7 Challenges Facing Fintech Startups in 2020
Financial technology companies are growing dramatically throughout the globe. The investments in Fintech globally have increased to one hundred Billion Dollars, supported by many mergers, acquisitions and large companies financing. The trend of fintech startup is expected to grow in the following years as well.
Fintech startups provide the best and novel solutions for the general public and businesses through the use of innovative technology. Such startups with huge investments are showing great potential and are attracting a lot of customer base. Some of those startups have grown into big giants and their market valuation is in billions of dollars. For example, Stripe is a FinTech startup that allows individuals and businesses to make prompt payment with the help of internet. It was started with 18 million dollar investment and now it is valued at 35 billion dollars in the market.
These fintech startups faced a number of challenges in their initial stages from government regulations to raising investment to competition issues. This article would include seven biggest challenges that are facing FinTech startups in this year of 2020.
1. Source of Funds
- Fintech companies are facing the greatest challenge to increase funds or attract venture capitalist for their innovative ideas. Until 2016, Fintech companies were enjoying the availability of funds especially from banks that were trying to collaborate with fintech firm startups. But after 2016, all financial institutions are trying to intiate their own fintech branch and operations and reduce their dependence on outside fintech firms.
- As far as attracting the venture capitalist is concerned, they go through the fintech startup idea in detail and would only invest if they are really assured of the success of idea. They will search the answers for diverse questions such as, what kind of financial problem the idea is solving, does the management team look qualified, what is the market opportunity, what level of passion and determination the founders have, and what is the potential market or regulation risks are etc.
- Without the funds and capital, the fintech startup cannot assure the success of their business. Without funds, they would be unable to focus on innovative products and ideas and incorporate innovative and expensive technologies in their operations. Moreover, they would be unable to focus on marketing their products that is the essential element for the fintech startups because they need to spread awareness what problem their product or service actually resolve.
2. Laws and Regulations
- The fintech landscape is quite different from the traditional banking or other financial institutions. Different laws and regulations can be applied to their operations and sometimes, fintech startups are unaware of what regulations or governing bodies they have to follow. Moreover, the permission or license in case of oblivion can result in huge losses and hefty fines.
- With the passage of time, the fintech space is facing increasing pressure to be regulated by the government. So the governments are trying to form regulations to address the current concerns of the masses and businesses.
- So for fintech startups, it is really important to hire a capable person or team that would understand and study all the regulations and laws concerning for your product, can make sure the compliance to the regulatory bodies and who can analyze the impact of certain law on your product or service or the way it can shape your product market. This is such a big challenge for fintech startups that some countries have make sandboxes that help and guide the new fintech firms with the laws and regulations.
3. Fierce Competition
- Fintech startups not only have to compete with the current giants in fintech such as Paypal, Citi and Goldman Sachs in 2020 but also have to face the competition with the new entrants in the financial domain with established name such as Amazon. New entrants like that have abundance of resources and funds that they can use in operations and marketing of their product.
- To get the best out of such fierce competition, the fintech firms needs to differentiate their products and services from other and target that market that is untapped by the other competitors or that customer segment that is dissatisfied with the current service. Moreover, the changing trends must be watched closely by the new startups to remain relevant and to get competitive advantage on the competitors.
4. Earning Profit early
- Earning profit in the earlier stages of life is really important for the fintech startups for their growth and organizational health. For earning profit earlier, fintech firm need to attract early adopters. The cycle of sale is long when the firm is selling B2B; can take one year or more but for B2C transaction, the sale cycle is really short. It is really recommended for the fintech startups to establish a sale pipeline so that the concerned department such as marketing and production team can see the trend and try to fulfill or increase the demand.
- Without the early profit, business would be unable to bear fruit for the longer period of time. Moreover, venture capitalist or funds providers analyse the performance of startups in initial stages to see whether to continue funding the project or not. So, it is really a challenge to attract customers in early stages. .
5. Data Privacy and Cyber-security
- For fintech companies, data security is really important because they delas with financial data of the masses or the businesses. Fintech firms have access to personal and confidential informations such as credit card numbers, income, net worth, social security number etc. so the need to have higher level of data protection.
- In past few years, hackers have become really advance and sophisticated with their attempts to access fintech firms’ data. Their new methods are unable to be detected and defended by the firms.
- If the company became unable to detect the data breach or cyber-security threat, the company can face huge losses in the form of negative reputation, legal fines and potential liabilities due to lawsuits etc. there are many companies that have faced the lawsuits due to data breach such as FaceBook, Uber and Google+.
6. Marketing Expenses
- Spreading awareness to the customers through marketing is really important for the fintech startups. But the cost of marketing is really huge to bear with the innovative expensive technology and operations to perform. There is a plethora of books and research that tells the business firms and companies on how to attract customers with marketing efforts. But fintech startups need to find ways that cost them cheap and those efforts that can actually produce results. .
- Some of the best way of marketing is using search engine ads, using companies website effectively, make social media platform, update content regularly and provide information regarding your business’ products and services to the customers easily and promptly. Nowadays, press releases, affiliate programs and influencer marketing, YouTube and direct e-mailing are getting the trend in the marketing platform.
7. Building Trust
- Fintech companies would face the challenge to build the trust among the customers. People are suspicious and dubious with the technology and they became more suspicious with the disruptive technology used by fintech firms. It became really difficult for the fintech firms to erase their potential customers’ suspicions and build trust. Firm not only have to build trust among their customers but they also have to proclaim that their product is important for them to solve their problem.
- It is suggested for the fintech startups to establish trust among their customers with the help of 3 c’s i.e. credibility, collaboration, and customer experience. Collaboration is important for fintech firms to build trust. It can be in the form of hosting some events. Create communities or directly interact with the users to gain their trust. Partnering with the similar small business and firms can also benefit the fintech firm to establish the required network and spread positive word of mouth.
- The next thing is increase credibility for the fintech firm. Credibility can be increased through online communication that is easy, quick, clear and authentic. The main purpose of this task is to build positive and over-lasting experience. The key in such sort of communication is to be transparent and honest. The more you are honest with them, the more they will feel connected with your brand.
- The next c is creating perfect customer experience. Disrupting the technology is a big thing and one of the major hurdles is to establish trust with the help of the communication even without face to face communication with the customers. Their communication must be precise without erasing the important information and honest yet not superficial to attract customers.
- Moreover, ensure the human element in consumer interaction and not just rely on chatbots etc. the best example is to engage real people in the customer service and spread the customer interaction number where customers can call when they want to get information for your product and services.