Why FinTech Startups are Difficult

Virtual reality goggles, messaging apps, and anonymous-sharing — these spaces have been getting a lot of interest recently with mind-blowing exits and controversy. Why aren’t FinTech startups getting as much love from investors and corporates? A panel of FinTech startup founders at the SF FinTech meet-up shared additional challenges that FinTech startups have to overcome:

Trust — When it comes to money, there is an additional trust barrier. Privacy and security become an order-of-magnitude more important when a request is made to directly access a user’s bank account and financial information. Trust is also a barrier between startups and financial organizations that are highly regulated, making a B2B sales/partnership model even more difficult for startups than it already is. Startups also have little room for error. For giants like Target, they will be able to survive long enough to regain consumer’s trust. For resource-constrained startups, it would be extremely difficult to rebuild a reputation once it is lost.

Regulation — The financial industry is a highly regulated one, more so after the worst financial crisis since the Great Depression. Having to deal with compliance is distracting and takes away time that could have otherwise been spent on building a great product. FinTech startups in the US have to comply with regulation at the federal level as well as the state level, with each of the 50 states having their own views on how the industry should be regulated. This also makes it time-consuming and expensive to scale to different markets. The absence of relationships with regulators makes it difficult for founders to voice their concerns.

Limited Viral Effects — They way most incentive structures of venture capitalists are structured, the opportunity cost is a major consideration — they are looking for 100x or 1000x returns, not just 5x returns. The fastest way to achieve this is to grow virally and leverage network effects. When it comes to sensitive personal financial information, it is far more unlikely that users would be willing to share what they are doing with friends.

Obtaining Financial Data — For FinTech startups that need to pull financial data from different sources, the key challenge is in obtaining accurate and complete data. The US government has been attempting open data initiatives, but access to data can be expensive.

Doing any startup is hard enough; the additional hurdles that FinTech founders have to overcome make FinTech a difficult market to operate in. That said, the financial markets are the few markets that are worth in the trillions. The financial crisis of 2008 has resulted in a seismic shift in the industry. Pressure from regulators and shareholders are forcing banks to leave money on the table for FinTech startups to take. The hardest markets are usually the ones with the greatest opportunity — for those that are able to cross the high barrier, those would be the same barriers protecting them from competition. More importantly, FinTech founders can actually make a meaningful impact in people’s lives.

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