When Ireland’s Collison brothers started Stripe together in 2010, there was little in the third quarter, according to real estate firm Cushman and Wakefield.

I want to learn more about FinTech, where/how do I start?

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

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.

A new way banks are responding to their temporarily threatened dominance—giants of the banking industry are collaborating with each other to regain their power and become a source of innovation themselves.

In a joint prepared statement, the CEOs of Bank of America, BB&T, Capital One, JPMorgan Chase, U.S. Bank, and Wells Fargo said, “Our customers want the ability to make payments to anyone, in real time, making funds instantly available in the recipient’s bank account. To achieve this, we are combining our collective, bank-owned digital payments network (clearXchange) with our fraud, risk and authentication assets (Early Warning) to further ensure that our customers can send money confidently, securely and in real-time via their financial institutions.” No wonder companies like Payfone (an Early Warning investee company) and Authentify (a wholly owned subsidiary), both now part of the Early Warning family along with ClearXchange, are looking forward to a “collaborative disruption” model in this space, where new technologies become innovations-at-scale by partnering with large FI incumbents.

Another example of the banking industry’s attempt to compete with smaller innovative players is a proprietary mobile wallet launch. For example, at the Money20/20 conference, America’s largest bank by assets, JPMorgan Chase & Co. announced the launch of its own digital wallet called “Chase Pay.” It is scheduled for launch during mid-2016. MCX—which includes retailers such as Walmart, Target, Best Buy and Shell—will be Chase Pay’s premier partner. Chase Pay will be entering the race with Apple Pay, Android Pay and Samsung Pay. Chase Pay is stated to provide a better payments experience to millions of customers, processing 34 million transactions each day on average with Chase banking.

Trend 4: Omnichannel experience is important

The way companies used to think about and approach retail marketing is changing. In order to succeed, companies need to reach their potential customers wherever they are and on any device—with the mobile revolution, it is particularly important to be effective through the mobile channel.

Therefore, the retail industry is undergoing a dramatic shift: in-store foot traffic is down, online research is up and smartphones are becoming increasingly important to the consumer’s in-store shopping journey. This change in consumer behavior shifting towards mobile is creating new realities for retailers to operate in.

Trend 5: The FinTech Revolution is global

Total global investments in FinTech almost reached $50 billion this year. The investments map by FinTech Week London demonstrates the most active regions and funds poured into FinTech. The US, Europe and Asia are leading regions where the biggest funds are invested in FinTech. However, it is also clear that new innovation hubs are emerging. Very interesting to see significant investments made in FinTech in Africa and Australia.

At a more granular level, the payments sector is particularly worth mentioning. In Q1 2015, the payments sector attracted more than $1.16 billion in investments; 12 companies raised more than $5.6 million in their seed funding rounds of which “Bringhub” raised the highest amount with $2 million in seed funding. Moreover, in the short time span of July-September 2015, FinTech saw $750 million of investments.

A legitimate question may arise about the reasons innovation became borderless and what the implications are.

One of the reasons is related to the trend of innovation coming from tech professionals. Increased technological competition fosters borderless business. Since technological advancements allow companies to operate globally even while being physically located in one country, it increases competition for local companies that did not achieve that stage of technological improvement.

Another reason is the fact that technological innovation is quickly adaptable. APIs offered by FinTechs can allow businesses to jump to another level of efficiency and experience relatively easily. Innovation spreads quickly due to its technological nature.

Global recognition is also an important reason. One of the weaknesses of FinTech startups is the limited network. It forces companies to attend international conferences, events, expos. An example could be the Money20/20 conference, a place where companies have an opportunity to share their technological achievements and innovative products with more than 1,000 CEOs, from 3,000 companies and 75 countries. The conference provides an opportunity to attract the attention of executives that are looking to mine fresh ideas and discover new business opportunities. For the innovators in payments technologies, there is no better place to go global than Money20/20.

Trend 6: New types of stakeholders are entering the space

FinTech startups were believed to be disruptive and competitive and hence, more interesting to traditional financial institutions like banks. However, this isn’t the situation anymore. Tech companies dominating other spaces started entering the competition for innovation in finances. It is surprising how actively tech giant Microsoft is involved in FinTech with a great variety of initiatives. Google, Intel and others have also demonstrated an interest in FinTech with their active investments. Here are some of the examples of companies in the portfolios of non-financial companies:

Trend 7: New types of partnerships are emerging

Previously, we demonstrated a rising interest from tech giants in FinTech startups along with banks. That interest led to new streams of investments and most importantly, incubation. However, there is another set of players shaking hands with the financial industry in a different way or even competing with FinTech while being in a completely unrelated field at first sight.

Social media and communication giants like Facebook or WeChat realized the power of applying financial transaction features into their extensive social networks. Facebook, intended to be a social media platform to connect millions, saw a great opportunity in adding a valuable feature of money transaction while WeChat, China’s biggest messaging app with more than 600 million active users, announced an agreement which enables WeChat users in the US to send money to 200 countries and territories via Western Union’s Connect platform.

Trend 8. FinTech 2.0 will be the new FinTech

previously, If startups were thriving to push banks out of the profitable markets with the rise of FinTech, we now see an interesting change both in attitude and strategies. As powerful traditional players indicated a threat, they figured out individual ways to cope with it. As FinTech has to react, it will evolve into FinTech 2.0.

Both banks and FinTechs have their strengths and weaknesses, and both are better off by cooperating and combining the best they can offer to cover each other’s weaknesses. Banks can guarantee rapid scaling with significant funding and access to demand while the FinTech sector can offer the most innovative and efficient solutions for better customer service. An interesting term called FinTech 2.0 is used in the paper recently published by Santander in collaboration with InnoVentures, Oliver Wyman and Anthemis Group called “FinTech 2.0 Paper: Rebooting Financial Services.”

While some FinTechs today are focused on the race to build standalone “unicorns,” FinTech 2.0 represents a far broader opportunity to re-engineer the infrastructure and processes of the global financial services industry in which the top 300 banks command a revenue pool worth $3.8 trillion. To realize the opportunity of FinTech 2.0, banks and FinTechs need to collaborate, each providing the other with what it lacks—be that data, brand, distribution or technical and regulatory expertise.

Trend 9: Lending and payments are the most attractive sectors within FinTech

There is a great diversity among the types of players within the FinTech industry. Therefore, we cannot distribute financial and innovative attractiveness of the overall industry on all players equally. Certain spaces within the FinTech attract more investments and attention than others. The LTP team charted the categories by the size of the investments:

In 2013 & 2014, finance/lending companies attracted a total of $567 million in funds, the largest compared to other categories. Payment rails companies raised $416 million while mobile wallet companies raised $286 million.

Trend 10: The “unicorns” club is expanding

Starting last year, the space in the “unicorns” club shrank with companies like Stripe, POWA Technologies, Avant, Prosper, One97 and others boosting their valuations far over $1 billion.

Even though the growing number of “unicorns” tightens the competition, it is a great sign. For potential entrants, it indicates an upward trend in the industry that is actively expanding. It validates a real opportunity for young startups to enter the club down the road and a clear interest from investors injecting funds into FinTech and boosting valuations. It is not clear whether the club will be growing at a fast pace in the near future. However, the growing interest from a variety of stakeholders may support the trend.

Choose the right place

Launching a startup, an entrepreneur can’t go wrong with the choice of location. Funding and growth opportunities quite significantly depend on the region along with other factors.

It is no secret that innovation momentum is not spread equally around the world. There are certainly well-known hubs where innovative solutions are being born the most and find their way up. For FinTech startups and bright entrepreneurs thinking on taking their products and ideas to the next level, there is a limited choice of the world’s hubs.

Not being a surprise for anyone, Silicon Valley in California, USA, is one of those hubs. Many FinTech unicorns have come from the Silicon Valley and there are more hot FinTech startups to look out for. Affirm, Stripe, Lending Club, Prosper, SoFi, Square and many more have formed a Silicon Valley unicorns club. A great momentum Silicon Valley provides is related to the vibrancy of the place, innovation culture, established network of companies that can speed up processes. Silicon Valley is a unique place where innovative solutions are getting tested. Consumers are spoiled with technologies as they get to try everything first. However, there is a catch; what becomes successful in Silicon Valley, doesn’t necessarily have the same chance to become successful in other places. The Empire Startups FinTech conference will take place in San Francisco and New York next year to gather FinTech professionals and showcase Silicon Valley and Alley FinTech at their best. It is also worth mentioning that seven out of the 10 best startups accelerators in the US are in California.

New York is the next hot hub where innovation is nurtured. New York was the city to issue the first comprehensive guidelines related to bitcoin and to adopt bitcoin for parking tickets payments. New York is a base for notable investors and companies that are hunting for innovative FinTech startups. Among those are Bain Capital Ventures Managing Partner Matt Harris, who is actively looking for investment opportunities in lending, asset management, trading systems, insurance, etc.

London is the European hub for FinTech. Unicorns like Klarna, iZettle, Adyen, Funding Circle, TransferWise, POWA Technologies came from Europe as a proof of a strong standing of the market on a global arena. According to Bloomberg, Tech Crunch and Huffington Post, South East of England is outpacing California on the number of jobs in FinTech along with rapidly growing funds and deals in the FinTech industry. Moreover, Tech Crunch reported that European startups have raised more than $2.8 billion from VCs in Q2 2014, the highest quarterly total since that iconic dot-com bust year of 2001. Clearly, European FinTech is creating a significant wave of competition for Silicon Valley and New York.

It would almost be a crime not to mention the Asian region as it is emerging at an outstanding speed as an innovation hub. One97 and Lufax are unicorns from Asia. India, Singapore, Hong Kong are fueling Asian FinTech and emerging as significant competition globally.

Know your competitors

One planning to launch a FinTech startup in Silicon Valley should be aware of the fierce competition he/she will face. We have been looking for examples of some of the most interesting FinTech startups across regions and here are some of them from Silicon Valley, US:

Thhe New York FinTech industry is also extremely competitive with some unicorns holding leading positions in various sectors:

Europe has been actively evolving its FinTech and now has some of the world’s most promising FinTech startups hosted in the region. Following are examples of FinTech companies to look out for in 2016 from Eastern and Central Europe:

Western Europe is also rich on innovators. Some of the examples are:

Analysis of the FinTech players in Asia:

And, of course, India is one of the countries with a highly competitive FinTech industry:

Choose the right sector

Payments and lending represent the most active FinTech sectors with the highest concentration of “unicorns” and “semi-unicorns” as well as high attractiveness for investors. For new entrants, it may mean there are more opportunities in other sectors, where disruption did not happen at such a deep level. Even though it is hard to say whether lending and payments are overheated already, the high density of those sectors may also imply that there are still great opportunities for new entrants. We have been following the insurance sector and it definitely represents great potential. Insurance is asking for innovations, and endless opportunities lay in the industry that hasn’t been fundamentally transformed in decades. In the near future, insurance technology will see the rise of interest and innovation applied.

Another interesting sector not mentioned before is RegTech. A relatively new term, “RegTech” refers to a set of companies and solutions that address regulatory challenges across industries, including financial services, through innovative technology. RegTech solutions are agile by nature due to the complexity and momentum of regulatory transitions. Traditionally, the technology was developed to be robust. However, RegTech can’t afford the luxury to deliver a solution for static requirements—it has to be a self-learning machine.

Another hallmark of RegTech is that it is usually cloud-based, which enables solutions to maintain, manage and backup data remotely, having it secured at the same time. Since RegTech utilizes the cloud, it significantly cuts the costs both for providers and clients. Agility leads to great flexibility and speed, which ensures a high level of control over information. Needless to say, modern cloud-based solutions and regulatory requirements set high expectations from tech companies with regard to security. Data encryption powers the safety of deployed solutions. Speaking of deployment, RegTech technology reduces the implementation time, enabling businesses to remove the pain of complex regulatory compliance and focus on business goals.

RegTech became a hot topic lately with investors looking for interesting solutions in the space. Regulation is a heavy burden on traditional financial institutions often restraining them from fast innovation adoption. Compliance is an expensive and time-consuming area holding back solutions implementation. RegTech has a potential to solve a major problem and become the next FinTech.

Should you join an accelerator or not?

As per some estimates, global FinTech investments will more than double by 2018. The number of accelerator programs, FinTech labs and incubators has also been increasing. The main aim of these platforms is to provide the right resources to entrepreneurs who are aspiring to convert their ideas into reality. Each of these platforms provides the startups with a specific time frame, committed membership, mentorship, and sometimes, capital & development efforts, making the startup concept ready for the market.

If you are questioning an importance to go through accelerators, some examples of leading FinTech disruptors may change your mind.

Large FinTech companies are looking for a fresh perspective by partnering with the best and brightest startups. In the continual pursuit of new ways to better serve their clients, banks are looking to test new initiatives as well as foster innovation. The growing interest in startups (all-time high) and the success of several companies initially based out of FinTech accelerators, labs and incubators means that we will be seeing much more of this in the coming years. Reputation will be important and rightly so.

Here are some accelerators (FinTech-focused and general) that one needs to take note of:

500 startups, AngelPad, Anthemis, AWI Ventures (reports suggest that the parent group AWI has stopped its support for the accelerator program. However, the founders have started H2 ventures to continue investing in FinTech accelerators), Bright Bridge Ventures, Chinaccelerator, FinTech Circle, Fusion (recently formed Swiss-focused FinTech accelerator), FinTech Sandbox, Holland FinTech, Matchi, PlugnPlay Accelerator, SeedCamp FinTech, Six Thirty, Visa Vision and Wayra.

How to get funded?

While accelerators provide certain financial support, upon graduation from programs, startups are forced to thrive to gain further funding. Some of the options are crowdfunding, personal loans and, of course, VCs.

Here are some of the online crowdfunding platforms for young entrepreneurs to start the big journey:

VCs are usually the main target for FinTech startups as they can provide significant funding, extensive networks and expertise.

There are at least 61 VCs to consider if you have a FinTech startup. Here are some of them:

How to comply with regulations without a lawyer

We have mentioned RegTech as an emerging sector that may attract a lot of attention in coming years. Even though it hasn’t been actively explored yet, there are already strong players in the space trying to ease the compliance for businesses.

Back yourself up

InsuranceTech has been another extremely hot topic lately. While there are certainly some challenges for those trying to disrupt the long-untouched sphere, there are also great opportunities.

Insurance carriers and related activities contributed $421.4 billion, or 2.5% of the United States’ gross domestic product in 2013, according to the US Bureau of Economic Analysis. Yet, with $3 billion coming into FinTech in Q4 2014, the insurance industry in the US—with a massive distrust and caution to the players—has not seen wide disruption from technology companies.

Here are some examples of InsuranceTech companies offering alternative insurance methods:

Reduce operational costs with insanely useful APIs

In the days of a great variety of APIs powering all kinds of financial services, there is no need to invent a the wheel again. Before building any financial product, each FinTech startup needs to make sure it leverages some insanely useful APIs to offer the best solution and save time and resources.

Banks and other financial institutions are sharing codes through application programming interfaces of software gateways that allow applications to work together. APIs are a bank’s tool for survival and relevance in a smartphone-first world. So making it open to outsiders is pretty much like inviting the competition to come in and read the insider’s note. However, industry watchers say that offering an open API is not a deterrent. Instead, it lets fresh-off-the-boat tech companies and ever competitive developers innovate much faster on the built platform, as opposed to keeping their app development limited to compliance-inhibited, resource-strapped IT organizations.

Considering the amount of APIs present in the market today, it is very important to recognize what we are exactly looking for. The important factors to consider while choosing an API include functionalities, services and pricing. The API allows developers to integrate the functionality into existing apps and platforms. Developers look for certain functionalities while choosing an API. These APIs also target some selected markets based on the functionalities they provide.

Braintree’s Partners APIs provides users with an integrated way to start accepting payments using the Braintree payments gateway. The API allows users to sign up seamlessly from within applications and get instant approvals so merchants can easily receive the credentials on a user’s behalf, basically everything required to process a transaction.

The CardConnect API allows secure acceptance of a wide-range of credit, debit and alternative payments. Instead of a high flat rate, CardConnect uses “interchange plus” pricing as processing costs. The API offers features like next day funding, certified PCI level 1, patented tokenization, recurring billing, online bill presentment, hosted payment page and fraud protection as well.

The Dwolla API provides an interface to integrate the Dwolla payments platform into a software application. The API provides developers with the functionality to send, request and retrieve account history and send money between Dwolla accounts.

Google offers exclusive Wallet APIs which enable the integration of its popular Google Wallet services. The APIs help streamline purchase flow across mobile apps and websites. Two major API offerings include: Instant Buy and Wallet Objects APIs.

Intuit offers the QuickBooks online API which allows developers to leverage the huge amount of financial data that businesses create within QuickBooks. Intuit also offers the Customer Account Data API which, along with the QuickBooks Online API, provides developers with programmatic access to data from more than 19,000 financial institutions. Using these APIs, developers can create third-party applications for QuickBooks which can be offered to consumers through the Intuit QuickBooks App Store | Accounting Apps app marketplace.

The iZettle API allows developers to access and integrate the functionality of iZettle with other applications and to create new applications. Some example API methods include managing account information, processing payments, and retrieving payment information. Developers can use the chip-card APIs to enable apps to access the card reader and turn the phone into a terminal.

Marqeta introduced an open issuer processing Payments API. The company already offers a payments platform with feature-rich functionality, making it quick and easy to set up new physical and mobile payment cards, configure multiple funding types, and define how and where cards can be used in real time.

MasterCard offers an array of API-based solutions to cover multiple aspects of payments solutions. Here are some prominent APIs that MasterCard officially offers to developers for developing payments solutions: Simplify Commerce, MoneySend, Mobile UI SDK, rePower, MasterPass, Western Union Money Transfers, etc.

PayPal’s REST APIs allow the integration of the popular payment processing system into a Web-oriented checkout system. PayPal also offers mobile SDKs for iOS and Android that make use of the REST APIs.

Square opened its Connect API to allow merchants and third-party developers to create apps and tools around Square’s platform. Merchants can use Connect API to retrieve activity reports for processed payments, refunds and deposits.

Stripe’s APIs let developers integrate payments within their website or apps. Stripe already went global in early 2014 supporting more than 130 currencies. With Stripe, a customer in South Africa can make purchases from a Stripe-using merchant in the UK. For merchants, Stripe APIs bring a one stop solution to multi-currency acceptance rather than having to work with multiple financial partners. Stripe recently updated its APIs to support bitcoin-based payments as well.

Visa launched the “Visa USA | Pay With Visa | Visa Checkout” digital wallet solution in collaboration with Nationwide in the UK. Visa USA | Pay With Visa | Visa Checkout allows the user to store card information for multiple credit and debit cards from Visa, Mastercard, American Express and Discover along with the “Bill to” and “Ship to” addresses for each of the cards.

Watch the leaders, they are doing something right

Finally, my last suggestion for those looking to enter the competition in the FinTech industry would be to learn from the leaders. Each story is unique in some way; business models are very different, and entrepreneurs behind the most successful companies have once been through/are still going through the journey the newcomers are about to start.

P.S : We at SODIO.TECH have helped numerous FinTech Startups with their product launch

For free consultation get in touch with us at contact@sodio.tech

Thanks

Naveen Saraswat
Mobile App Development | Android and iOS App Development company
SODIO.Tech