Things to Consider Before Starting a Fintech Startup in the USA

Yana Troianska

November 6, 2017

Building a fintech startup is not an easy task. However, this industry is experiencing a great upswing, there are still a lot of challenges associated with government regulations, security requirements, and other industry specifics.

After the financial crisis in 2008, the financial sphere started to change, and many enterprising people invested in applying technology in this area. Fintech startups began to appear, attracting more money to the financial sector. Fintech now has significant potential, and plenty of entrepreneurs are trying their luck there. If you are one of them, make yourself comfortable and check out the main things to consider when building a fintech startup.

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First, please, remember that the fintech industry is not the same everywhere. Setting up a startup in the UK will differ from creating one in the USA. And it is not just about government politics and regulations, although they are quite important. Many factors determine the fintech market in every country, starting with access to information and ending with the needs of the area’s inhabitants.

We have tried to cover the main factors that are relevant to every fintech startup regardless of the country of its location. Nevertheless, some of those mentioned can be specifically applied to the USA.

1. Challenges

If you have some rosy dreams that building a fintech startup will be easy, be prepared for the bitter truth. It is much harder compared to other industries. From the very beginning, you must be ready and understand that this direction is tough and you will encounter many challenges. It’s better to think about possible risks beforehand and plan to overcome them if they occur.

The first challenge for every startup is applying the general idea and neglecting the end customer. You can have an incredible idea that you believe can change the world. Great, but if it does not solve your consumer’s needs – you are stuck. The first rule of the business is to think about the end customer. Because the time when entrepreneurs produced something without taking consumers needs into account is gone!

The next most important thing to consider is orientation. Often, startups focus on solving local problems, overlooking the global scale. This is understandable due to limited resources and money. However, don’t let that happen, especially in fintech, because this industry is competitive and risky.

Be smart and plan to scale your business globally from the beginning.

And last but not least, the challenge that can take you unawares is the lack of a marketing plan. Technical aspects are important, but it is nothing without a well-thought-out marketing strategy in the real world. So, create a consistent marketing strategy that will drive your sales and give you a good start in business development.

building fintech startup

2. Determine a sector you want to focus on

The fintech industry consists of a great variety of sectors. Here are ten of them:

  • Payments and international money transfers
  • Lending
  • Small businesses financials
  • Data analysis and financial decision making
  • Bitcoin and blockchain
  • Personal finances
  • Mobile banking
  • Insuretech
  • Crowdfunding
  • Smart Finance Management

Choosing the right sector is very important, as it will determine your future actions. Every sector has its own specifications and regulations.

Before setting up a fintech startup, you must understand what sectors are there and what is important to know about them.

building fintech startup in the USA

 2.1 Payments and international money transfers

This segment contains wallets, money transfer services, and online payment gateways. Here, the margin is rarely more than 2-3%, and you can only earn if you operate on a large scale. For example, PayPal –  a giant company in the payment sector, grew to almost $100 billion in transactions a month. Such growth was possible due to its close cooperation with the world’s largest trading platforms, like eBay.

2.2 Lending

Lending is more understandable for the users of the market. We are talking about landing, which creates almost 60% of modern banks’ profits. Also, this is a sector where half of venture financial investments go. Its development started after the crisis of 2008. Then due to regulatory changes, it became less profitable for banks to lend money to certain groups of people.

The first success here is associated with companies that didn’t compete directly with banks. Instead, they went beyond their clients. Note that there are about 2 billion people in the world who do not have access to banking services. One of the most striking examples is Wonga, the micro-finance organization in the UK, focusing on providing high-yield loans to cover people’s expenses until they get their next paycheck.

It’s important to mention startups working on peer-to-peer (P2P) lending models. This service provides a platform for borrowers and lenders to meet. This model is also successfully used for enterprise lending.

2.3 Insurance

The insurance industry, estimated at almost $ 5 trillion, remains one of the most non-technological ones. First, this is due to the increased requirements imposed by the regulators and the inactivity of existing players. For example, the average age of a major insurance company in the United States is almost 100 years old. So far, major innovations in the insurance sector have taken place in the distribution sector. Not surprisingly, as most insurance companies still distribute their products, relying on huge offline agent networks that take up to 20% in commission fees.

3. Find out everything about the regulations

The industry you are about to enter is highly regulated because the financial components of every country are controlled by the government. Fintech falls under these regulations, as it deals with personal information and financial assets.

If you are serious about building your fintech startup, be ready to devote some time to bureaucratic tasks. Of course, a lot depends on the country where you plan to base your enterprise, as regulations differ according to governance and how the specific country polices its fintech sector.

When compared to other countries, the USA lags behind when it comes to regulating financial business services. For example, Gerald Tsai, director of applications and enforcement at the Federal Reserve Bank of San Francisco, confirmed that financial regulators in the US are behind the U.K., Singapore, Australia, and China when it comes to responding to FinTech and reg tech innovations.

If your fintech startup falls within the existing legal framework, you will not feel any resistance from the US regulator. Yet they try to constantly comply with new regulations. Here is a brief list of the main players and initiatives in fintech regulation:

building fintech startup

4. Think about funds

If you look at the country statistics, the USA is the leading country in terms of profit from the FinTech industry. According to Statista, this year’s transaction value in the FinTech market equals $1,025,519, which is expected to show a growth of 17.9%. This is a highly profitable industry that requires funds from the start.

Building a fintech startup is not cheap; new entrepreneurs usually are low on budget. Yet to maintain consistent business development, be prepared to shell out a considerable amount of money. When you start a business, be ready to face typical capitalization and operating expenses. Later on, as the business expands, costs associated with integration with traditional institutions such as banks and brokerages will occur.

If you are unable to deal with such expenses, consider attracting investors. When choosing an investor, you should think strategically.  An investor should be a money source and your business partner. Keep in mind that investors are not new to the business. Therefore, they have other resources that are more valuable than money. They have the knowledge, probably burnt fingers, and a good sense of the market. So, use it in your favor. Look for investors who understand the regulatory landscape of your startup even better than you do. As regulations may change and may impact your product road-map and timeline. Your investor has to understand those risks and help eliminate them.

building fintech startup

5. Do not forget about technology

The sphere of financial services is experiencing a technological revolution. The financial sector learns from industries such as natural sciences and aircraft building. In these industries, people already use technologies to industrialize processes and reduce costs. Revolutionary innovations in financial services arise both in the interaction between organizations (B2B) and in the interaction of organizations with customers (B2C). In the B2B sector, startups have appeared that develop and offer optimization technologies, for example, analysis and data management services, cheaper than current financial institutions. In the B2C sphere, revolutionary technologies lead to the emergence of “mobile money” that significantly impacts the economies of different countries.

Machine learning and artificial intelligence technologies are also widely used in fintech. Banks are experimenting with chatbots and integrating them with Facebook Messenger. As a startup, you need to focus on technologies that would power your service.

Obviously,  you need to make your service unique, as this industry is getting crowded. If you deliver an outstanding technology or a progressive solution, you have a much better chance of success in fintech. Also, due to the major risk of penetration by hackers, you must provide a high level of security. Protecting customer information, assets and compliance with legal requirements has to be the top priority in your product.

building fintech startup

To sum up

The development of the Internet and digitalization became catalysts for the development of financial technologies. Until recently, the only technologies in this sphere were accepting payments and electronic money. Not surprisingly, Internet payment services, acquiring, and e-wallets became the most popular. The rise of e-commerce, SaaS businesses, and freelancing played a crucial role in their development.

For several decades, traditional institutions such as banks, insurance companies, stock exchanges, and brokers tried to introduce internal innovations. Compared to other industries, it was quite a slow process.

Taking into account what is happening now with the shares of various Internet companies, we can draw the conclusion that investors do not underestimate the online financial sector. This industry is growing and is becoming more attractive for investment.

Nevertheless, entrepreneurs who want to bite off some of this attractive investment pie must deal with plenty of challenges. We covered some of the issues, but there are others. Be ready to devote significant effort, time, and money to succeed.

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