Fintech is one of the rapidly developing industries in 2021. Cutting-edge digital solutions and trends, such as cloudification, blockchain, machine learning and artificial intelligence change the way we manage our finances, pay for purchases and services, invest and save. Researches show that in just five years the adoption of fintech by consumers grew from 16% to 64% in 2019. The COVID-19 pandemic sped up the process: more people use mobile banking apps, contactless payments and invest in cryptocurrencies, while bank branches see fewer visitors, and paying in cash becomes less popular.
Starting a company in such a competitive industry like fintech, which is also an object of scrutiny of governmental regulators, is no easy task. But a successful fintech startup that becomes a leading solution in its sphere can potentially help millions of people all over the world and turn into a profitable business.
Surf has worked with several fintech companies, building mobile apps for banks and crypto trading platform, so we have quite extensive expertise in solving fintech challenges. In this article, we’ll go over the 7 problems in fintech that arise before almost every finance startup and offer insights on how to overcome them.
Complying with regulations
Because fintech companies deal with personal and corporate finances and have access to a significant amount of sensitive data, the industry is closely watched by governmental regulators in every country. If you’re planning to launch a fintech startup, be prepared to interact with regulatory bodies almost daily, especially in the beginning, while acquiring the necessary permissions to operate.
Every country has its own set of requirements for a financial service, and it will be a wise move to hire a person who knows local laws well and preferably has a legal background. It is important to understand right in the beginning, what license will be required for operation, to avoid huge fines and other restrictions. If you’re launching a project in the US, here are the regulations your financial company will likely have to comply with.
- Basel III. Set of regulations for banks focused on increasing minimum capital requirements, holdings of high-quality liquid assets, and decreasing bank leverage.
- Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) is a set of laws regulating high-risk financial products, such as derivatives, aimed at protecting consumers.
- Current Expected Credit Losses (CECL) is an expected credit loss accounting standard that is mandatory for banks and other financial companies that issue loans.
- Telephone Consumer Protection Act imposes certain restrictions on telemarketing.
- Security Breach Notification Laws require a company to promptly notify its consumers in case their data was exposed in a breach.
- CAN-SPAM Act of 2003 regulates marketing by protecting consumers from deceptive or misleading information and subject headings.
- Gramm-Leach-Bliley Act requires providers of financial services such as loans, investment advice or insurance to explain their information-sharing practices to customers and to protect their private data.
One way to decrease fintech regulatory challenges is to partner with a company that has already obtained the necessary licenses. For example, many neobanks operate in partnerships with established fully licensed banks. In this case, it is important to weigh the risks of such partnership, work out conditions and determine whether such cooperation is a temporal measure or a long-term strategy.
Maintaining high security
Cybercrime is one of the main banking industry challenges. According to researchers, banks become targets of malware attacks in over 25% of all cases across industries. A single successful attack can result in losses of millions of dollars and, what’s even more important, the trust of users. Just think, would you ever trust your assets to a company again if you have been robbed using its services?
A hacker attack can come on the company’s infrastructure and servers, as well as a mobile app. There are many varieties of cyberattacks on apps, including pirate apps, man-in-the-middle attacks and clickjacking. In most cases, code quality, insufficient use of cryptography, or insecure app elements play critical roles in the success of such attacks. In our dedicated article, you can learn more about common banking app security issues.
At Surf we know that security is the cornerstone of fintech and always use the best security solutions to protect the sensitive data of app users. Among must-have security features of fitech apps we always point out:
- Usage of HTTPS and SSL security protocols for every connection.
- End-to-End Encryption (E2EE) of transactions and private messages, using cryptographic keys and both endpoints to block third-party intervention.
- Sophisticated authentication solutions: biometric authentication with voice or facial features, or two-factor authentication with single-use codes received via SMS or e-mail.
- Remote wipe feature that enables a user to remove data if their phone gets lost or stolen.
The level of app security is largely determined during the development stage — quality code and sufficient testing create protection from future attacks. When developing fintech apps, Surf aims to test the entire app code. To achieve this as quickly as possible, we substitute manual tests with autotests. For example, during the development of an app for large European bank, we automated 75% of sanity tests, which are done by testers rather than programmers, decreasing the total amount of testing hours by more than a half.
Keeping up with modern technology
One of the key benefits of fintech is how it relies on the latest technologies and early adopts new solutions. To be on top of the game, companies must use technologies, such as machine learning, cloud solutions and blockchain to cut down costs of day-to-day operations, risk management and compliance.
As more people use smartphones to manage finances, the “mobile-first” approach gains widespread popularity — opening a bank account via an app, without a single visit to an office, gradually becomes a new norm. A B2C fintech startup needs to invest wisely into its app for customers — a smooth working interface and beautiful design play a significant role in user retention.
The development of native apps for iOS and Android requires significant resources: in fact, you’ll be paying two separate development teams for building two separate apps. For many startups, a better choice might be to build an app with a cross-platform framework.
Surf was one of the early adopters of Futter cross-platform framework, which was released by Google in 2017. We used it to build a mobile app for Rosbank corporate clients — the first banking app on Flutter in Russia. The cross-platform development required only one team of developers and a smaller budget — basically, one set of code is used for both Android and iOS apps.
Also, Flutter provides high security: the code in Dart language used by the framework gets compiled into non-human readable code, complicating the reverse rendering process and further reinforcing the app security. In 2020, the highest Russian award for interactive projects, Tagline Awards, named the app for Rosbank “the best app” in the Banking, Finance, and Insurance category.
Acquiring long-term users
Cost-effective user acquisitions require a carefully thought-out marketing strategy. While B2C companies can rely on the effect of virality, marketing of B2B products is more complex and starts from convincing other businesses that you can increase their revenue, and in the end, a decisive role is often played by the B2C component of your marketing. Choosing the most effective channels of acquiring new users is one of the challenges in fintech: experiment with search engine ads, social media, content marketing and affiliate programs to find out what works better for you.
In contrast with streaming platforms or food delivery apps, people are less likely to try out multiple banking apps and switch them often. Most customers choose their fintech software solutions once and for a long time. For B2C fintech startups that interact with customers via mobile apps, the stability of an app plays a crucial role in developing long-term customer relations. A frozen for 30 seconds app is no big deal if it is a game, but if it is a trading platform, you can expect not only losing investors, who were unable to close their positions in time, but also receive legal demands to pay damages.
When choosing a development company for your fintech app, pay extra attention to their portfolio and related experience — feel free to check our dedicated article on outsourcing fintech development in which we also give tips on how to choose the right developer.
Raising venture capital
Because the industry of fintech sees rapid growth and many success stories, there is a genuine interest among investors in it. But attracting the right venture capital for your project is no easy task nonetheless.
Strategic investors, preferably with previous fintech experience, can bring to the table not only capital, but also valuable to any early-stage fintech startup things, such as:
- relevant experience on improving marketing and growth strategies;
- intelligence and insights on competitors and current state of the industry;
- introduction to potential customers, partners and team members.
To attract the interest of such investors, you’ll need to show them how your company is “very focused on the problem you want to solve and very clear on the solution that you propose”, says Paolo Gesess, Co-Founder of United Ventures. Also, don’t forget to present a coherent financial plan of long-term growth and an understanding of the competitive landscape in the country where you plan to launch.
Another tip for fintech startups looking for venture capital is to avoid tailoring your product to the needs of the investor or granting them too many rights (such as first refusal on sale of the company) because this can potentially turn away other investors and mergers & acquisitions opportunities.
Competing with banks and big corporations
Fintech startups face fierce competition not only from established banks and other financial corporations, but also from the so-called BigTech companies — Google, Apple, Amazon and Facebook that gradually introduce their financial products. To make customers choose its services instead of a well-known large brand, an emerging startup needs to be able to offer more convenience, faster processing and lower fees.
Take neobanks that offer digital banking services, for example. More than 40 million people chose them because of significantly lower commissions on transactions and ATM withdrawals and twice as fast account opening, compared to brick-and-mortar banks.
Another ace up the sleeve of fintech companies is, of course, easy-to-use and reliable mobile apps. While apps of banks often have poorly designed UI and might lack responsiveness, apps of fintech companies are developed to provide a perfect experience when managing finances from home, office or on the go.
When developing a fintech app, keep in mind current trends in mobile app features and design, such as a dark theme — once rarely used in apps besides e-books, today it is a staple feature among apps of various categories, including finance. For example, because traders often buy and sell stocks on foreign markets located in other time zones, and non-professional investors analyze their portfolios in the after-hours, a dark mode is a beneficial feature for investing apps. When Surf developed an app for Twim crypto trading platform, we used a combination of dark gray background and fonts in bright orange and shades of white to create a dark mode that is less stressful on the eyes and does not impede the secretion of the ‘sleep hormone’ melatonin.
Finding a winning business model
A high burn rate (the rate of spending of a company’s venture capital) without substantial revenue can quickly get out of control and destroy an early-stage company. Therefore, it is important to plan expenses and revenue streams from the very beginning. Before a revenue trajectory is established, startups should spend only the necessary minimum amount in all of these categories:
- Team. Hire only specialists who are vitally necessary for business, avoid too rapid team expansion, expensive offices and team-building activities. Also, don’t try to match your employees’ salaries with those at big banks and corporations. Instead, offer them other benefits of working at your company, such as a flexible work environment or company’s shares for chief officers.
- Sales and marketing. Don’t overspend on promoting your products before establishing a definite market and audience for them.
- Product development. A short time-to-market time is what startups are all about — try to present a minimal viable product (MVP) as soon as possible, so you can have something working on your hands for potential investors and clients.
Fintech companies not only challenge the ways traditional companies provide services, but also the way they earn money. Among business models for fintech we can point out:
- Small ticket loans. Big banks usually don’t offer good terms on small loans because of low margins and high risks. This part of the market is getting filled up with fintech startups that implement one-click buttons on e-stores web pages to offer a quick loan on the desired item without a lengthy authentication process.
- Payment gateways. Banks charge online merchants sky-high fees for handling transactions, and fintech startups such as Stripe and Zettle offer card acceptance and payment processing services at affordable rates for small businesses.
- Partnerships with other businesses. If your company’s product is a free personal finance app, you can analyze how and in what categories your customers spend money and offer them suitable products from partners at special prices.
- Alternative credit scoring. Because banks often use outdated or too strict criteria, many reliable individuals fail to pass loan screenings. This is getting changed by fintech companies, such as CreditKudos and Juvo that use consumer transaction and mobile network data to build financial identities and measure creditworthiness.
- Insurance underwriting. The use of big data and AI algorithms provides startups in insurance (InsureTech) with insights that take into consideration a multitude of factors and calculate an accurate insurance premium. For example, Capre Data gathers data from social media and online platforms providing enhanced risk profiling for insurers.
Investment solutions. Investment apps, such as Robinhood, gave rise to commission-free stock trading. The platform earns rebates from market makers and trading venues, and, together with fees on money management and premium features, this makes it possible to offer a $0 trading commission to customers.
To sum things up
Because finance companies are inextricably linked to other people’s money and lots of private data, there are many challenges facing fintech industry. As more money will flow through fintech, the inescapable attention of state regulators will only increase, and any startup should be prepared for extensive and productive dialogue with government bodies.
Also, big banks and financial corporations have no intention of giving up their customers easily, and, with their huge budgets and solid brand images, pose strong competition to emerging companies. On the other hand, new technologies, such as AI and big data, ability to offer lower fees and shorter processing times, and underbanked populations of developing nations give a new fintech company all the chances to create a revolutionary product and find its target audience.
For many fintech startups, mobile apps are the main way of providing services. If you are thinking about starting a business in the industry, you will need a reliable app development company with a proven track record. Surf has a profound fintech expertise creating apps for banks and crypto trading platform, and we’ll be glad to discuss and estimate your project. Fill in the form, and we’ll contact you shortly.