Fintech is a rapidly expanding segment, seeing some of the fastest expansion in Q1 2014 globally since the early 2000s. It is gradually revolutionising how businesses interact and consumer transact. However, fintech venture capital flows have remained relatively sobering while the segment has not seen the headline-grabbing start-up acquisitions witnessed in e-commerce, mobile messaging or social media. Clearly, fintech businesses face greater challenges than other technology ventures, and here is why.
Trust takes time
Unlike with social media or gaming, trust becomes a major sticking point in fintech services. Financial trading platforms, settlement systems and low latency financial messaging architecture, for example, all require additional layers of privacy and security. Both consumers and businesses want a mature fintech product, rather than one that could experiment with their money. A business-to-business sales partnership model between a start-up and a traditional financial organisation is made difficult by strict regulations, while innovative products take time to be cleared by traditional finance. Unlike a mobile messaging platform, fintech services cannot afford security breaches, making the room for error much narrower.
A highly regulatory environment
Finance is one of the most regulated industries worldwide, with different economies often implementing contrasting measures. A fintech payment system could have an open road for growth in one country but be completely shut off from mass markets in another. A new product has to be tailored individually to each market and cannot expect the rapid growth in users that a mobile messaging app might see. In the USA, for example, fintech firms have to comply with regulation at the federal level as well as the state level, with every state rolling out its own regulations. Scaling up to different markets is therefore expensive and complex. Unlike traditional banking structures, fintech entrepreneurs rarely have developed relationships with regulators.
Limited add-on opportunities and difficult data collection
Unlike in social media or other end-user focused industries, the financial market offers little opportunities to leverage network effects by expanding virally. Consumers are highly unlikely to share financial information and businesses are keen to keep their internal fiscals private, which eliminates add-on value operations such as analytics or market statistics that could be sold to corporates. Similarly, collecting financial data for market expansion or consumer targeting is difficult and time-consuming, not the same as a digital TV start-up looking to analyse viewer figures, for example. Fintech companies therefore usually have a core product range that cannot be overly expansive or easily transfer to other areas. There is a natural limit to product innovation.
Nonetheless, despite the various obstacles, fintech opportunists can see significant returns if they manage to overcome the challenges. The financial segment is highly lucrative and is the glue that ties the global economy together, meaning the potential for revenues is huge.
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