How to Start a Fintech Company
According to a PwC report, 88 percent of major, well-established financial institutions (incumbents) believe that a portion of their business is at risk from fintech startups. For a long time, incumbents appeared to be immune to upstart competition; they had long-term clients and processes in place to meet continuously changing and onerous rules.
So, what constitutes a FinTech start-up? And how did they manage to pique the interest of the powerful incumbents?
FinTech companies leverage modern technologies to improve financial service delivery. They’re shaking up the financial services industry by solving previously unmet consumer needs in areas like as insurance, cryptocurrency, payments, lending, investing, and risk management.
The FinTech environment is vast, but by understanding general patterns and learning from those who have gone before you, the path to success becomes much clearer.
How financial technology is disrupting industries
Several industries are being disrupted by financial technology in various ways, but there are certain similar characteristics.
Lemonade achieved a new world record in early 2017 when its artificial intelligence (AI)-powered system processed and resolved a theft claim in three seconds with no documentation. The obvious conclusion is that artificial intelligence reduces the demand for human resources. However, the achievement highlights FinTechs’ customer-centric strategy to disrupting their industries. Instead of waiting days, if not weeks, for the claim to be resolved, the customer’s problem was resolved in seconds.
The world record set by Lemonade is just one illustration of how financial technology is enabling previously inconceivable feats. And it isn’t limited to the insurance business.
Another illustration of what’s possible is Zac Prince’s bitcoin firm. Many users were dissatisfied by their inability to earn safe and secure interest on their Bitcoin and other money. BlockFi, founded by Prince in 2017, allows consumers to earn up to 8.6 percent annual percentage yield on their cryptocurrencies.
BlockFi has thrived because it:
- Addresses a demand that was previously thought to be too little for the large companies to handle.
- Developed a customizable solution that would appeal to a wide range of crypto enthusiasts.
- Is concerned about cybersecurity.
Above all, BlockFi became intimately acquainted with its target market and developed a user-friendly solution.
Around half of millennials prefer to pay for little purchases with their phone rather than cash. For several reasons, mobile payments have been widely accepted, including:
- Tap-and-pay transactions are faster than typical credit card transactions. People are busy than ever – or at least it appears to be – so even a few more seconds can make a huge difference in their minds.
- More convenience: Nobody wants to lug about a big wallet stuffed with credit cards and loyalty cards. Consumers have fewer items to tote about when they go mobile.
- Better security: Using a mobile wallet instead of a plastic credit card is actually safer. Merchants rarely validate that you’re the legitimate owner of a plastic credit card, whereas mobile payments have multilayered authentication.
The shift to mobile is not limited to the financial services industry; people have been abandoning physical devices in favor of mobile in other industries. With its electronic agreement enabling software, DocuSign, for example, has eliminated the need to sign physical contracts.
Trends in financial services have their origins in other industries. The sharing economy began with taxis and hotels and has since expanded to include loans. Previously, banks served as mediators between capital providers and users; if someone couldn’t find suitable terms, they were often out of luck. Peer-to-peer (P2P) lending services have sprung up to allow people to borrow money from other people, democratizing capital acquisition.
Robinhood is a startup that has achieved success by democratizing the stock market. Prior to the introduction of the FinTech app in 2013, many young people believed they lacked the financial means to invest in the market. Robinhood made investing more accessible by eliminating account minimums and trading fees. Established brokers like E-Trade and Charles Schwab were caught off guard by its tactics.
However, the numerous FinTech developments have potential implications, with increased risk being one of them. According to Deloitte, we are seeing “new characteristics of risk that may not have existed in the recent past,” and startups will always need to assess and mitigate these risks.
Many of the top FinTechs share the four things in common:
- An outstanding user experience is the consequence of a customer-centric approach.
- Convenience and quickness without sacrificing security – and in many cases, security is enhanced.
- Observing what’s going on in other industries, including those not related to finance, and applying what they learn to their own.
- Democratizing something that was previously only available to a privileged few.
FinTech startup tips for success
So you surveyed the landscape and came up with an idea for the next big FinTech startup, but now you’re wondering: How do I bring it to life? Here’s some of the tips from Andrew Ward, the CEO of SelfWealth.
#1 Know your motivation and back yourself
Ward is blunt on what it takes to grow a startup into a profitable business with employees. “Nothing you learn in books will ever prepare you for what you’re about to embark on, no matter how difficult you think it may be,” he says, “from both a personal and professional experience.”
It could take years before you produce enough revenue to make your business self-sustaining. You’ll need to persuade venture capitalists that your business will succeed since they’ll be the ones to keep the lights on until it does. Ward points out that folks around you “will assume you’re wrecking your life,” which isn’t entirely unfounded; after all, nine out of ten businesses fail.
How do you get past this? You’ll have to “believe it’s going to work, even if people think you’re crazy,” Ward says, because you’ll be competing against incumbents who have significant resources and experience. However, if you sincerely believe your idea can revolutionize your industry, you will find the will to see it through.
#2 Test and learn
“[Your product] is never flawless when you initially launch it… No one’s ever done it,” Ward warns. With that in mind, you should test your product frequently and learn from your findings.
Seek comments from strangers rather than family and friends. Strangers are more inclined to say exactly what they think since they are unconcerned with your sentiments. According to Ward, you should actively seek out critical feedback. “Tell me why you don’t think it’ll work instead of why you like it.”
The best thing that can happen to your startup is harsh feedback, providing it is genuine. The earlier you start, the better. That’s because the longer you stay on a coding route, the more difficult it is to change your mind. Furthermore, you don’t want to wait years to master something that could have been learnt in months. At the very least, it will take you longer. In the worst-case scenario, you’ll blow up before you get there.
#3 There’s always a boss in FinTech
According to a survey conducted by Guidant Financial and Lending Club, 37 percent of ambitious entrepreneurs describe the desire to “be their own boss” as a driving force behind their ambitions. But, at least in the FinTech industry, this is not the case. “There’s always a boss,” Ward says succinctly.
You report to the chairman and the board of directors if you’re the CEO. You have shareholders that have caused a lot of anxiety for Ward. If you’re collecting money from strangers, friends, or relatives, you want to treat them well and prove chevalier. You certainly don’t want to waste their hard-earned cash.
As the founder and CEO, you are ultimately responsible. There’s no one else to blame except yourself if your product isn’t being used. If you’re a mid-level employee at a typical company, however, this isn’t the case; you don’t endure the full brunt of product failures because you lack unilateral decision-making authority.
#4 Keep the dream alive
In the midst of adversity, it’s important to recall why you started down this path in the first place. Ward attributes his success to his passion and drive to share his concept. “The money is fantastic, but the most important thing for me was to be recognized for my creativity.”
However, because the day when you have the money and recognition may take years, you must find ways to keep the dream alive in the meantime. Investors will become frustrated as they question why it is taking so long. At the same time, you’ll need to maintain paying your employees and reassuring them that you’re on the right track. Remember that by working for your startup rather than a well-established company, your employees are also sacrificing stability.
“You can’t have a gloomy day,” Ward argues, because you need to reassure your investors and employees that everything will be fine. “You need to be that consistent source of hope at the top,” Ward adds.
#5 Have a plan G
It should be obvious by now that starting a business is never a smooth process; many things will go wrong. Ward recommends having a “Plan G” so that you know what to do next if (when) Plan A, B, C, and so on fail. “You can’t be one of those people, that you all know, whether it’s friends and family, who just won’t change their minds,” he continues.
The trick is to be flexible and pivot as needed. Once every few years, you might make a major shift. Smaller pivots, on the other hand, will be made significantly more frequently. Ward claims that you’ll be “reshaping your opinion on a daily basis,” and that you’ll appreciate your thinking time more than ever before since “99 percent of it happens in the mind.”
Article source: UNSW Sydney