An old classic financial institution with multiple physical branches competes with the agile and low-cost mobile-only bank. Possible hundreds of years of tradition versus a few years or even a few months on the market. And yet, the mobile bank is on the rise, attracting users left and right; like a moth to a flame. They know their issues will be addressed quickly and every operation will take minutes, sometimes even seconds. If so, why many FinTech startups pivot early on and change the product? What common mistakes do they make?
The main reason why startups fail
The simplest answer: they don’t understand the user’s psychological behaviors and the market itself. FinTech companies work under different rules than the classic financial services industry. Founders sometimes think they have to compete with everyone – old banks, other challenger banks, for attention and customer volume. That’s true to some extent but the most important fact is that FinTech is the industry where experience matters.
FinTech is not only highly regulated but also very demanding. If you’re making a loan app, you have to know everything there is to know about money flows, margins, creditworthiness assessment, and more. If the goal is to build a money transfer app, do you have users’ habits mapped? On most profitable markets, locally? Will the application work in Africa, where public internet infrastructure is totally different compared to Europe or the U.S.?
These are the questions you want to answer before taking any steps further. And there are plenty.
Failed FinTech startups make these common mistakes
If you can dream it, you can make it. At least on paper, the paper can take anything. In reality, though, a business plan is only the beginning. Psychological behaviors around money vary from country to country and despite your best intentions, still will. That’s the main problem but we have other ones for you. FinTech startups that can’t make it go through at least some of these reasons. They:
- Lack industry knowledge. This point was previously mentioned but I feel we have to repeat it. The mobile banking industry is not always about disrupting the entire market. Sometimes it’s “just” about serving customers with things they want and need at the moment. Market and industry awareness is everything.
- Innovate by force. What is the definition of innovation? Doing something in a whole new way. Improving, making better. If so, then why some FinTech startups insist on the “new way” part, instead of making life better for the customers? Sometimes it’s easier to create an application that is “good enough” and still make a profit. Customers don’t judge the product based on how innovative it is. They want to have as much addressed pain points as they can.
- Overlook legal aspects. There are many “rules of the game” you need to take into account. On any given continent and country. The anti-terrorist funding law (AML/CLF), anti-money laundering regulations, digital identity verify verification (know-your-customer – KYC) compliance issues, and more. Every one of them can efficiently derail your business or make it more complicated than it could be. Going blind to the industry without legal knowledge or support can cost dearly and break the budget. There are also violations in fields like security and trading, consumer information/consent, deposits, digital currency.
- Ignore customers’ onboarding. The year 2020 will go in flames in history but it will also be the year of the “connected customer”. This term is crucial to understand what exactly has happened. According to Atos, each year FinTech companies get financing worth of $50B. 20B smart devices may become the next terminals for banking operations. More than 500 FinTech companies are created every single year. 2B of unbanked customers may be served thanks to mobile FinTech solutions. Two-third of all financial transactions are now made online. Conclusion? Usage of FinTech products will only grow in time. As FinTech awareness grows, the number of potential customers grows as well. Ignoring a simple way to explain how the app works, can very much sink the business. There are still demographics not served by the industry, but the even younger crowd don’t want to figure out how the product works. It should work on its own. Onboarding should briefly guide the user through the app. Everything beyond that is faulty.
- Overcomplicate things. Which brings us to another point. Do you know what kind of solutions your customers are looking for? Do you know what they imagine it should look, feel, and work like? Making a product appearing to a customer like a Swiss knife is flesh over substance. Focus on one or two key everyday challenges and make a product that helps people. The application itself should be intuitive and friendly. FinTech customer experience should center around ways people engage with a product.
- Lack proper sales and marketing strategy. You can aim the product towards the right audience but you can’t make anyone buy and use it. The key lays in highlights – show, not tell. Create videos going through major functionalities. Write blog posts describing what needs are addressed with the product and why. Start with the last word. Explain to customers what drives you and what were you thinking at every stage of production. Show that customer-centricity is something you deeply care about.
- Ignore economic cycles. Yes, 2020 was a highly unusual year but it actually proves the point more than anything. Not one customer lives and functions in a vacuum. His behavior around money is always subject to change. The economy thrives and collapses and habits change. People can spend like crazy, another year they will save up or borrow money. With each transition, companies face marketing, sales, and technical challenges. How to communicate with customers? What do they expect from us in this day and age? Have we been asleep while the competition run rampant with new and exciting solutions?
- Lack the ability to quickly pivot and adapt. Inability to change sunk many startups. They could raise money but couldn’t stay afloat. Lendy, a P2P property investment platform, got £150m from investors, went under. Nodal Labs, a “blockchain-powered freelancer firm” got £250m, the same story. What are the reasons to change? Look for users’ early feedback. If you got something, but the details are wrong, fix them. If the competition is too fierce, neutralize them by going the extra mile and revamp functionalities and business plan. If you can’t develop the product on time or the competition is too strong, partner up with someone.
- Go alone. Finding partners in other financial institutions is not uncommon for FinTech companies. In fact, traditional banking reenters the stage, as we have said in the FinTech trends for 2021 article. FinTech has a market share of 1%. As impressive it might be, challenger banks can’t compete in the current model. Not in the long run, not all of them. Seeking partnerships among established organizations isn’t necessarily a bad thing. They have scale and money. Thinking of them as “necessary evil” or “notorious competition” might not be as profitable as you thought. Plus, it might scare away a portion of the demographic, who’s looking for a stable challenger bank. Especially with one that might not have a lot of money, but a great idea and friends in high places. Legal financial institutions bring other things to the table. Such as an experience in compliance and regulatory acuity.
- Have limited technical background. Another form of partnership can come with the support of seasoned software developers. Areas like end-to-end FinTech product development or UI/UX design services can be outsourced. This will give you time to work on your product, space to breathe, and possibly rethink your operative and business models. Finally, it will free your in-house resources to do additional work. The crowd wants fast and seamless transactions made on-the-go. They expect steady application without bugs and a proper customer experience. What you need is a reasonable time-to-market date and at least a minimum viable product (MVP) to present after the initial phase of development. Reach a healthy user base and build from there.
Bonus round: don’t expect quick adoption
This mistake can’t be stressed enough. Many people have a brilliant idea and expect the market to share the same opinion about it. That is groundbreaking and will change lives across the globe. It can totally happen and we wish you the best of luck. But the reality is, that even with quality marketing and friendly interest rates, your application will hold water months, maybe years in.
People need time to discover the product, learn about its perks, incorporate it into a daily routine, and then proliferate it through the word of mouth. The last thing you should do is to lose patience. Give people time and polish the solutions over the months to come. You will get there, just do what you do best.
How many tech startups fail?
According to Investopedia, 90% of them. Yes, you have read it right. At the same time, Deloitte reports that the traditional financial services industry will recover from unexpected 2020 turmoil. Banks will invest in resilience, accelerate digital transformation, and focus more on safety, corporate responsibility, and cost reduction. In a nutshell – in 2021 and beyond they will become at least slightly more attractive to the “traditional” FinTech audience.
How can you mitigate these moves? Don’t make mistakes highlighted in this article and go alone. There are multiple great apps but it’s hard to get spotted in the wild. Suit up, partner up, and let’s go!