The real truth about FinTech startups…

Nouveau FinTech: The new wave of consumer-centric companies tackling the old financial ecosystem.

Originally published: August 2014, update pending.

FinTech is a good place to be as a startup these days.
Investors love the space with dedicated VC funds coming up (Brightbridge Capital, NyCa, OrangeGrowth Capital)
Engineers too are keen to join the next Square, Simple, LearnVest, Klarna ...
Consumers are eagerly waiting for the next disruption to their financial needs.
Even the banks are excited about FinTech (despite IPOed companies like LendingClub who are taking away business from them).

But what is the reality of actually running these nouveau FinTech startups. Yes the challenges of building up the past ‘Giants of Financial Technology’ must have been similar, but many of them actually started as member-owned organisations created by banks as utilities for themselves and spun-out to capitalise their eventual value (eg: Visa, TSYS, Sabre).

My own FinTech startup, Aire, is relatively young compared to some of the rising rockstars in this space (see more compiled here in my FinTech Fantastic list). Written out below are some of the truths that I have encountered myself at Aire. But they also include anecdotes from various FinTech entrepreneurs in London, New York and the Bay Area that I have seen grow up from scratch. I have been involved in the wider “financial technology” space for just over 10 years now, and these are the things I learnt:

Truth 1: FinTech is a huge space.

Much like financial services, there are many flavours to financial technology and yet more spaces are being carved out by innovative entrepreneurs who are creating wholly new business models.

FinTech doesn’t just mean mobile payments or crowd-lending (as many incorrectly oversimplify it). As data and computing become ubiquitous, there are other amazing startups tackling information transparency like Duedil, stock trading insights like the guys at eToro or even essential security like Sedicii.

And many of entrepreneurs aren’t your typical 22-year old college graduate. Most of these guys have paid their dues running prior startups, some have PhDs and many even have deep expertise working in the specific field in a bank (the ClauseMatch guys spent 10 years doing OTC derivative contracts before launching!).

Truth 2: Consumer-centric mission.

Trying to ‘right-the-wrong’ is becoming the strong unifying force amongst the new wave of FinTech startups. Most of them are taking matters into their own hands and directly working with the consumer to help alleviate their problems (Simple, Osper, NutMeg, Robinhood, Moven and Squirrel). Compare this to the past wave of financial technology companies who had been focused on providing enterprise technology to help banks and other financial institutions do more with their customers.

New terms are emerging to describe this wave. Bradley Leimer calls them “outer-fintech” startups. Matt Harris called them the “finsurgents”. But they all agree that working directly with the consumer to transform their experiences is good for the financial ecosystem.

And right next to them are the startups that are helping the small businesses also prosper with innovative credit platforms like MarketInvoice, Bolstr, AgileCredit and NoviCap.

Truth 3: MVP is a longer process.. and takes a lot more capital.

All FinTech entrepreneurs look with envy at their counterparts building the next “food discovery” or “photo sharing” app. Rightly so. It is a lot more work to get the product to minimum viability stage. They require a lot more moving parts including multiple regulatory certifications, identity checks and even thorough security tests. Many times the MVP isn’t that far away from a fully formed product (as Jason Henrichs calls these Minimal Valuable Product).

And that means more time and more runway to build up the product. So it’s not unusual for these new FinTech startups to have multi-million dollar seed rounds. Be ready for that (and also longer trial periods and deeper security in your tech stack). But the outcome is well worth the wait.. look at what Mambu has built up. Unbelievable tech stack. And same is true for guys like Dwolla, MarketIQ and Avuba.

Truth 4: Customer acquisitions costs are a lot higher.

Another matter of envy. Acquiring consumers for financial services has always been expensive. Banks have known this for years, often spending upwards of 400 USD to acquire a single consumer. FinTech startups have the same challenges, though most of them fare better with innovative and viral methods like what Simple did — however the costs can still range 30–50 USD per consumer. Not cheap. And therefore they need much more capital at the scaling stage — hence the larger Series A rounds.

This is especially evident when you see large rounds from B2C players like Transferwise who clearly have to spend a lot to get their brand and message out in front of consumers (with some rather cheeky but effective ads!)

Truth 5: Regulators matter.

Not all FinTech startups are necessarily affected by this (and definitely not the Bitcoin ones.. yet!). But this can be a showstopper. CurrencyCloud founder, Nigel Verdon wrote a hilarious timeline of a payments startup, and jokes about the 7 month hiatus in plans to resolve regulatory hurdles. And its a justified point as this stuff matters to protect consumers, and also conveniently creates a barrier to entry for a copy-cat clone trying to jump in quickly.

Truth 6: Responsible global ambitions.

With the change in distribution methods that technology has enabled, more startups realise that they are able to help real consumers with the unjust limitations of the financial ecosystem. There is a rise in global business models that link up capital for people across borders. Obviously remittance startups like WorldRemit are beneficiaries of this, but it is extremely encouraging to see companies like StudentFunder that are enabling access to education for students leveraging global capital markets.

Truth 7: FinTech is a supportive community.

There is a strong sense of camaraderie amongst the FinTech gang. They know they are all fighting a tough battle... everyday. So it makes sense to unite and use each others amazing technology products to ‘do more faster’. Clearly very evident when you see how many FX payments startups are using the CurrencyCloud API: Fidor, Moni, Transferwise, CloudX …
Investors too like to invest in multiple startups that can support each other. Even the FinTech vertical accelerators often end up pulling together a network of complimentary startups. Many find their first use-case within the cohort itself, as perhaps true amongst the TechStars FinTech group in London at the Barclays Accelerator.

I am sure there are more that we will discover.. so I am keen to hear what other FinTech entreprenuers think of these truths.. ping me @AneeshVarma