Financial technology, commonly known as fintech, continues to be a hot spot for innovation and investment across the world. Based on data from CB Insights, Accenture estimates that global fintech investment in 2015 reached US$22.3 billion, a 75% increase over 2014, of which approximately US$4.5 billion went to the US alone. Fintech companies seeking to innovate within the consumer banking, lending and payments landscapes often face different barriers than other types of consumer technology companies. I had the opportunity to attend TechWeek Chicago on 23 June 2016, where panellists from both start-ups and established financial services companies spoke about the unique challenges facing fintech innovators.
Stringent regulation
A factor cited by nearly every panellist as a challenge facing fintech companies was the difficulty of understanding and complying with the regulatory environment for banking, lending and payment. The financial crisis of 2009 led to calls for change within the financial services industry and created opportunities for innovation in fintech, but also much greater regulation of the sector with which established banks as well as start-ups must comply. These difficulties are even greater for fintech companies that operate internationally, such as remittance company Pangea Payments, which must comply with different regulations in each market of operation as well as laws governing cross-border transactions.
Successful new fintech start-ups also have to think about security of data much earlier than other types of start-ups to prevent fraud. Panellist Joe DeCosmo, Chief Analytics Officer at online lending company Enova, pointed out that many fintech start-ups do not develop an anti-fraud plan until after they have been defrauded for the first time. Start-ups that do not meet security and anti-fraud standards early on thus risk consumer information as well as the stability of their business. The difficulties of complying with regulations – on top of the challenges of being digitally innovative overall – led one panellist to quip that they ought to have started a photo-sharing app instead of one in the much more highly-regulated fintech space.
A different target audience, opportunity for impact
A second unique characteristic of many fintech companies compared to other types of start-ups is their target audience. A topic of discussion in a panel titled “Design & Development in FinTech” was the fact that banking and payment services are already largely digitalised, while companies in other sectors are still at an earlier stage in this process. This fact led Brooke Rickets, VP of Brand and Design at online lender Avant, to point out that while other types of technology are usually designed with early adopters in mind, fintech is designed for consumers that have been squeezed out of traditional circles. This is one of the contributing factors for the success of alternative online lenders, many of whom use additional metrics beyond a standard FICO score to lend to consumers who otherwise might not qualify or only on worse terms.
A second example of how fintech often focuses on audiences not targeted to the same extent by other types of technology companies is that much of fintech works to improve financial services in emerging markets. For example, Wala, represented at Techweek by co-founder and CEO Tricia Martinez, is one such company. Wala is a company working to develop a digital banking platform that partners with existing banks in Africa to provide a more convenient, lower-fee way for consumers to manage their account than that which is currently offered by many traditional banks.