Is FinTech different?

I’ve recently been asked to be at a Panel that covers the questions:

– Is there a difference when investing in FinTech startups and startups in other industries?
– Do investors consider different aspects?
– Is the risk bigger?

So my answers are yes, yes and not really. Blog post done. But in all seriousness, if it is appropriate, of course there is a difference when investing in FinTech startups compared to startups from other sectors. But there is also a difference between investing in E-Commerce and investing in AdTech. Or B2B vs B2C plays. Every business, every vertical has its characteristics and nobody knows them all. I briefly want to explain based on three sections why (and how) I think FinTech is different.

Legal, legal, legal and compliance

Licensing requirements, compliance, regulation — catchwords that every banker gets nightmares  from— are topics every FinTech company has to deal with. Securities law, laws protecting borrowers, privacy laws and many more are part of the day to day business. And those laws are different from country to country. You have to know your country specific regulatory laws and licensing requirements. Know your issuer, your customer, your banking provider, etc. If you compare for example FCA and BAFIN — KYC processes and requirements are completely different. Things that are not necessary in the United Kingdom are obligatory in Germany. Also when it comes to licensing. There are businesses that need licensing and BAFIN approval in Germany and that are unregulated in the UK; the latter is anyways completely different from the rest of Europe (and also one of the reasons why London as a FinTech hub is so successful). And there is more or less a basic rule: if it is allowed in Germany, it is probably allowed everywhere else ;). So scalability is not that easy (it is never easy actually) due to the reasons mentioned. In reality it is pretty hard. As a result there are e.g. a lot of regional champions in payments and mobile banking but not that many Pan-European FinTech players. Because of these challenges experience in the Financial Services industry is crucial. Knowing local rules, habits, players and having contacts within the industry is definitely for the good if you want to be successful.

But also regulation for FinTech companies changes in the US and in Europe. This has to be considered. These two papers are just an outline of two recent changes that are affecting a lot of FinTech companies. But regulation definitely is worth an own blog post (for the nerds then).

Branding and user acquisition

Also, user acquisition is different. “Hey, that’s easy. I’m just paying for some Facebook and Instagram Ads for customer acquisition.” Said no one ever in Financial Services (and probably nobody else except bloggers). Customer acquisition costs are typically pretty high compared to other industries and it takes a lot of effort to acquire a customer (especially SMEs). Why? Because people are much more cautious when dealing with banking, payment or other financial services and it takes time to convince them to use your product. Everybody cares about his money and in the end it comes down a lot to trust, brand and reliability. Or as amazon puts it: “payment is a trust business”. And you have to earn that trust. This definitely is a long process. Therefore competing on cost or betting on an aggressive growth strategy does not really work (and somebody can backfire). As it is simply not possible to have a fail whale in financial services. The product has to work 24/7.

To dig deeper into the topics it is definitely worth reading these excellent Holvi blogposts:

· How to build a FinTech brand from scratch
· Marketing assumptions that don’t apply to FinTech
· From branding to customer acquisition in FinTech

Strategic Partnerships and cooperation

A third point I want to highlight are strategic relationships and industry focused investors. At most FinTech cases strategic relationships are key. So often it is more about cooperation than competition because 1.) banks do not sleep and 2.) you probably need a bank and other infrastructure providers for your service to work even better.

Banks used to be in deep sleep mode (not even mentioning insurance here) but now it seems they woke up and are well rested and ready to go. There a couple of banks which made an impressive shift towards a real digital focused bank. Especially when I think about the presentation of Carlos Torres Vila, CEO of BBVA, at Money 20/20 in Copenhagen this year. When he was talking about its bank digital strategy, I think a lot of FinTech companies in the room got scared for a second. Or as Matt Harris from Bain Capital Ventures put it: „The empire strikes back!“ But to be honest some banks are still sleeping (no names). Pretty well. They can only hope that there won’t be a rude awakening soon.

The second support beside strategic investors you will need are VCs with deep experience in the financial sector. If you want to build up a scaling VC case this can be crucial. Experience, having contacts to banks, card issuers, payment companies and others are very important. This goes hand in hand with what I mentioned in the first section: know your business inside out. And sharing is carrying. It is always a good idea to bring FinTech founders together. Our founders love that. Because there are people that have the same issues with regulation, processing, whatsoever and that understand each others’ problems. But you only benefit from this experiences and knowledge sharing with an investor that already did FinTech deals. So in the end it’s like a marriage: finding the right partner(s) is key.

To read more on that, the Deutsche Bank wrote a paper about different ways of cooperation between banks and FinTechs.

Is the risk bigger?

IMHO I don’t think that they downside risk of FinTech investments is bigger than in other businesses. I think the risk is far less. Most E-Commerce and Consumer plays are really binary cases. It is either one or zero. You either go big or you go home. In Financial Services there are many potential exit cases. If you take banks and insurance companies as an example. There are hundreds of regional banks and insurances in Europe. Most of them don’t have a clear digital strategy or even an own digital team. For them it is a clear make or buy decision, most of the times it is cheaper to acquire than to build up on their own. This point also goes hand in hand with the strategic partnerships mentioned above. And there are also a lot of other financial service or non-financial service companies that could be potential exit cases. But that is a whole different story I want to talk about soon.

So that’s it. Just a brief summary of my opinion. Always open for comments and an interesting discussion.

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