5 initial mistakes fintech start-ups need to avoid to achieve optimum success
The fintech industry in India is growing rapidly. From USD 1.2 billion in 2016, the industry is poised to reach USD 2.4 billion in 2020.
Cutting edge startups sprouting up in the sector are going on to become big, lucrative businesses. Fintech in India has an unmatched scope with increasing technological penetration along with the expanding youth demographic.
However, even with the unparalleled opportunities in this innovation-driven sector, numerous fintech startups fail to taste success. Apart from fierce competition in the space, there are certain mistakes that can become roadblocks in their path to realize their true potential. Here are some mistakes that startups initially make but are easily avoidable:
Lack of market research
Skipping the research stage to proceed straightaway with business development is one of the greatest blunders a fintech startup could make. Startups that fail to understand the vendor market are at risk of investing in a product that the industry does not require or one which already exists. This is especially true in case of financial products.
Companies need to scrutinize the market, identify opportunities, segregate them on the basis of long-term and short-term needs and then focus on attempting to fill such gaps in the financial industry. With a lack of research, a company can create a solution to a non-existent problem, and find itself on the path to failure.
Instead of having blind faith in their idea, startups must identify a void in the industry’s infrastructure, needs of the customers and drawbacks in the solutions that already exist in the competitive market.
Lack of technological uptake
A report by IBM states that 90% of startups fail within the first 5 years due to a lack of innovation. This is especially true in the fintech industry. At its very core, fintech is about transforming the financial services sector using disruptive and innovative technologies.
It is, therefore, essential for fintech startups to offer innovative solutions by incorporating the latest technologies into their systems. Initially, the fintech industry was based on the internet, cloud services and data services for mobile phones. Gradually, the focus shifted to technologies such as Blockchain, AI, Machine Learning, APIs, cryptocurrency etc.
Evidently, financial technologies are evolving rapidly and startups are required to evolve with them. Companies working with technologies that are obsolete can end up becoming outdated and irrelevant.
Not securing enough capital beforehand
A company that is financing individuals or other businesses requires a substantial amount of capital in place before its launch. Numerous startups underestimate the number of funds they will require post-launch and find themselves on board a sinking ship.
In fact, payment recommendation platform Cardback, launched in 2012, had to shut shop in 2017 due to a lack of funds and inability to raise capital. Similarly, creditworthiness-calculator Finomena also had to shut down for similar reasons. Fintech startups must secure significantly higher amounts of capital to meet sudden growth, diversification or upgradation requirements and to stay ahead of their competitors.
With the risk of non-performing assets looming large, cash flow is perennially fluctuating within fintech startups. Startups should constantly be aware of their outgoing cash, potential profits, and current savings. Any funding rounds that may be required should be secured well before the need for money arises.
Not meeting regulatory requirements
In June 2018, In fact, digital payments giant, Paytm was directed by the RBI to halt onboarding of new clients. RBI observed certain discrepancies in the KYC norms of the company, and certain pitfalls in the data security of customers. Providers of alternate payment methods have to acquire more licenses and file for more registrations than traditional startups.
Startups often find fulfilling regulatory requirements a pesky, additional task that shifts their focus from marketing plans, capital infusion and other important aspects of launching a business. However, non-compliance with regulatory requirements can prevent a company from lifting off the ground even with the most brilliant, relevant product offering.
If non-compliance can hamper the growth of established brands such as Paytm, it is indispensable for new companies to adhere to all regulatory rules. Since laws protecting investors and regulatory procedures surrounding loans are incredibly strict, these should be tackled well before the company’s launch, especially within the fintech domain.
Not educating the target market
Fintech companies introduce novel, cutting-edge technologies that claim to enhance the convenience of conducting financial transactions while offering numerous allied benefits. However, their target audience, comprising risk-averse, non-tech oriented people who are inherently sensitive about their finances, might not be aware of, or willing to, adopt new methods easily.
For example, Fintech companies offering top-notch digital lending facilities to MSMEs based in semi-urban or rural areas might face skepticism due to the lack of knowledge about the benefits of digitization amongst their target audience. If these companies do not invest their time and resources in educating the masses about their novel idea, the chances of non-acceptance and subsequent failure are high.
Startups usually go through a lot of hit and trial before zeroing-in on that perfect success mantra. However, by adhering to a few fundamental initial procedures, fintech start-ups can sidestep through pitfalls and not commit mistakes with disastrous and often irreversible consequences that can jeopardize their journey to optimum business growth.