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Current news 26 Sep 2016

Six mistakes fintech startups make that lead to failure

It is not easy to start out in the financial technology sector and be successful on your first try. Investment is important to be able to implement ambitious projects and ideas, but startups also need quality products and services, knowledge of regulations and should avoid underestimating the complexity of the target market.

Fintech startups are multiplying. This sector moves more than €11.1 billion in capital, according to Accenture’s 2014 data. Not all the glitters is gold, however. It’s not easy for a project or idea to be successful, no matter how disruptive it may be. Some experts go even farther, saying that the worst mistake fintechs can make is thinking they are going to eliminate the banking industry.

In addition to this key principle, the consulting firm William Mills has identified other mistakes fintechs should avoid when breaking into the market:

1. Blind faith in an idea

A good idea is not synonymous for success. Thinking that a product is going to change the financial landscape often leads to failure. It’s important to analyze the market and see if there is room for the idea. Don’t launch a financial product without researching to see if it already exists, if it is really necessary or if it actually solves a problem or fills a gap. Analyze what traditional banks and the competition do.

2. Products do not sell themselves

It’s a good idea, but how does it reach the market? All fintech startups dream of being the next Uber, but innovation does not sell itself. Sales and marketing plans are vital for the technological product to conquer the market. Just like product development takes time and diligence, a sales strategy also requires planning and skill.

The strategy should take into account that sales deadlines can take longer and may not coincide with the fintech sector’s rapid development. This can be very complicated for innovative products that become obsolete in a few months.

3. A website that’s “under construction”

Credibility is essential to make deals and a website is the cover letter. Many potential customers will visit a fintech startup’s web site just to see their idea. What they find is vital to users betting on their products.

A website should include the following elements: product description, marketing materials and media materials. And if the product is not initially well-known and there is no media coverage, include links to related issues.

4. Ignoring economic cycles

Like it or not, the economy will play an important role. A startup that is going to launch an alternative lending platform, for example, will have to take into account the interest rates at the time and foresee rate hikes to prevent the economic cycle from ruining business.

5. Regulation is very important

Legal expertise is very important for certain sectors of the financial world, especially in terms of privacy and use of data. This is something fintech firms should never forget to include in their business plan.

Even though many companies forget that the financial services industry is highly regulated, fintech startups may also need to follow certain legal requirements. Keeping this in mind will save time and money and help develop smarter business plans.

6. Investment and financing

When requesting investment, ask what type of reports will be needed, what information is requested and the policy to follow to reach an agreement. Foreign shareholders will apply different rules, so it’s important to be familiar with the legislation, be aware of cultural differences and make adjustments accordingly.

For capital injections, in order to avoid fraudulent operations like money laundering, startups need to be well-informed and select a venture capital investor with experience in the fintech ecosystem. If there is a sector where experience matters, it’s the financial technology industry.

Sources: The Financial Brand, American Banker, William Mills