10 Key Issues for Fintech Startup Companies

By Richard D. Harroch and Melissa Guzy

Investment in financial technology (“Fintech”) companies is growing dramatically. Global Fintech funding has risen to over $100 billion, fueled by large M&A deals and large rounds of financing. Investment in Fintech companies is expected to continue to grow significantly in the next few years, as such companies offer outsized growth opportunities.

Fintech companies encompass a broad landscape of businesses, generally around financial-oriented services and products. Examples of Fintech related companies or products include:

• Payment infrastructure, processing and issuance, such as services provided by Square, Ant Financial, Revolut, and Stripe
• Stock trading apps, such as from Robinhood, TD Ameritrade, and Schwab
• Alternative lending marketplaces, such as Prosper, LendingClub, and OnDeck
• Cryptocurrencies and digital cash, such as Bitcoin
• Blockchain technology, such as Ethereum
• Insurtech, which seeks to modernize and simplify the insurance industry, with companies such as Lemonade, Oscar, and Fabric
• Money transfer and remittances, such as TransferWise, PayPal, and Venmo
• Mortgage lending, such as through LendingHome and Better Mortgage
• Robo investment advisors, such as Betterment and Wealthfront
• Neobanks such as Chime, N26, and Monzo
• Credit reporting, such as Credit Karma
• Online business loan providers such as Lendio and Kabbage
• Small business credit cards, payments, and financing, such as through Brex and Fundbox
• Financial cybersecurity companies seeking to protect institutions from money laundering, chargeback risk. and cybercrimes, such as Forter, EverCompliant, and CrowdStrike.
• Infrastructure and software to power financial applications, such as from Plaid

See a thorough analysis of companies in the Fintech space in Fintech Insights by FT Partners.

Fintech companies fall into either a business-to-consumer sales model (B2C) or business-to-business model (B2B). Each model has its own challenges, although the B2C sales cycle tends to be much shorter than the B2B sales cycle, as businesses are slower to adopt new technology.

A number of Fintech startups show great promise and are quickly earning rising market valuations. Some of these companies have grown, or will grow, to become valued at billions of dollars. For example, Stripe is valued at over $35 billion and Square is valued at $25 billion.

Startups in the Fintech space face a number of issues and challenges, from regulatory to fundraising and competitive issues. In this article, we will outline 10 of those key issues and challenges.

1. Raising Venture Capital or Strategic Financing

Raising venture capital financing is never easy for Fintech companies. Venture investors will raise a number of key questions in their due diligence process, including:

• What problem in the financial process is the company’s solution looking to solve?
• Is there a qualified management team?
• Is the market opportunity big?
• What positive early traction has the company achieved? Are there early or pilot customers?
• Are the founders passionate and determined?
• Do the founders understand the key financials and metrics of their business?
• Have the founders been referred to the investor by a trusted colleague? (It’s extremely difficult to get a venture investor interested through cold calling or cold emails.)
• Is the investor pitch deck professional and interesting? (See item #2 below as to what your investor pitch deck should contain.)
• What are the potential risks to the business, especially regulatory risk?
• Why is the company’s product or service great?
• How will the investment capital be used and what progress will be made? Will it be enough to obtain the next round of financing?
• Is the expected valuation for the company realistic?
• Does the company have differentiated technology?
• What is the company’s intellectual property?
• Are the company’s financial projections realistic and interesting?

See 15 Key Questions Venture Capitalists Will Ask Before Investing in Your Startup and A Guide to Venture Capital Financings for Startups.

Ideally, Fintech companies will attract the right venture capital investors with Fintech experience and the right strategic investors.

Here are some examples of how experienced Fintech investors can assist Fintech companies:

• Provide market, product, and competitive intelligence
• Help to refine the marketing plan and the customer target list
• Offer introductions to:
  • Potential customers
  • Potential strategic partners, including providers of debt financing
  • Venture capital investors interested in the Fintech space
  • Potential management team members

Strategic Fintech investors can be:

• Pilot customers
• Distribution partners
• Technical and product advisors
• Strategic partners collaborating on product development
• Helpful in providing insight into regulatory issues
• An M&A acquirer of the Fintech company

However, Fintech companies need to avoid granting too many rights (such as rights of first refusal on sale of the company), as this will chill or kill future fund raisings or M&A opportunities. Additionally, tailoring product development to the needs of a strategic investor can turn a startup into a captive development team.

2. Having a Great Investor Pitch Deck

Both venture investors and strategic investors expect to see a concise and interesting summary of the business before they will even consider taking a meeting. Therefore, it’s crucial that a Fintech startup creates a great investor pitch deck that tells a compelling story and shows scalability.

You want your investor pitch deck to cover the following topics, roughly in the order set forth here, and with these titles:

• Company Overview (A summary overview of the company)
• Mission/Vision of the Company (What is the mission and vision?)
• The Team (Who are key team players? What is their relevant background?)
• The Problem (What big problem are you trying to solve?)
• The Solution (What is your proposed solution? Why is it better than other solutions or products?)
• The Market Opportunity (How big is the addressable market?)
• The Product (Give specifics on the product or service.)
• The Customers (Who are the target customers? Why will there be a big demand from these customers? How easy is it for a customer to adopt and use?)
• The Technology (What is the underlying technology? How is it differentiated? Is it defensible and difficult to replicate?)
• The Competition (Who are the key competitors? How will you be better than the competition?)
• Traction (Early customers, early adopters, revenues, press, partnerships)
• Business Model (What is the business and revenue model? Is it scalable? What are the acquisition costs and stickiness?)
• The Marketing Plan (How do you plan to market? What do you anticipate for customer acquisition costs versus the lifetime value of the customer?)
• Financials (Projected revenues, key assumptions, and EBITDA)
• The Ask (How much capital are you are trying to raise? What progress will you make with that capital?)

Here are some helpful pitch deck tips:

• Tell your story in 15 to 20 slides. (If you can’t tell the story with brevity, you can’t tell it well.)
• Explain why the market opportunity is or will be large.
• Describe the talent on your team.
• Don’t provide excessive financial details. Hit the key indicators and save the rest for follow-up.
• Don’t try to cover everything in the pitch deck. Your in-person presentation will give you an opportunity to add and highlight key information.
• Use plain English—too much jargon or acronyms can distract from your story and you will lose credibility.
• Don’t underestimate or belittle the competition, or dismiss the regulatory risks.
• Make sure your information and metrics are up-to-date.
• “Look and feel” matters. Think of it as your investor interface, and consider getting professional help from a graphic designer.
• Review other pitch decks for ideas on presentation. Do a Google search and you will find hundreds of pitch decks online.
• Be sure to include the following wording at the bottom left of the pitch deck cover page: “Confidential and Proprietary. Copyright (c) by [Name of Company]. All Rights Reserved.”
• Send the pitch deck in a PDF format to prospective investors in advance of a meeting. Relying on Google Drive, Dropbox, or some other online service just puts up a barrier to the investor actually reading it.

For additional guidance, as well as sample pitch decks, see How to Create a Great Investor Pitch Deck for Startups Seeking Financing and The 17 Biggest Mistakes Startups Make With Their Investor Pitch Deck.

3. Regulatory Issues for Fintech Companies

If you are in the Fintech space, you should anticipate that dealing with regulation will become a daily norm. There is increasing pressure on Fintech startups, globally, to address and deal with existing or potential regulatory hurdles.

It is important to work with regulators and make sure that you hire a capable team member who is dedicated to understanding the trends, can interface with the appropriate regulatory bodies, and who has a solid understanding of any regulatory impact on your product or the way you market the product. Many countries have “Regulatory Sandboxes,” such as Singapore, Australia and the UK, that can assist and guide Fintech companies.

Unfortunately, in the United States, Fintech companies must comply with both federal laws and a patchwork of state laws. Although certain federal agencies and state regulators have voiced support for promoting Fintech innovation by simplifying the applicable regulatory regime, in the near term, Fintech companies should expect to engage specialized legal counsel experienced in navigating the morass of laws, regulations, and court decisions that could apply.

As a startup, it’s important to be aware of the regulatory framework. A few key issues to consider include:

• Are there existing regulations today that regulate the company’s products or services?
• If there are existing regulations, does the company comply?
• What licenses will be required?
• Does it make sense to partner with another company that already has the required licenses?
• If you are going to partner, what would be the economic split? What is required to partner from each company’s perspective? What is the risk? Is this a long-term approach or an intermediary step?

If the company is dealing with securities, deposits, and/or lending, then legal counsel should be consulted on an appropriate approach before marketing to consumers. 

Privacy and protection of personal information is a huge issue right now, with new laws coming out all over the world. Even large financial institutions are struggling to keep up with new requirements. The following consumer privacy, data security, and financial services-related laws or regulatory schemes are important for Fintech companies:

• Federal Trade Commission–The FTC is broadly empowered to bring enforcement actions to protect consumers against unfair or deceptive practices and has developed a sort of “common law” with respect to regulatory expectations. The FTC has taken the position that “deceptive practices” include a company’s failure to comply with its published privacy policy and its failure to implement “reasonable” security measures to protect consumers’ personal information.
• Consumer Financial Protection Bureau–Also regulates at a federal level certain financial services provided to consumers. The CFPB recently issued new policies intended to promote Fintech innovation, but these policies remain untested, and there is a key unresolved issue regarding whether federal regulations can preempt state laws or regulations governing the same subject matter.
• European Union GDPR rules–Europe’s data protection laws for companies that may collect or process EU residents’ data. GDPR rules have a global reach as they regulate any international company which collects or processes EU residents’ data.
• Telephone Consumer Protection Act–Imposes restrictions on telemarketing.
• State data breach notification laws–All 50 U.S. states require customer notification of security breaches involving personal information; moreover, many states are establishing minimal “reasonable” standards to protect consumer data.
• CAN-SPAM laws–Places restrictions on email marketing.
• Evolving federal and state laws–For example, the California Consumer Privacy Act of 2018, which imports EU GDPR-style rights for California residents around data ownership, transparency, and control.
• Gramm-Leach-Bliley Act–Imposes privacy and security obligations on insurance companies, banks, and other covered financial institutions with respect to customer financial records.
• New York Department of Financial Services cybersecurity rules–Imposes specific security requirements, including technical controls and reporting obligations on licensed entities. The requirements are directed at the security of the systems underlying the financial sector, not simply on data.
• Anti-Money Laundering laws–Fintech companies that handle, remit, or transmit funds may be required to comply with laws designed to prevent money laundering and other illegal activities.
• International laws—There are numerous countries around the world developing their own requirements. Some of these laws require that transactions have to be processed and information maintained in the country.

4. Competing With Huge Financial Brands

Today, Fintech companies don’t only compete with the large existing financial powerhouses, such as Goldman Sachs, Citi, or PayPal, but they soon will have to contend with Amazon and other technology companies expanding into financial services. A Fintech startup cannot underestimate the spending power of the incumbents and their willingness to spend when it comes to direct consumer marketing.

A Fintech company needs to differentiate its product and services and ensure defensibility. The target market might be poorly understood or underserved, or consumers are simply dissatisfied with the current offerings. In the infrastructure space, it might be that a new trend is emerging and a new solution bridges a product gap or reduces friction.

As “open banking” expands globally, along with PSD2 (the European Payment Services Directive applicable to the payments industry) and GDPR, new opportunities are emerging for Fintech companies. The introduction of new regulations is leveling the playing field and creating new opportunities for products and services in both the B2C and B2B spaces.

Although large incumbents have been working to address these changes, they are generally slower than the average Fintech company; speed to market is an important competitive advantage, but might not be sustainable over the long term. 

A Fintech B2C company should be able to answer the following:

• What problem do you solve that the large incumbents are not addressing, and why are they ignoring that market segment or opportunity?
• Are you trying to change customer behavior? If so, what is your approach and why do you think it is possible?
• What are customers risking if they adopt your solution versus an incumbent’s product?
• Can you build trust with your customers?
• How will incumbents react? And if they do, how long will it take them?
• Do you have any technology that is defensible with your solution?

For a B2B company, the questions are centered around product differentiation and the problem you can solve for the enterprise. Remember that the product needs to solve a significant problem in order for a large company to bet on a startup versus a larger more established company. The following list highlights the most critical points:

• Does the product solve a pain point today that is causing the company either significant expense, loss of business, or potential regulatory fines?
• Is the product robust enough to compete with the incumbents and beat them in a head-to-head match up?
• Will the incumbents use it as a loss leader, eliminating any potential margin?

5. Cost Effective Marketing to Acquire Customers

Customer acquisition is a significant issue for Fintech startups. To be honest, entire books are written on the topic of customer acquisition, and the methods will vary depending on whether the company has B2C or B2B offerings. But, in brief, key ways Fintech companies can market themselves are:

• Search engine ads—Pay Google, Bing, Yahoo, Facebook, or other sites to send you traffic (such as through Google Ads). However, such ads are often expensive and not cost-effective, so you need to do testing/pilot programs to see what keywords work and at what price.
• Company website—Build a great site with lots of high-quality, original content that is search engine optimized as well as optimized for mobile traffic. Continue to add fresh content to the site.
• Social media marketing—Have a smart social media plan to drive traffic from Facebook, YouTube, Twitter, LinkedIn, Instagram, Pinterest, and other free social media sites.
• Content marketing—Prepare well-written articles and try to have them posted on other quality sites, such as AllBusiness.com or Medium.com, with links back to your site. Employ content widgets on third-party websites through Taboola or other third-party content discovery platforms.
• Affiliate programs—Affiliate programs work as a mechanism to pay a finder’s fee to an affiliate who refers a client to a Fintech company. For example, a credit card issuer may pay a $75 fee for each client referred who signs up for the issuer’s credit card.
• Press releases—Issue press releases announcing major developments in your company: new financing raised, new partnerships, new senior employees hired, and new product announcements.
• Influencer marketing—Implement a marketing/advertising campaign with the help of influencers who have a large following on LinkedIn, Instagram, Twitter, Facebook, YouTube. and other social media sites.
• Videos—Produce videos that describe your services in an interesting and professional manner. You can then post these videos on your website, YouTube, and other social media sites.
• Direct mail—Direct mail can be a valuable channel for Fintech companies to reach potential customers. Targeting information can be combined with credit data, making it easier to identify valuable customers, and the price of direct mail may be more cost effective than search engine advertising.
• App marketing—If you have a mobile app, you will want to optimize it to rank higher in app store search results. Consider paid promotions in the Apple App Store or Google Play.

Although venture capital financing has been flooding into Fintech startups, marketing is an easy place to waste money. We have been in a period of “growth at all cost,” but this will not be sustainable.

We recommend carefully constructing a marketing strategy before you launch and making sure your tech can support analyzing cohort data on a granular level. Creating a budget for different tests on short cycles will help you to eliminate any strategies that are not working and fine tune marketing programs that are showing success. Keep fine tuning and experimenting, and making sure the data collected shows the right metr

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