Move Fast, But Be Careful: The Challenges of Fintech

Challenges of Fintech

The Fintech revolution has been in full-swing over the last five years. In fact, more than a staggering $25 billion has already been invested in an estimated 4,000 Fintech companies since 2010. Despite this impressive growth, Fintech presents a number of complex challenges that entrepreneurs have yet to resolve. Here are six challenges of Fintech:

Stringent regulations.

Unlike traditional banking and financial institutions, the Fintech industry doesn’t know exactly which regulators and governing bodies they have to adhere to. This means that these companies often aren’t even aware of the regulations that they must comply with. This conundrum can result in delays in getting licensed on-time and the possibility of getting hit with hefty fines.

For instance, in May 2015 Ripple Labs was hit with a $700,000 civil money penalty for failing to maintain and implement an adequate anti-money laundering (AML) program, along with failing to register as a money services business (MSB).

To make matters worse, since the financial crisis of 2008, governing bodies have created even more stringent regulations that the financial industry must follow. Thankfully, the Fintech industry has responded with the emergence of RegTech which can be best described as the “adoption of new technologies to facilitate the delivery of regulatory requirements.”

Lack of understanding.

Since the Fintech industry doesn’t follow those crystal-clear guidelines that were previously mentioned, there’s obviously a lot of misunderstanding in the exact procedures which must be followed in the Fintech industry.

The problems occurring include the misconceptions that the Fintech industry isn’t secure, but this is not so. Many have felt that the industry of Fintech may be some kind of equalizer for the masses and that it is going to somehow bank all of the unbanked which may cause a disruption to the flow of all financial good to the rich and give the common person a chance at financial success. This is partly true, especially with the advent of new apps and automatic or robotic financial advisors.

Fintech seems to be flashy and exciting. Whether that statement of “flashy” is true or not, one thing is sure, and this is that Fintech is changing everything. All absolutes in the financial sectors are changing as they never have before.

The Fintech revolution has the potential to disrupt the financial industry, but until more people become educated about Fintech, some of the misunderstandings will prevent the Fintech industry from reaching it’s full-potential. It’s the responsibility of those involved in the Fintech industry to educate the mainstream population about what Fintech is and isn’t.

Hard to attract funding, partners, and teams.

Funding for Fintech startups had a great beginning in 2016. Unfortunately, the sector fell 49 percent globally in the second quarter of 2016 from the first quarter of the year. The reason? Ian Kar writes in Quartz that this occurred because “many in the industry are realizing they don’t need startups to build products.”

For example, those quickly becoming knowledgable about Fintech such as banks and other financial companies are practically having a coronary over the Fintech revolution. Some traditional services such as, “JPMorgan Chase has started initiatives in mobile payments, blockchain technology, and has partnered with alternative lending company OnDeck for small business loans.” This quick maneuvering on the part of financial companies is likely the only thing they can do to save their industry.

While there are partnerships like the one between OnDeck and JPMorgan Chase, that’s not the norm for smaller Fintech companies. Traditional banks may have been seeing these companies as rivals or the banks and other financial institutions aren’t aware of the advantages that the Fintech technology can provide for them. When Fintech startups don’t have the opportunity to partner with banks it makes it more difficult for them to grow, since they aren’t introduced to the community — and often Fintech is actually kept obscured by the financial community. This begs the question: what are they so afraid of? Being taken over by Fintech? The logical conclusion seems to be that they need to work together to make the best helps for their customers. If these two sectors don’t unite in some way — it seems possible that one of them will be going down.

Every successful Fintech firm has a skilled and diversified team that isn’t just innovative, but also knows how to use all of the limited resources that are available to them — this may be bad news for the banks unless they come up to speed with knowledge of how Fintech works.

There is also the problem that the most talented individuals are going to ask for higher wages. When you’re just launching a company in Fintech, you may not have the budget to offer a competitive salary. A company could offer stock options or perks, like allowing their team to bring-in their pets…but ultimately these employees are going to want a solid salary. Banks and other financial institutions have an advantage in that department, but they may not for long. Without an awesome team, it’s going to be challenging to remain innovative and meet the demands of customers who will began to demand the innovations of Fintech.

Balancing scale and innovation.

“A lot of financial institutions want to differentiate themselves and become bespoke,” said Jonathan Allaway, senior managing director at Accenture. Bespoke means something that is made specifically for a particular customer or use.

“There is a tendency to take a startup’s standard product that is already innovative and to try and make it unique to each instance it’s applied in. Founders will have to make management choices about how they can get standardization to scale and also keep innovating.”

It moves fast.

The Fintech industry moves lightning fast. Whether it’s because of the changing regulations, changes in the market, or advances in technology, Fintechs must be able to move fast. This includes making quick decisions and how to be flexible enough so that pivots and changes can happen rapidly.

The best way to keep-up with these changes is to try and stay-away from a one-size-fits-all product or service. Remember, banks are already building their own Fintech teams, so if you are in Fintech you need to develop something that’s outside-of-the-box if you want to compete in the financial industry.