5 Risks of Starting a Fintech Business and How to Avoid Them

Devin Partida is a prolific writer about crypto, open banking and fintech for publications like Worth, Due, Yahoo! Finance and Entrepreneur.

Starting a business in financial technology (fintech) is a smart investment for the direction in which the world is moving. High-speed digital transactions will dominate the global market for years to come, and your startup could be a part of it.

However, entering this field has many uncertainties. Here are five of the biggest risks of starting a fintech business and how you can avoid them.

More Global Competition

Financial institutions used to operate under national regulations. This created a more level playing field for small businesses and allowed them to develop more locally focused solutions for their clients. Today, the market is more globalized and thus more saturated with deregulated competition.

Your startup only has two choices to survive in the new market. Firstly, collaborate with some of your competitors and try to get a leg-up on other new players. Or secondly, face the global competition head-on and hope you build a large enough following to stay afloat after a few months. The first option is your best bet, but with minimal regulations in place, you can’t entirely trust anyone.

In any case, you need to find little ways to make your business stand out from the crowd. A partnership can only take you so far. Make sure you do these things when pitching your company:

  • Make your “story” quick and concise.
  • Don’t overwhelm potential investors with too many statistics. Cover the essentials and move on.
  • Don’t downplay your competition. Focus on your brand.
  • Provide your information on multiple platforms (email, pdf, print, etc.).
  • Act like you’ve been there before. If you’re going to succeed in a global market, you need to have a demeanor that suggests you belong.

The fintech industry might look different than in years past. But the personal aspect of the business will never go away, no matter how efficient and streamlined the work becomes.

Unpredictable Market Events

Predicting the next “event” in finance is nearly impossible, but even when fintech companies have valuable information, they still may not react appropriately. An overreaction could cause major liquidity problems and do irreparable damage to your business’s reputation. Even with crises like COVID-19, you need to differentiate between optimism and realism and avoid too much experimentation.

Many startups try to be the first company to jump on a new trend or bandwagon. Don’t be the first. The risk far outweighs any potential reward. You need to establish a decent track record with little victories before taking a big leap of faith. Customers prefer slow, calculated responses over quick responses when their money is at stake.

Regulatory Non-Compliance

Startups naturally experience some difficulty when entering a new market with unfamiliar regulations. You need to conduct a thorough business plan analysis to make sure you’re 100% legal or determine any special licenses you might need. It sounds self-explanatory, but many new companies overlook this simple step. They find themselves paying fines and doing damage control later on.

Technological advancements also complicate things. As the tools of the game evolve, regulations evolve with them. The best thing an emerging fintech company can do is follow industry tech trends like digital banking, data aggregation, and blockchain technology. We might not know the full direction of finance, but we can safely say these things will play bigger roles and help mold future regulations.

Intellectual Property Pitfalls

Patent protection of software and technology innovations is imperative for any fintech company. However, startups without prior experience can easily fall into a misunderstanding or fail to protect their intellectual property. Patent restrictions might also impede a company’s ability to maintain consistent business methods.

Instead of relying on intellectual property laws, you should utilize all available legal means, such as copyright and trademark, to secure their information in writing. You want your ideas to grow, but you don’t want them to fall into the wrong hands and lose credit for your hard work.

Professional and Personal Liability

Whether your fintech company provides or enables a service is irrelevant – both business models leave your startup exposed to fraud claims, service errors, and other common issues. These risks are manageable on their own, but they leave you exposed to professional liability claims and put your business’s integrity on the line.

If you find yourself in such a predicament, the source of the problem wasn’t the fraud claim or service error, but a failure to adjust your operations as your business expanded. You underestimated your company’s impact and let more errors slip through the cracks. Make sure you review your contracts at least annually to avoid this issue.

Similarly, consumers can use fintech applications without taking the necessary steps to protect their financial and personal information, leading to a personal liability suit even if it’s not your fault.

You can’t do much to directly prevent customers from falling victim to cyberattacks, but you can demonstrate your business’s capabilities when it comes to protecting their data. You need to be transparent and on the same page with your customers. If you sense a disconnect, clear the air and make sure the customer knows you’re doing everything in your power to keep their data secure.

Build Your Fintech Business

Starting a fintech business in the current climate has a unique set of challenges. For starters, regulations aren’t as clear-cut as they used to be, and your competitors will always look to bend the rules in their favor and at your expense. You also might react poorly to a sudden market change or fall into a legal bind with intellectual property or personal/professional liability.

There are no foolproof ways to avoid these risks, but you can do a few things to improve your chances of survival. Partner with similar competitors. Don’t overreact until you’ve earned the right to overreact. Use the available technologies and legal strategies, and make sure your business size and plan remain consistent with each other. These efforts will build your fintech business from the ground up and help it become viable in the unforgiving market.