Tech versus finance - three things that influence how a fintech startup pivots
We often talk about Fintech as a stand-alone sector in the sea of startups… but in reality it’s straddling two different industries with completely different cultures. So what about those cultures might influence how a startup develops?
Infrastructure – how disruptive do you want to be?
Some concepts are so disruptive that they need to develop quickly, be tested to destruction and potentially fall by the wayside. So long as the startup can build a sandbox big enough to test the idea, they might be operating more like a tech startup to begin with. Others rely so heavily on existing infrastructure and regulatory knowledge that they will have to align themselves with the finance industry from the outset. The key is to know when the business has reached a point where it needs to seek advice on navigating regulations, for example, many technology innovators in payment services will have at best a passing understanding of how their interaction with funds might be viewed by a regulator. When the technology has been shown to work, they need to look seriously at whether they will need regulatory permissions or whether they need to partner with existing businesses that already have them.
Customers – is this a product that can rely on innovative marketing or does it need cooperation from finance industry incumbents?
Some fintech products are aimed at untapped consumer markets, where they’re offering a non-traditional financial product to a new customer base. In other cases the product will struggle to grow without selling their concept to the finance industry itself, acting as a more efficient glue between organisations already used to trading with each other. In the first instance, it’ll all be about jumping through regulatory hurdles and getting to market fast enough to grab a share before too many of the competition are off the ground, for example, the early stored value payment systems such as PayPal. In the second example it might be more about developing strategic partnerships with early customers, without exposing too much unprotected intellectual property to the finance goliaths. For example, Stripe and Adyen have grown very large through packaging existing services in ways that appeal to users.
Funding – are investors expecting extreme growth or to sell the business to get their payout?
Sometimes, when investors expect a startup to make it to that very small circle of businesses that are synonymous with the product that they are offering, they might be investing in fast paced growth – companies they hope are destined for an IPO. That’s a really small number of businesses, the likes of Uber, Amazon and Google. Some examples from the fintech industry might be Stripe and Monzo. In contrast, many businesses are being nurtured for sale, with investors looking for potential purchasers from the outset. In these cases, startups need to be far more proactive in developing processes and robust products that will stand up to the tests of any larger organisation hoping to acquire them, organisations that are heavily regulated. For example, Worldpay was a small start up when it was purchased by The Royal Bank of Scotland PLC in 2002, and RBS was able to bring its regulatory might to bear on a business rich in technology but light on regulator authorisations.
These simple differences will have a big influence in how a fintech startup positions itself to both customers and through funding rounds. In many cases, support navigating regulations; protecting intellectual property; and understanding which processes to develop and document for compliance can make all the difference.