According to Valuates Reports, by the end of 2025 the size of the global fintech market will grow to USD 124.3 billion, with a compound annual growth rate (CAGR) of 23.84%. At the same time, the largest and most dynamically developing players on fintech market which are neo and challenger banks, will reach a value of USD 30 billion with a CAGR of 40.4%.
In the light of this data, it is not surprising that the fintech industry is becoming more and more attractive to both investors and entrepreneurs. This does not mean, however, that launching a fintech or financial industry startup is an easy task.
On the contrary — before making such a risky decision, each fintech entrepreneur should take into account a number of external market factors, as well as internal risks related to creating their own offer and organizational structures. It is difficult to predict all the potential problems and challenges related to building a fintech startup, but a few issues should be considered in advance to increase the chance of success. Below, you will find 7 areas you should take care of when starting your fintech business.
It is difficult to predict all the potential problems and challenges related to building a fintech startup, but a few issues should be considered in advance to increase the chance of success.
1. Obtain a license for financial activity
To start a financial activity, you need to obtain a license appropriate for your purpose. The scope of the license depends on the type of activity, so the simplest division includes the following licenses: banking, payment, brokerage, investment, loan, credit, peer2peer, insurance, cryptocurrency or securities issue.
For fintech entrepreneurs who decide to operate in the management and processing of electronic payments, the most important should be payment and banking licenses. They include, among others, LPI (Licensed Payment Institution), PSP (Payment Service Provider), EMI (Electronic Money Institution) and EBL (European Banking) licenses. What is significant, is the fact that licenses for financial activities are issued by regulatory authorities competent for the country and region of the world in which the company is registered.
Licensing a financial entity is one of the most demanding and time-consuming stages of fintech development, and above all, it is crucial for the ability to operate in this industry.
Therefore, applying for a license should start at the very beginning of the project to confirm the purposefulness of the other activities related to the launch of a fintech project. Fortunately, there are countries in Europe where the process of granting financial licenses takes much shorter time than the standard one. One of such countries is Lithuania. More and more fintech start-ups start to register in this country.
2. Look for stable financial support
Start-up capital is the basis, and it is almost impossible to start a business without it. Building the offer, team development, marketing activity or legal issues – all these elements generate huge costs. And if you want to develop a fintech, you should secure financing for your business for the minimum of 2 years – and preferably for even longer. You should consider that even after the project enters the market, for the long time, the revenues may be much lower than the regular maintenance costs. Such a prospect may not seem very encouraging, but you need to know that there are many opportunities to obtain funding, which will be sufficient to calmly develop fintech.
The most popular option is, of course, to look for a venture capital, i.e. an external investor. Business angels, i.e. private investors who are looking for innovative companies and solutions to locate their capital in, can be one of the solutions.
You should consider that even after the project enters the market, for the long time, the revenues may be much lower than the regular maintenance costs.
3. Build partnerships
Building a partnership is not a crucial factor to run a fintech, but it is a step worth taking for many reasons. For a beginner fintech, the partnership is an opportunity for intensive development, financial and substantive support and increasing credibility in the eyes of potential customers and investors.
Membership in foundations that create an ecosystem supporting the development of fintechs is also worth considering.
They help to build financial, technological and business facilities, as well as provide access to the knowledge and experience of market experts and investors. They can also be helpful if it comes to finding economists, lawyers or IT specialists whose knowledge and contacts can be of considerable value, especially at the initial stage of fintech development.
4. Find a trusted technology partner
Behind each successful fintech company, there is not only an innovative idea, but also, and perhaps above all, advanced technology.
Therefore, when creating a startup, you have to consider both perspectives – business and technological points of view. While there are no major problems with the first one, fintech creators are often unaware of the technical aspects of financial solutions.
Fintech creators, having an innovative idea for a financial product or service, know exactly WHAT they want to do, but in most cases need support in HOW to achieve the result they want. At our company, we often advise our customers in the areas of infrastructure, tools, and architecture of the solution. The support of a technological partner that cares about the customer’s success is precious. Thanks to their knowledge and experience, the customer optimizes costs, develops new functionalities and selects technology that allows them to achieve business goals much faster and more efficiently than if they had created the solution on their own.
…when creating a startup, you have to consider both perspectives – business and technological points of view. While there are no major problems with the first one, fintech creators are often unaware of the technical aspects of financial solutions.
5. Ensure you have legal support
The financial industry is the area of many restrictions. Offering financial products or services requires obtaining appropriate licenses and approvals from financial supervision authorities. Therefore, it seems necessary to start cooperation with an institution that is well-versed in applicable laws, directives and legal conditions of the financial industry. Ideally, it would be a RegTech entity that specializes in technologies allowing fintechs to meet the requirements of these regulations.
The popularization of each is a great help for companies that can adapt their activities to the current legal requirements in a cost-effective manner, and thus expand the scope of their activities.
6. Introduce modern technology
Solutions based on microservices, blockchain technology, AI and machine learning are a necessity for fintechs today. First of all, it’s because of the fact modern fintech offer must be highly competitive in comparison to traditional financial solutions. Fintechs offer their customers faster, cheaper, easier and more modern services than those offered by classic banking institutions. Fintechs achieve advantage mainly due to the identification of optimization areas, technological advances and their skillful implementation.
The use of modern solutions is also an added value in the context of marketing communication. The aforementioned technologies, such as AI or blockchain, still have a strong impact on the imagination of recipients and customers, giving a sense of modernity to the services offered.
7. Last but not least – central transaction system or platform
Fintech is the network of related services and technologies that, when properly integrated, allow us to offer our clients innovative financial solutions. Startups and other non-bank institutions do not have to build systems as complex as traditional banks. Nevertheless, they need an IT solution to conduct financial activities, which will, on the one hand, meet compliance requirements, and, on the other hand, allow for the functional and product-related development of the fintech offer.
Modern and fully flexible transaction systems, such as BOS or the FaaS AI platform, save time by reducing the implementation period by up to 50 percent. At the same time, they are cost-effective – easy modification of individual microservices and full automation of transaction processes generate significant savings. Functional flexibility, scalability, quick implementation and the possibility of advanced integration are key factors that should be taken into account when choosing a transaction system for your fintech. Especially since it is a one-time choice – so it is worth making sure that it is a winner and fully fulfills its task at the start, but also in the following years of fintech development.
ABOUT THE AUTHOR:
Piotr Hanusiak is the CEO of INCAT Sp. z o.o. Prior to INCAT, Piotr was General Director of Delivery and a Member of the Management Board at Innovation Technology Group SA –a company focused on integrating IT solutions for multiple sectors; banking, utilities, general business. Before joining ITG, Piotr performed managerial roles in banking division at Sygnity S.A. – one of the largest tech companies involved in software production.
Piotr has extensive experience in project portfolio management, software project management and IT Strategy. Piotr has graduated in education faculties in the field of Commercial Banking, Market Policy, and Marketing Management.
Contact an author: piotr.hanusiak@incat.com.pl