintech startups may find it difficult to weather the storms when recessions happen. Since many people avoid spending money and go for cash reserves, the fintech companies suffer a blow as their offerings lay idle.
Fintech is growing very fast. And its path is strewn with challenges. Yet they are not perennial roadblocks, and if a fintech company succeeds in overcoming them, there are huge potential rewards waiting.