EVEN BEFORE the election of Donald Trump, rumours of an impending tech slump on both sides of the Atlantic were becoming more pronounced. Despite the much-vaunted Fintech boom, evidence suggests companies are staying private for longer, as the markets grow less tolerant of those not generating profits. Overall evidence suggests a climate that is becoming more cautious to tech start-up valuations, with the value of dollars invested last quarter totalling less than half of that seen in the third quarter of 2015.
The reasons for this are myriad, but partly relate to a period of widespread market uncertainty following Britain’s decision to leave the EU and the election of Trump to office. Despite the apparent rivalry between digital disruptors and traditional banking models, Fintech remains more closely reliant on old-fashioned forms of finance that most people realise.
"The level of investment from corporate venture capital, especially banks, has increased from 25 to almost 33% in the last 12 months" commented Mike Smith of Business Expert. "But as overall markets reel from political shifts, it’s hardly surprising to see VC investors shifting down a gear. Startups are also finding banks are looking more closely than ever at their ability to execute sound business plans and manage resources before committing which makes the playing field that much tougher."
Despite the challenges, the promise of Fintech is still exciting enough to lure many to attempt the summit (San Francisco’s Square was recently valued at $5bn). Yet with estimates putting the existing number of Fintech startups at anywhere between 6,000 to 25,000 companies, few will truly achieve their financial goals. As we move towards 2017, here are some key areas which ambitious young techies would do well to consider before launching.
Licensing and Regulation
The complex Fintech journey through the licensing process has scuppered many a promising start-up. Many enter the process of licensing with very little understanding of the convoluted red-tape, nor the sometimes protracted time-frames involved in actually becoming legally allowed to offer financial services. Given that securing a licence within a rapid timeframe may be a crucial factor in achieving market readiness, a misunderstanding of this can drain the last in the company coffers.
Because the very nature of a startup applying for the necessary licenses to provide their own banking services is inherently threatening to banks, there may also be a conflict of interests here which banks have used to their advantage. Noteably, TransferWise, according to The Wall Street Journal, is now seeking its own independent licensing in the US and cutting ties with banking partners. So, too, are UK digital-only bank Monzo and Germany’s N26.
It's likely that the area of licensing is going to evolve rapidly over the next few years, with many pundits suggesting the current licensing situation is a distinct barrier to Fintechs. For that reason, certain geographic locations are already smoothing the process for tech startups as a means of incentivising companies to register there. In North Carolina, a law enacted in July exempts virtual currency users and blockchain software providers from licensing requirements, a move that garnered praise from organisations such as the Chamber of Digital Commerce.
Although funding for venture capital-backed Fintech startups is on track to hit a new high in 2016, any tech slump will hit start-ups hardest. "With cash-flow the bloodline of any startup business, many Fintech businesses fail during the first year of operation due to lack of funds," a spokesperson from insolvency practitioners Company Debt told us. "The obvious places to look for early seed capital are crowdfunding, angel investment, or funding from incubators but if those opportunities fail you, you can quickly find yourself between a rock and a hard place. Over the last 12 months, we’ve certainly noticed increased insolvencies within the UK tech sector."
Many Fintech startups enter the market with a visionary idea and great technical acumen, while lacking the necessarily regulatory savvy to keep abreast of compliance rules. Startups need to acquaint themselves with the sometimes convoluted rules regarding money laundering, terrorist funding, data protection, payment services security, and wealth management, to name a few. These areas are compliance minefields, often combining the laws of multiple geographic regions since the nature of the web is international. A failure to staying abreast of regulatory changes has proven a thorn in the side of many a Fintech player.
Failure to protect intellectual property
Obtaining global patent protection for Fintech is extremely complex and, as such, is often overlooked by companies desperate to bring their product to market as quickly as possible. While copyright extends automatically to things like computer code and audio-visual features, patents are the clear mechanism with which to protect core innovation. That said this is a notoriously murky legal grey area and one in which the Supreme Court has already ruled against companies on the grounds of their patent being an "abstract idea."
Article written by Jameson Smith and Co