Secret of Building a Successful FinTech Startup in 2016 [Part 1]

This is a Christmas gift to you, our readers. To all you lovely people, Merry Christmas and happy holidays!

With the intention of helping the FinTech industry, especially startups, we cover amazing opportunities as they present themselves. Continuing the work, the LTP team has put together a list of the listicles that talks about the steps entrepreneurs should take to succeed in their journey as FinTech startup founders. In this two-part article, we will cover some amazing topics, so don't miss the second part tomorrow.

Part 1

  • Challenges to take into account
  • Understanding the industry trends
  • Choosing the right segment
  • Understanding the competition
  • The right accelerators to join for boosting the chances

Part 2

  • How to get funded
  • How to comply with regulations without a lawyer
  • Insurance
  • Operational efficiency with the right APIs
  • Leaders to watch

Before you start, understand the challenges

Do not overestimate customer adoption rates. While busy developing a perfect product, startups usually forget the end-user, which leads to a hard time acquiring customers/users when the product is launched. A very common case is when startups at the end spend more time and resources educating the target audience that this particular product will solve a pain. Instead, startups should be developing a product for it not to be just perfect, but perfect for the customer to solve his/her particular problem. The research stage is time and resource-consuming, but extremely crucial for a successful adoption.

Think big. While a product may be doing great at a certain area, there is no guarantee that it will work the same in other locations. With limited resources and networks, startups usually focus their product on solving local problems. Only a minority is looking into scaling the business to a global level from the beginning. Have a plan in place that makes your company scalable across continents.

Follow smart money. As many startups are either self-funded and/or supported by family & friends, there is a clear gap of smart early-stage money. Looking across ecosystems, angels and early-stage investors with a finance background are scarce. Most startups lack the seed support from experts from the industry that push them to the next level and also help them to overcome the mentioned challenges.

Have a marketing/go-to-market plan. Having a great technology simply isn’t enough; a good marketing strategy is crucial to driving the business forward. Founders get stuck on their product and forget to be open-minded about their business development. Sales will happen if marketing is doing its job.

Study the regulatory side. Depending on the market, it can obviously be challenging to reach out to the right people in banks and regulators. However, startups have to get in touch as early as possible to seek feedback, especially from regulators and see how they can push the regulatory framework. Additionally, there is no point in disrupting the banks, rather than figuring out how you can leverage the bank as partner/customer.

Founders will face a variety of other problems apart from the ones we have mentioned. For example, setting focus, KYC, long sales cycles, etc. Challenges may also be specific to the industry and location. However, the talent and complementary skill sets of founders can make the magic.

Understand the industry trends

Trend 1: Shift from business model innovation to technology innovation

In recent years, the financial services market has seen a major disruption wave coming from the FinTech sector. Surprisingly, innovations were brought not by payments experts, but by technology experts and people passionate to utilize technology for a better experience. Innovation is coming from techies rather than business professionals. Companies like Venmo, Square, Stripe, Braintree and many others, without a doubt, have had a great impact on the industries they are operating in. Those disruptors came from a tech background. Nowadays, there is no necessity to be a payments expert to become an innovator in the space; tech professionals passionate about innovation can disrupt the industries they previously had very little to do with.

Trend 2: Identity verification and security represent a major issue

As money transactions become easier and easier with technological innovation, the security issue becomes a major concern. A vast variety of applications allow consumers to move funds with one or two clicks. However, this very ease makes those transactions more vulnerable and makes the identity verification question more complicated than it was before. There is always a balance and a choice between security layers and consumer friendliness. As banks are joining hands to create a powerful network in response to the rise of FinTech, fraud prevention companies and identity verification providers are also joining hands to make seamless experiences as secure as possible.

When it comes to payments, security and fraud protection is one of the biggest concerns among the service providers. JPMorgan released the results of its Payments Fraud and Control Survey this year with disturbing results on fraud rates. According to the report, some of the key findings include the following statistics:

  • About 92% of finance professionals believe EMV (Europay, MasterCard and Visa) cards will be effective in reducing point-of-sale (POS) fraud
  • About 61% believe that chip-and-PIN will be the most effective authentication method in mitigating credit/debit card payments fraud
  • Paper checks continue to lead as the payment type most susceptible to fraudulent attacks even as their overall use continues to decline
  • Credit and debit cards experienced a decline in fraudulent activity, down from 43% in 2013 to 34% in 2014

The high level of fraudulent activity in the financial sector leaves FinTech with a problem to address. The most important statistic for FinTech as targeted on wireless transfers is the fact that 62% of companies were targets of payments fraud in 2014, among which 27% are wire transfer-related.

Trend 3: Banks took one step back in 2015 to took two steps forward in 2016

In one of our recent articles, How Banks Are Joining Hands With FinTech Firms to Serve Customers, we highlighted the trend in the banking sector to collaborate with FinTech startups in order to provide better value to end-customers. The FinTech addiction has spread among the biggest banks in a variety of forms. Industry giants like BBVA, Rabobank, Wells Fargo, Barclays, Lloyds Banking Group, Bank of Ireland, Commerzbank, UniCredit, Credit Agricole, and many others have chosen to set up startup programs to incubate FinTech companies. The market power of banks and assets enable them to invest significantly in incubating innovation.

However, monetary capability is not the only advantage banks have. Access to a large customer pool is a crucial advantage over FinTech startups. The LTP team picked a very interesting quotes from FinDEVr 2015, where the Temenos team mentioned, Something banks have and FinTech doesn’t, but want, are customers!

A new way banks are responding to their temporarily threatened dominance—gi ...

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