What are the Reasons for the Failure of Fintech Startups?

CONTENT

Why Fintech Startups Fail? 12 reasons
1. Funding gap
2. Choosing the wrong VC (Venture capital? Investor)
3. Excessive compliance
4. Work like another tech startup
5. Considering costs as a factor to eliminate competition
6. Underestimation of competitors.
7. Skip understand your customers
8. Overloading of product offers.
9. Transition to innovation through technical functions
10. Insufficient clarity of the income model.
11. Excluding legal aspects
12. Random selection of a development partner.
Conclusion

Fintech is one of the hottest trends in the tech sector. The fintech market is projected to reach approximately $ 460 billion by 2025. Financial startups are driving this boom and digital transformation.

They launch innovative products and services using technological innovation. However, achieving success in this area is fraught with difficulties. While fintech startups start with the right investments and funding, there are higher business risks.

Most fintech startup owners think they are building their next million-dollar business. But they face challenges in scaling their businesses. They also run into problems when they force users to pay for their products.

Most fintech startups make mistakes in various areas that lead to their failure. What’s more, misconceptions about target customers, finance, and technology aren’t just problems in the fintech ecosystem. These startups even face challenges due to fierce competition and chosen revenue models.

Here’s how fintech startups fail and how to avoid it.

Why Fintech Startups Fail? 12 reasons

1. Funding gap

The total value of investments in fintech companies around the world soared between 2010 and 2019 when it reached $ 215.4 billion. However, in 2020, investments by fintech companies fell by more than a third, amounting to $ 121.5 billion. America was the region attracting the most investment in this sector, accounting for nearly 80 percent of the total. In the second quarter of 2021, the total value of investments in fintech worldwide was $ 47.3 billion.

Throughout its history, fintech has provided people with new opportunities to start investing. However, if you don’t have enough funds, your fintech startup is likely to fail.

Fintech startups need the right tools, the best talent, and other essential resources, and that’s all recurring costs. Thus, such startups need to have an upfront payment on ongoing investment..

Insufficient funding drives the fintech business out of control and leads to failure. With the start-up costs in mind, you also need to keep your business running until you have convincing proof of concept. And later on, you may have a steady stream of paying customers.

However, researching your products upfront is very important. You must develop a solid business plan and include all possible costs to ensure that you have enough funds to support your business.

It would be a good idea to choose minimum viable product (MVP) development (link to our article) to validate your business idea and concept.

An MVP will not only help you test your business concept, but it will also help you collect the first audience feedback before launch. As a result, you can avoid financial losses and continue to constantly raise funds.

Investors are an important part of launching a fintech startup. And getting enough funding from them will increase the chances of success with a return.

2. The wrong choice of VC

While funds are vital, those who give them to you also matter. The venture capitalists you partner with don’t just offer their money. However, they even add their brand and specialization to help your business. Choosing the wrong financial partner in the future can lead to significant mistakes.

It is always beneficial to choose a financially savvy investor. An investment partner from the same field will help you navigate the industry as their know-how is critical to the success of your business. In addition, funding from investors with no financial experience may soon stop your funding.

You need to interact with investors about their involvement in your business. You also need to clarify what category of reports they expect from you and what type of management the company prefers. Promoting these expectations in a timely and open manner will increase your business’s chances of success.

3. Excessive flexibility

It’s very important to follow the rules, but unnecessary submission or over-submission can lead to the quick death of your startup.

A robust grievance strategy is needed. Stakeholders, especially in the fintech industry, are talking about cyber laws and a host of other requirements. However, you don’t need them. Find the best ones based on the products you offer and the geography of your business.

Cyberspace laws cover legal informatics, e-commerce, and information security. Fintech companies are also subject to anti-money laundering regulations, financing regulations, and payment security.

Thus, it is important to carefully plan your regulatory compliance when launching your fintech startup. You need to plan your expenses and decide on matching options.

Excessive compliance should be avoided unnecessarily. However, you should be guided by the advice of a professional lawyer when starting in financial technology. Failure to do so may result in an accident.

4. Working like another tech startup

Not all startups are the same, especially fintech. Working models and promotion strategies are completely different from fintech startups. However, they are making a serious mistake by organizing their business operations like another tech startup.

Most of them lack understanding of the business model. And they are not competent to innovate their product offerings.

If fintech wants to thrive, it needs to limit the thinking of its audience. They need to figure out how they spend their money, what their investment fears are, and more. In addition, they require an understanding of issues from both sides, at the client and company level, as they both think differently.

You need unique marketing strategies when compared to other startups. As a startup founder, you cannot compromise on personality and do everything like any other startup. A deep understanding of your users and market is critical to getting things done right.

5. Considering costs as a factor to eliminate competition

You can think of lowering your product costs with the thought of eliminating competition. But when your regular customers find out about your regular discounting methods, the situation only gets worse over time. Especially when your regular product prices are discounted.

Also, since your previous discounts have lowered the cost of the product, what about your future profit margins and why will users pay extra later?

Thus, discounting leads to a bad example that diminishes your future business opportunities to increase profits. Hence, don’t compete over costs, especially if you’re a fintech startup.

6. Underestimating competitors

Many fintech startups are springing up, and they think that it cannot affect you, that you are making one of the biggest mistakes.

Here are ways to avoid underestimating your competitors

• You need to continue to develop your product and services for your customer base and investors so that your competitors cannot attract your customers.
• You must regularly update and update your product with technological innovations.
• Keep track of your competitors’ decision-making processes and business steps.
• Adopt more effective marketing strategies and try to implement new business tactics compared to competitors.
• Even if you’ve grown into a popular name in fintech, you need to keep a close eye on and track your competitors as you never know when something will change in this highly competitive space.

7. Skip understand your customers

It is imperative to understand how consumers approach their finances. If you cannot take advantage of this, you cannot succeed as a fintech startup.

By lagging too far behind suppliers and competitors, you may be missing out on an opportunity to understand your core customers and their needs.

Listening to customer feedback and transforming customer feedback into new product features is a huge challenge. However, this can lead to fruitful results, especially if you are a fintech startup.

You need to know how your audience in each segment is saving, investing, and managing their finances. For example, in anticipation of mobile banking apps, consumers in their 20s are curious about advanced financial tools. In contrast, those over 30 require a higher debit card reward. Meanwhile, consumers aged 40 and over are only interested in interest rates.

So, you need to find such ideas to understand your consumer base.

However, age is only one factor. Other characteristics such as educational level, gender, and financial standing, among others, need to be analyzed to understand your customers.

In addition, from a buyer’s perspective, the adoption and use of a fintech product require detailed understanding. Thus, if you don’t understand your customers, it will lead to certain setbacks.

People prefer what they know and their behavior can be tracked. Thus, promoting your users according to their behavior will lead to prosperity in the financial technology industry.

According to the study, people prefer digital payments to be the largest segment of the market, with an expected transaction value of $ 8,266,917 million in 2024.

8. Overloading of product offers

Since technology and innovation are the strengths of fintech, they assume that all customers want more. So, fintech startups are joining the race for new features, faster services, and more automated solutions.

However, they forget to consider and know what customers are asking for and overwhelm their product offerings.

Fintech startups should prioritize customer service quality. When moving to cutting-edge technology, it’s easy to overlook what consumers are looking for in your products.

Therefore, when optimizing and updating products, be sure to listen to your customer base.

9. Move to innovation through technical functions

New technical features like artificial intelligence (AI) and machine learning (ML) take the guesswork out of your financial decisions. Innovative learning apps further reduce unconscious savings and investment decisions.

With chatbots, you can cut down on staff costs. You can identify fraud and take action to eliminate it with features that allow you to analyze your payment history.

All of these technical features can help fintech startups innovate with technology. Skipping continuous innovation after the product is ready can lead to disruptions.

So, fintech startups need to optimize their products and services by introducing new features regularly.

To some extent, fintech companies have become leaders in usability and have provided consistent experiences across multiple channels.

10. Lack of clarity in the income model.

The income model of any startup is important to the success of its business. However, for the founder of fintech, this is very important. This is because clients have doubts about the revenue models of fintech startups. For example, consumers think when a startup asks for a higher price for a product that it will receive a share of the investor’s return.

However, gaining consumer trust is vital for fintech companies and is directly related to their revenue model.

According to Forbes, the most-funded startups to date are creating a cheaper version of the current financial product. And customers are already paying for that versus a new product with a different value proposition.

Startups with lower installation and distribution costs take advantage of the power of their networks. Thus, for these other scenarios, it is important to choose an accurate income model. And decide how you, a fintech startup, will make money shortly?

You must have a clear understanding of the sources of income, whether from customers or digital advertising. A business model that is simply based on creating new users without a monetization strategy can lead to failure.

11. Without taking into account legal aspects

Along with financial laws, fintech companies must comply with legal aspects to operate smoothly. This includes elements such as know your customer (KYC), anti-terrorist financing regulations, and consumer data protection, just to name a few.

However, many fintech owners do not do legal research well and do not increase the risk of product rejection.

Financial services are highly regulated and very detailed when it comes to legal space. Thus, it is important to consider the legal aspects when creating a business plan. This includes precise licensing and accompanying laws, especially for fintech startups building a software solution.

12. Random choice of development partner.

You need to choose your development partner wisely. You can hire a development partner with your team or an individual who can work as a member of your team.

You need to carefully check whether your development partner has the appropriate experience and knowledge in the selection process. If you choose newbies to develop your Fintech app, you may end up spending too much.

Your development partner must comply with all required regulatory requirements and have a good understanding of current cybersecurity needs. He must have a robust risk mitigation plan in place.

Are you looking for a dedicated financial technology development partner? If so, check out our fintech portfolio and jump in to discuss how we can help your fintech startup!

Conclusion

When you start a fintech startup, you may feel like it’s you and the world. However, to avoid disruptions, fintech startups in 2021 must engage in customer experience acquisition and support for customer support services.

More: Is Your MVP Ready? How to Approach Validating Your Startup Idea

No matter how advanced your product or service is, customer engagement is still critical, especially for the finance-related business sectors.

However, failures happen, as do business successes. So, learn from the successes and mistakes of other fintech startups and make sure you can apply accurate strategies.

At Unit Space, a leading financial technology app development company, we help emerging startups around the world. Start your development journey and launch a comprehensive fintech product in the App Store with us.