Most entrepreneurs think they’re building the next big thing. But at the end of the day less than 90% of startups productize their ideas and are adopted by the potential users. Then they face a challenge of scaling their venture, reaching to the next million customers and making them pay for their product. Many startups make mistakes in all this process which results in failure. In this post I am not going to talk about common mistakes that startups make and fail — no market need, hiring the wront people, lack of cash, competition, poor product, no customer centricity, etc. etc. Instead of that, I will share my insights on 5 mistakes that are unique for fintech startups and lead to failure of the fintech startups.
Fintech startups are multiplying, and more money is being invested in fintech. Fintech startups raised $41.7bn in the first half of 2018 globally, surpassing 2017's record total amount of investments in fintech. But as we hear a lot about big funding rounds and the successful fintech startups, we often forget that it is not an easy task to turn an idea into a successful fintech venture, and, no matter how disruptive or innovative it may be.
Here are 5 main mistakes unique to fintech startups that leads to their failure.
1. Ignoring legal aspects
In addition to financial laws, fintech startups must remain at all time compliant with the “rules of the game” in the market they want to operate. This includes anything from anti-money laundering, know-your-customer (KYC), and anti-terrorist funding (AML/CLF) related regulations to the new Payments Service Directive 2 (PSD2) that came into effect in the EU earlier this year, and consumer data protection. Many fintech founders do not deeply research the rules and develop a siple compliance rule book that they abide, and increase the risk of mislaying the product and not even having an opportunity to launch it.
The financial services industry is heavily regulated, and certain sectors (like deposits, investments, money transfers etc.) 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.
2. Ignoring the concept of money
Growing a fintech startup in general is the same as growing any other startup, but general concepts of growing a fintech startup cannot be applied because money is a very different, unique and at the same time very tricky concept. Many fintech startups fail because they don’t understand psychological behaviors around money, credit, savings, payments etc. Different segments of society do not think the same way about their money, when they are trying to invest, save or spend. For instance, some individuals have financial education but some lack it, the net disposable income of different individuals is also very different, many individuals are trapped by student loans etc. In addition, there is huge difference in saving, investing, spending in retail and institutional levels. Startups must study these subtle behaviors closely. Behavior around money also impacts on how the fintech startup deals with marketing, as marketing for a fintech startup works much different than for example in e-commerce. Many fintech startups do not figure out a smart way to do marketing for their fintech product and try to copy e-commerce marketing strategies ignoring the behavioral aspect of humans and companies around money.
Money is a weird concept. Understanding psychological behaviors around money, credit, savings, payments, investments both at retail and institutional levels, can give so much advantage to founders of fintech startups. Most founders that do not study these behaviors closely, end up being surprised by how slowly they gain traction as they “suddenly” figured out that growing a retail customer base is more expensive than they originally thought, or selling cycle of a b2b fintech product to a bank or an insurance company is much longer than they anticipated.
3. Choosing the wrong strategic investor
The financial services industry is a very unique industry where experience really matters. Fintech startups looking to raise funding from VC-s must choose those, which have both experience and understanding of the space. And if they decide to go with a bank or an insurance company (as their investor), it is crucial to think about what it takes to raise money from regulated financial services incumbent (banks, insurance companies, etc.). In addition to the work-culture differences these incumbent organizations work under different rules. Prior to closing an investment from an incumbent, fintech startups must ask what type of reporting they will need, what type of governance, and what type of ongoing information they will require.
4. Ignoring the customer adoption challenges
In fintech usually one of the biggest challenges isn’t the technology, it’s the people who are targeted to become usersand their willingness to use a fintech product. Many fintech founders fail thinking that individuals are keen to use fintech products as they are using communication/chatting or social apps, but this is not the case. Fintech products still do not have widespread adoption among different customer segments. Many people do not want to spend their spare time learning about banking products. Additionally most of them are comfortable in their routines — there’s no incentive to change. According to EY the customer adoption of fintech products is 33%, but the biggest portion belongs to payments and money transfer services (50% customer adoption) versus comparably low customer adoption in financial planning, insurance, borrowing (10–24% customer adoption). It is like e-commerce 5–10 years ago. Fintech startups can consider that the usage of fintech products will only rise as fintech awareness grows, consumer concerns fall and technology advances to reduce switching costs. But they should also take into consideration that they will need to put more efforts in customer awareness and customer activation than e-commerce or entertainment startups.
5. Being trapped by “financial institutions are our competitors”
Fintech firms aim to fix issues within the financial industry. Things like clunky customer service of banks , inefficient use of big data by financial institutions, and a lack of a sustainable model for customer engagement are now fair game for fintech disruption. But the “move fast and break things” paradigm doesn’t always work in a field that’s renowned for being bound in red tape. Many fintech founders think they need to compete with the financial institutions and call the financial institutions for a bout. Fintech startups bring agility and technological know-how to the table and they think it is enough to win the competition. But legacy financial institutions provide resources and regulatory acuity that has been honed over decades. This is where legacy financial institutions, with their years of experience and knowledge, can lend a hand to fintech founders. Fintech founders should consider that though they seem to be in market competition with legacy financial institutions. Fintech startups and financial institutions can actually work together and mutually benefit, and fintech startups should coprehend that “the new strategy should be partnership instead of competition”.
So if you have a great fintech idea or have moved one step ahead and built the product and maybe have some early traction that is fantastic, you can have a chance “to live another month” by avoiding these 5 mistakes unique to fintech startups.