Growing Pains of Fintechs in the Financial Industry

September 4, 2019|0 min read

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Fintech companies have undeniably transformed the financial industry—entering the space at an increasingly rapid pace. And they’re just getting started. A recent report from KPMG shows that in 2018 “global fintech funding rose to $111.8B...up 120 percent from $50.8B in 2017.”¹ That same report shows that in the US funding grew from $29B to $54.5B.

However, as more entrants look to take a piece of the pie in the financial space, they’re starting to realize the growing pains that financial institutions have long faced and worked to overcome. And “these roadblocks are causing serious issues for fintechs, giving banks [and credit unions] the upper-hand during the fintech’s “growing stage.””

Regulations: The Main Hurdles Fintechs Face

Regulations have one main purpose: to protect the rights of citizens by enforcing rules and imposing requirements. And the financial industry is perhaps one of the most highly regulated industries across the globe. However, with the increasing pace and rate of innovation, fast-moving startups are predominantly motivated by creating innovative solutions to address age-old problems, and unsurprisingly they’re now experiencing the full scope and complexity of the financial industry.

It seems that fintechs have a lot of hurdles to overcome in the financial industry’s complicated regulatory environment if they want to be successful with bringing new products and offerings to the marketplace. An analysis by Bloomberg points to “three reasons why a slowdown – or, as some fear, a meltdown – could occur in fintech sooner rather than later. First, fintech companies are highly vulnerable to systemic shocks, as most are undiversified and poorly capitalized. Second, fintech companies, especially start-ups, are hard to monitor and regulate. Thus, a failing company, and its effect on the wider system, is hard to predict. Third, the fintech community is yet to come up with a system of rules and responses that will govern such a slowdown.”²

The solution, in part, might be looking for ways to refresh certain regulations that may not apply as fully in today’s evolving financial landscape as they did in the past. It seems that one of the reasons fintechs face so many regulatory hurdles is because the laws they have to adhere to were created long before their time, when the financial industry as a whole looked much different. “Imagine running a business under laws written before your industry or product ever existed. That’s the reality for most fintechs. Congress’s directions for regulators about what “banks” are and do are based on how banking worked in the 1970s.”³ Furthermore, according to a recent Fortune article, regulators and lawmakers have said “we know the laws are outdated and need to be scrapped and rewritten, but it’s just too big, too hard, and too much work.”³

It seems that as of right now, “the U.S. lags behind other leading developed countries in offering fintech firms a legal framework which supports innovation and protects consumers.”⁴ Whereas, according to a Pew Trust report, “other jurisdictions that are leading in supporting financial technology innovation — including Abu Dhabi. Australia, the UK, Singapore and Hong Kong — have centralized their approach to regulation to provide a coherent end predictable framework for fintech companies and banks. They have acted to build up their financial industry.”⁴

How to Succeed as a Fintech

As the regulatory environment stands today, the fintechs that are most likely to succeed are the ones that are radically disrupting the space, while being mindful and inclusive of the rules and regulations in the rapidly evolving financial industry. According to McKinsey, “ data-driven iteration, coupled with early and continuous user testing, has led to robust product-to-market fit for these firms.”⁵ Whereas, “companies that are trying to replace the system – which has existed for centuries, populated by incumbents who are also investing heavily in the future – will be most vulnerable to shocks, because in times of crisis, customers will return to the safety of old, trusted, capitalised institutions. It is these companies, with ambitions beyond their product offering, which may be vulnerable.”⁶

The winners will clearly be fintechs that “enable the wider system by focusing on delivering technologies that service the existing financial community and its customers. And the key to this is product market fit. A fintech company with laser-sharp focus on a solution delivered via innovative, cost-cutting technology will survive and thrive.”⁶

Fintechs in the financial industry are rapidly changing the rate and pace of innovation, but with that come challenges. However, despite all the hurdles and growing pains that fintechs will inevitably face as they continue to navigate this new landscape, they can add a lot of value with new technologies and innovations that are desperately lacking in the industry today. When it comes down to it, the benefits are clear, fintechs “could [help] underserved consumers around the globe by allowing approximately 2 billion unbanked consumers to be connected to the financial system.”⁷ And in this scenario, financial institutions stand to gain a huge advantage by partnering with fintech providers.

How MX Can Help

Technology has the power to change people’s quality of life for the better. At MX, we partner with forward-thinking fintech innovators to deliver powerful solutions that help financial institutions leverage AI-driven tools and technology to better serve their customers along their financial journey.

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