Scaling up today's fintech business: Obstacles and Opportunities
Over the past few years, the UK has become a hub of FinTech activity, producing some of the most well-known and successful fintech companies in the world. Just last year, the UK fintech sector attracted $48bn in investment, or 83% of all European FinTech funding, and generated over £20 billion in annual revenues.
From mobile banking to insure-tech, robo-advisers to online payment platforms, an endless parade of FinTech start-ups have been reimagining every nook and cranny of the financial services sector.
But hidden behind all of the fanfare, only a chosen few FinTech companies ever enter the scale-up mode. Building long-term relevance and sustainability has proven to be a challenge. Besides having to work through all of the issues that any start-up faces, FinTech companies are simultaneously operating in a highly regulated industry dominated by large, established and resource-rich incumbents.
Banks, insurance companies and brokerage houses just aren't going to disappear, no matter how much disruption comes their way.
The significance of this last point is tremendous. The biggest challenge facing FinTech's today is navigating the revolution within the traditional financial services sector that the FinTech industry has itself started.
Incumbents are Jumping on the FinTech Train
In the early days of the FinTech sector following the 2008 global recession, a start-up could come along and bring a single product or service to market that offered consumers a significantly better value or experience than the traditional version. They could compete with the incumbents by throwing all of their resources behind their niche offering.
But traditional financial institutions offer multiple financial products and services and the vast majority of users today prefer it that way.
The world has changed dramatically over the last few years, and perhaps even more so over the past few months. Traditional financial institutions are facing a lot of pressure to create a positive digital experience and meet shifting consumer expectations. It means they need to develop somehow the same agile, customer-centric approach that small FinTech's have. The most cost-effective way to do this is by partnering with the very companies that have been taking away their market share.
Today's FinTech’s Need a Shift in Strategy
To survive and thrive, FinTech’s thus have to think less like a disruptor and more like an established player in the industry. They have a lot to gain by partnering up with incumbents instead of competing with them head-on.
New FinTech companies often need the scale and reach of the large incumbents to break into the mainstream market and get into the scale-up mode.
But, how can a fintech ready itself for such a move? Though transforming from a competitor to a partner creates a lot of opportunities, niche FinTech companies will also face a new range of challenges and obstacles along the way. To overcome these roadblocks, a FinTech company will need to have several things in place:
Have clarity and focus on core strengths. As the FinTech industry grows and evolves, smaller players will need to understand where their key strengths and weaknesses lie. They then need to focus the majority of their resources to developing their core skill set, while outsourcing the functions that can be better performed by third parties.
Be prepared for potential obstacles. Collaboration with a large financial services institution comes with a whole set of challenges. There may be striking differences between the systems and culture of a start-up to that of an established player. Aspiring FinTech start-ups thus need to target the companies that share their vision and are in the position to improve their products or services while connecting them to an expanded consumer network.
Build infrastructure for today and tomorrow. Today's FinTech’s are valued based on the size and scope of their network. It means it is vitally important that the company develop a platform and a business model that is designed and built for future integration with other platforms, partners, mobile apps. Compatibility issues will quickly alienate the user base of even the most promising platform.
Keep an eye on regulations. Given that the financial services industry is defined by the regulatory environment it operates in, today's FinTech's need to figure out how to adapt quickly to any changes. Legislations, such as the fourth money-laundering directive (MLD4), the second payment services directive (PSD2), and even the General Data Protection Regulation (GDPR), are proof that quick, responsive compliance needs to be a priority that is baked into a FinTech's business model from day one.
In short, there has never been so much opportunity for a FinTech start-up to scale-up and achieve a high level of success. Nevertheless, the potential pitfalls are many, and the chance of failure is a real risk. To bridge the gap, new FinTech companies need to keep their eyes trained to shifting industry trends and know who they should be partnering up with to help them get to the next level and beyond.
