Congratulations! The moment has come when you decided to develop a unique, revolutionary financial software product that will disrupt people’s ideas about financial management and become a new milestone in industry history. Hundreds, thousands, millions of people will thank you for solving their pressing problems. But how to do it right?
Fintech is one of the hottest trends in today’s technology area. It seems that wherever you go, there is a new startup trying to get you to open a digital account or use an application to pay for goods and services. These companies are catching the wave of the digital revolution and trying to revolutionize the way we think, manage, and feel about our money. And that’s exactly how it should be!
The pace of change in the banking industry has been relatively slow compared to other sectors that have already been affected by the digital revolution. What many perceived as an outdated system, rife with bureaucracy, is now ripe for change as customer preferences and expectations change. However, achieving success in this field is not an easy task. Even if a fintech-startup starts with good financing and its development was on highly-qualified specialists, the risks are high. But they did not scare away motivated startupers either. If we look at the financial technology market as a whole, in 2019 the U.S. broke the record for investing in fintech, reaching 59.8 billion dollars (compared to 58 billion dollars a year earlier). So, if everything is so rosy, why do financial startups tend to fail more often than others?
There are pain points that are standard for all startups: the problems of financing, competition, customer behavior, expectations, and so on. However, fintech still has additional difficulties with law enforcement, understanding of the financial sector, and digital boundaries. These factors have led to the situation when even the most promising startups from the fintech industry blow like a balloon. And so that your startup doesn’t become part of the sad statistics, we wrote this article. Let’s look at the 4 mistakes that are specific to fintech startups and learn how to avoid them.
1. Failing to gain trust of your target audience
Fintech marketing faces a unique set of problems that simply do not apply (or at least not to the same extent) to most other industries. The problem is that the fintech sector is still relatively young (same as most innovative technologies) and confronts perhaps the most mature, well-established, wealthy, and influential industry in the world – mainstream banking. In many countries, people prefer traditional financial institutions. But it would seem that we are going through the 4th industrial revolution, each IoT-dishwasher bugles about the benefits of digitization. So why are people so biased towards fintech products? The answer is quite simple, it’s all about trust, and if to simplify even more, it’s about money.
Confidence-building is important for any young business, especially for those who work in the financial sector. To convince new audiences to trust your new, unfamiliar concept and give you their hard-earned money, you need a strong marketing strategy based on customer education and trust-building.
Creating educational content on industry trends and issues is crucial, especially at the introduction stage, to provide relevant information about your product or service. It’s amazing how many B2B fintech startups are missing out on this. According to the Lavidge U.S. Technology Marketing Report, the focus should be on the following important segments of product information:
- Reliability (68%)
- Ease of use (64%)
- Cost (49%)
- Easy integration (43%)
Moreover, a successful marketing strategy for a B2B fintech startup should go beyond the product specifications. For these people, the speed of application loading (although it is also important) is not as critical as the business value the product will bring them. It is important to find a way to effectively use this information in marketing materials and campaigns at appropriate stages.
The bottom line is that each B2B fintech customer group will have unique needs that your marketing team will have to meet. This means that B2B-oriented fintech marketing teams need to work on identifying the right decision-makers among their target audience. Marketing agencies that work with fintech clients tend to believe that the key goals in promoting such brands are as follows:
- To gain trust and credibility (key objective for any new financial services brand)
- Train the market as quickly and cost-effectively as possible
- Make people talk about your fintech brand
- Establish a customer acquisition process that will lead to increased sales and revenue.
2. Ignoring legal aspects
Go to any news site and open the “Cyber Security” section, or something like that. What do you see? We bet more than half of the news is about user data leaks. And behind each headline are huge reputational and financial losses, as well as a precedent that is pushing regulators to tighten legislation in this industry. In addition to financial laws, fintech-startups must always comply with the “rules of the game” in the market they want to work in. This includes everything related to anti-money laundering, “know your customer” (KYC), and anti-terrorism financing (AML/CLF), as well as consumer data protection. Many founders of fintech-startups fail to do in-depth research on rules and do not develop rulebooks which they will follow. This entails an increased risk of misrepresentation of the product and may even lead to the impossibility of launching it on the market.
Privacy and the protection of personal information is a truly huge challenge nowadays, with the advent of new laws around the world. Even large financial institutions find it difficult to keep up with the new requirements. For companies intending to operate in the U.S. and Western Europe, the following laws or regulations concerning consumer privacy, data security, and financial services are important (this is not a complete list, but just to give an impression about key acts and regulators):
- Federal Trade Commission (FTC) – the FTC has broad powers to take enforcement action to protect consumers from unfair or fraudulent practices and has developed a kind of “common law” in relation to regulatory expectations.
- Consumer Financial Protection Bureau – also regulates certain financial services provided to consumers at the federal level. CFPB has issued an act with a number of measures aimed at promoting innovation in the field of fintech, but this policy remains unverified and there is a key unresolved question as to whether federal regulations can anticipate state laws or regulations governing the same subject.
- European Union GDPR rules – Europe applies strict data protection laws to companies that may collect or process data from EU residents. The GDPR rules have global reach because they regulate the activities of any international company that collects or processes EU residents’ data.
- Telephone Consumer Protection Act – it implies restrictions on telemarketing.
- State data breach notification laws – all 50 states in the US require customers to be notified of personal data security violations; many states also set minimum “reasonable” standards for consumer data protection.
- CAN-SPAM laws – restrictions on email marketing.
- Developing federal and state laws – for example, the California Consumer Privacy Act 2018, which imports for California residents GDPR-style EU rights related to data ownership, transparency, and control.
- The Gramm-Leach-Bliley Act – sets out confidentiality and security obligations for insurance companies, banks, and other financial institutions covered by the law with respect to customer financial reporting.
- Cyber Security regulations – specific security requirements, including technical controls and reporting obligations for licensed organizations. The requirements are aimed at ensuring the security of systems underlying the financial sector, not just data.
- Anti-money laundering laws – companies that process, send, or transfer money may be required to comply with laws designed to prevent money laundering and other illegal activities.
- Separate countries’ specific laws – many countries around the world have their own requirements. Some of these laws require the transactions to be processed and information be stored within the country.
The financial services industry is heavily regulated and some sectors (such as deposits, investments, money transfers, etc.) are even ultra-specialized when it comes to the legal world. These include legislation on securities in the capital markets, laws on the protection of borrowers, laws on privacy when applied to personal data, and much more. It is critical to cover legal aspects when developing a business plan, including thinking about proper licensing, as well as related laws and requirements, particularly for companies developing high-tech software.
3. Ignoring the problems of customer acceptance
In fintech, usually one of the biggest problems is not technology, but the target audience and its willingness to use the product. Many founders of the fintech startups may think that people want to use fintech products in the same way as they use communication applications or social networks, but this is not the case.
Fintech products are still not widely distributed among different customer segments. Many people don’t want to spend their free time exploring banking products. In addition, most of them feel comfortable with what they already have – they have no incentive to change their way of life. According to the data of the EY consulting company, the share of clients who use financial products is 64% on average, which at first glance is quite good, because it is more than half, but in general, if compared to the same social networks, the industry has a lot to grow. Moreover, pay attention to countries have the highest percentage of fintech services acceptance.
This is similar to e-commerce 5-10 years ago. Startups in the field of financial technologies may believe that the use of their products will only grow as awareness of financial technologies grows, consumer concerns are reduced and technologies aimed at decreasing switching costs are developed. But they should also consider that they will need to do more to raise awareness and activate customers. This requires a product that is truly unique, that offers something new, that solves immediate problems. It is unlikely that this can be done with the help of template solutions, however, with the custom software it is quite feasible.
4. Startup is not adapted for different markets
A good idea will come in handy everywhere, and it’s the investor who must think of why they needs your solution. Doesn’t it? It doesn’t. If you launch a new Instagram, it will probably be equally suitable for both Europeans and Americans. But in the fintech area, universal ideas work much less often. Markets in different countries are very different. Legislation, regulatory requirements, and even the needs of ordinary customers are different in each country.
Experience of using even such a simple product, as a debit card, will be different in Japan and Hungary. In Budapest, you can pay with Android Pay or Apple Pay in any nearby store, while in Tokyo it might become a problem.
The way out of this situation may be the partnerships with local banks, which are already established in the market and know all its specifics. Fintech firms are trying to solve problems in the financial industry. Things like clumsy customer service at banks, inefficient use of large data by financial institutions, and the lack of a sustainable customer interaction model are often used as pain points to entice clients. But the “move fast and break the mold” paradigm doesn’t always work in an area known for its bureaucracy.
Many founders of fintech startups think they need to compete with financial institutions and call on them to fight. Fintech-startups bring flexibility and technological know-how, and they think that’s enough to win the competition. But financial institutions provide the resources and precision of regulation that has been honed over decades. This is where traditional financial institutions, with their years of experience and expertise, can help the founders of financial startups. Fintech startup founders should take this into account, although they seem to be in market competition with traditional financial institutions. Fintech startups and financial institutions can really work together and benefit from each other. Startups should understand that the new strategy should be a partnership, not competition.
When you start a business, you may feel like you are alone against the whole world, and in many ways this is true. This feeling can be even more tremendous when you launch a startup. But there is a way to get rid of it. Understand what you’re facing, find out the typical mistakes, and avoid them. Dig up information, do research, and failure should be the last thing you think about. If you have carefully studied your target audience, if you have foreseen all the legal delays, and the technical part is done by reliable specialists – success is inevitable.