What blocks the success runway for FinTech start-ups?

The start-up ecosystem in India has witnessed a euphoric growth rate in the past couple of years, spearheading the entire landscape for emerging economies globally. Unfortunately, amongst the various industries that start-ups are laying a stronghold on, there is one industry where they often fold before being able to lay the winning card – Finance. Despite adequate funding and an unprecedented growth of 135% in just two years, most FinTech start-ups are grappling with inefficiencies in multiple operations. However, with India slowly but surely making the transition towards a cashless economy, access to internet services, and increasing transparency in transactions, the outlook for the future is most certainly robust.

In the recent times we have seen excellent success stories – PayTM, FreeCharge, BankBazaar.com, Lendingkart etc. but the victory has been tainted by the increasing number of FinTech start-ups closing down, despite support from various government initiatives like Make in India, BHIM, UPI etc. Regulatory sandboxes have been established to be able to better mitigate risks and understand the viable opportunities. Yet, there remain multiple reasons for this anomaly that we need to explore.

Primarily, we need to understand that the ecosystem of FinTech is an antithesis in itself. It is a combination of the fast moving technology-led innovations aiming to change business models and their consequent acceptance by the generally slow-paced world of finance. The finance industry is at the cusp of a major transformation. There is most certainly no dearth of ideas but ideas need to be scalable. They need to be backed with the potential to grow and evolve as the situation demands. Innovators need to understand that the solution they have come up with, albeit revolutionary, may not necessarily be required in the industry. An idea that may work in US may nose-dive back home due to differences in economy, consumer dynamics etc. Research is a primary factor to ensure whether the product will ace the market.

Once the research is in place, what you require is sufficient domain expertise with respect to the technology you aim to work and the financial services sector you wish to operate within. It is imperative to understand that the finance industry functions on myriad rules, regulations and compliances. Often, the masterminds behind FinTech start-ups are technology driven whiz-kids whose proficiency lacks in comprehending the integrities of the finance world. Talent is needed to understand and work in accordance towards licensing and compliance, two major factors where new entrants face acute backlash. Inability to stay updated on the changing regulations and compliance has pricked many players in the past and will continue to do so unless a veteran is brought on-board.

While the ecosystem is being swept over by technology, one needs to understand that it also results in equal opportunity for fraudulent activities. Considering that it is the sole industry that deals directly with people’s hard-earned money, one can never be too careful. Traditional players have a clear idea of the compliances and governing regulatory bodies that they have to adhere to but most FinTech players do not understand the cardinal ecosystem they are stepping into. Being hybrid entities, the main aim of FinTech players is to keep operational costs at a low minimum, which essentially means that the compliance teams are either non-existent or poorly staffed. The only solution for FinTech companies and compliance to co-exist is that these players need to come up with a creative and cost-effective way to meet their due-diligence and for regulatory compliance to embrace technology and adapt to the fast moving world of FinTech with rapid processes.

This brings us to the best solution for FinTech players; promising mentorship. Although there are many incubation projects and regulatory sandboxes set in place to mitigate risks and optimize value for FinTech start-ups, they are far from being exhaustive. Nurturing and incubating start-ups is a two-way street. Start-ups need to understand the importance of incumbents to help assess their problem, assist in regulatory issues, etc. The earlier they venture upon this partnership, the quicker the results and lesser the mistakes such as improper allocation of funds etc. Once the goals between two parties have been aligned, it is far easier for incumbents to foster this relationship with experience and for start-ups to cultivate creative technology-led solutions that can be scaled, profiting all.

In the future, the adoption of technology in the financial service sector is expected to intensify further. Despite discrepancies, FinTech start-ups are steadily on the rise. However, we are yet to witness a home grown player that has completely changed the outlook for the FinTech ecosystem and is in unison with global standards. Maybe what the FinTech space needs is an Amazon or Uber of its own to achieve the competitive edge that is needed.