Magazine article American Banker

Ten Reasons Why Fintech Startups Fail

Magazine article American Banker

Ten Reasons Why Fintech Startups Fail

Article excerpt

Byline: Pascal Bouvier

You have a great fintech business plan. So you assemble your team and create your startup. Here are ten common mistakes you should avoid if you want to have a chance to live another day.

Ignoring the licensing process

You think you are a tech company. You think you are only building software. But if you are focusing on a business-to-consumer model, chances are you may require some type of license. At the very least, you may need to talk to your local regulator. Many startups have tripped up by forgetting that the financial services industry is heavily regulated. Make sure you understand the regulatory laws and licensing requirements. Do not be shy. Ask a law firm specialized in regulatory work. Heck, upfront homework may actually save you time and money later on and may help you make your business plan smarter.

Weighing the drawbacks of taking bank capital

You have decided to raise money from a bank or an insurance company. Financial services incumbents are regulated entities. They have to abide by very tight rules. If you are raising money from a financial services incumbent, do your homework and ask if regulatory approval is needed and plan accordingly. Prior to closing an investment from an incumbent, ask what type of reporting they will need, what type of governance, and what type of ongoing information they will require. They work under different rules. Be aware of the cultural differences and fine tune how you interact with your future shareholder.

Disregarding compliance as a pesky annoyance

If you are late hiring a compliance officer and/or late to developing a compliance rule book that you abide and operate by, you may end up dead meat. Be smart, realize compliance can be your friend -- this includes anything that has to do with anti-money laundering and know-your-customer rules.

Not choosing a venture capitalist with fintech experience

If there is one industry where experience matters, it is the financial services industry. Venture capitalists with an understanding of the industry are invaluable. Shun them at your peril.

Assuming that fintech disruptors are like other startups

Money is a weird concept. Individuals care about their money, yet at the same time they are less engaged with their finances as they are with their social networks, friends or the passionate causes they care about. Incumbents care very much about money and are risk averse, whether the risk affects them or their clients. Regulators care about individuals' money and the health of the enterprises they regulate. In other words: if you think the laws of scaling a business apply in exactly the same way in any given tech industry as they do in fintech, think again. Understand psychological behaviors around money, credit, savings, payments, both at retail and institutional levels, and you will be better off.

Most that fail to study these cautious behaviors end up feeling surprised by how slowly they gain traction either because growing a retail customer base is much more expensive than they originally thought or because selling to incumbents takes much longer than they thought. …

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