It is estimated that nearly 90% of fintech start-ups have failed and the major reasons are lack of understanding what the customers specifically want and a lack of timely funding:
The financial technology, or fintech, ecosystem has been in constant evolution ever since its founding at the time when banks and financial institutions decided to become digital and operate online. Fintechs are credited with having created the concept of a cashless society, the development of apps and platforms to run the financial transaction systems and the transition of the world of finance to a near borderless operating pattern. Fintechs are also the creators of cryptocurrencies, neobanks, blockchain, distributed ledger technology, et al, besides powering simple, day-today chores like ordering food online or booking a cinema ticket remotely, or even attending a school session.
Researchers have split fintech into different periods with distinct differentiation in the market that led to changes in the way customers perceived what a fintech should be. Accordingly, some have segmented the evolution into Fintech 1.0 (1886-1967), when the infrastructure started to take shape, Fintech 2.0 (1967-2008), when the analogue gave way to the digital and the first ATM came to be operationalized, Fintech 3.0 (2008-current), when Bitcoin was designed and developed and cryptocurrencies came into being using the blockchain technology, and Fintech 3.5, which paved the way for revolutionary changes in consumer behaviour and how people access the internet in the developing world.
Fintechs are ubiquitous today. And they have created some awesome and hitherto unimaginable products and services that made living worthy and less bothersome. Just 2 of the innovations – blockchain and open banking – are changing the way financial services are managed in a manner that was never thought of. And add to these, there is AI and ML that is reinventing core of banking. Take for example the neobanks that give a new meaning to the very concept of banking.
In spite of all these positives, fintechs are highly susceptible to failure. Sustaining a fintech startup is a difficult proposition for any entrepreneur. For, there is uncertainty and constant pressure to perform. So, why do some of the promising fintech start-ups fail?
MAJOR REASONS FOR FAILURE
Many researchers have broadly ascribed the reasons mainly to (i) lack of funds, (ii) poor quality or absence of customer service, (iii) poor quality or wrong focus of products on offer and (iv) lack of understanding of what a start-up proposes to achieve.
There have also been reasons like lack of understanding of the users’ psychological behaviors and the market itself. Then there are erroneous and impractical beliefs that ‘if you can dream it, you can make it’. In addition to these, there are sometimes lack of industry knowledge on the part of the promoters, lack of understanding of the mindset of the customers with regard to product design and development and lack of proper sales and marketing strategy.
Research work has broadly listed the following general reasons for the failure of fintech start-ups:
- Inadequate funding
- Mimicking another startup
- Thinking of cost as a factor to eliminate competition
- Underestimating competition
- Lack of understanding of the mindset of customers
- Disorderly innovations
- Lack of clarity on the revenue model
- Choosing a partner without due diligence
A majority of fintech start-ups have been found to be making errors in diverse areas like targeting wrong customer segments, funding source and technology infrastructure.
Not in the least, failures on the part of the fintech start-ups in properly understanding and mastering the customer experiences and backing client support services are a major contributory factor. No matter how technologically superior the product offer is, unless customer engagement takes place and customers are privy to the details of the product in the right perspective, there is bound to be disaster.
For almost all fintech start-ups, especially those in the lending business, regulators often play spoilsport. Recently, the Reserve Bank of India came out with a mandate specifying who all can be in this business. It has conveyed to fintech start-ups that it is barring the practice of leading non-bank prepaid payment instruments (PPIs) – like prepaid cards – using credit lines. This has been a virtual threat to the existence of several fintech start-ups, who are exclusively in this line of business. There are several of them in the country, like Slice, Jupiter, Uni and KreditBee, who hold PPI licenses for long to issue cards and then equip them with credit lines.
The central bank’s directive, which does not identify any startup by name, is widely thought to be impacting just about everyone including buy now, pay later firms as well as entities like Amazon Pay, Paytm Postpaid and Ola Money.
SOME FAILED VENTURES
Here are some of the top Indian fintech start-ups, which initially had offered a lot of promise but faltered and collapsed.
Finomena was a fintech targeting students seeking small loans. It provided ‘EMI without cards’, aiming to allow students purchase mobile phones and other electronics on a loan. It was launched in March 2016, raised its seed funding and then made quick strides but shut shop in 2018. It faced fierce competition from rivals and it spent cash where it was not needed.
CardBack was a fintech platform that lets credit and debit cardholders with multiple cards know which card provider would offer the best rewards and points on transactions. It has raised$170,000 in 5 years. However, it could not secure funds after 2014, and the number of multiple cardholders in India was less than what the fintech startup had expected. Its proposal to shift to Singapore, where the multiple credit card culture is prevalent, also failed.
LoanMeet began its operations in 2015 to help small businesses grow through ultra-short-term loans (tenure of 15, 20 or 30 days) for buying inventory. Its services included B2B marketplace financing, working capital financing, cash credit line, and channel financing in the range of `5000 to `500,000 for a period of 15 days to 9 months. It had an average lending ticket size of `50,000 at around 18% interest rate. The startup raised funding from Chinese investors but failed to secure any funding after that.
Zebpay provided seamless mobile trading experience in cryptocurrencies like Bitcoin, Ripple, Ethereum and many more with the wallet that serves customers across the globe. It had to stop operations as the regulator RBI issued a directive to its regulated entities to stop having a business relationship with entities dealing with virtual currencies.
Koinex claimed it is the largest cryptocurrency exchange in India when it was set up in August 2017. It had a user base of over 1 million and a trading volume of over $3 billion and the successful execution of 20 million+ orders. The fintech, however, suspended its services in June 2019, mainly because of the uncertainty of the cryptocurrency trading business in India.
CoinSecure was one of the fastest and largest online bitcoin exchange platform in India. It faced a hack in April 2018, which led to the theft of BTC 438 amounting to $3.3 million. The startup had no other option but to shut down operations.
Globally too, there have been major shutdowns. 37Coins, which developed a new Bitcoin platform and promised to provide Bitcoin transfer across different regions, could not do so, mainly because of lack of funds to develop the required technology.
BitPass was a US startup that provided a platform to make micropayments online. It has raised $12 million in funding, but could not survive just because of competition from traditional and well-established players.
CircleBack Lending of the US was a loan marketplace. It had to close down in view of profitability issues created by an unviable business model.
ScaleFactor in the US was a startup that automated SME bookkeeping and payroll using AI tools, which were developed in-house. But the tool did not find many takers and the firm had to wind up.
Birdy in the US claimed it was a simple app to track spending habits. But the startup could not figure out a way to monetize the idea properly and faced scaling issues, which ultimately led to its closure.
Australia had a unique neobank, Xinja. It had all the credentials to be a flourishing digital bank, but it could not launch credit products that attracted the discerning customers.
US-based Denizen, a neobank launched in 2018, closed its operations in 2019 after struggling to achieve the scale required to sustain operations. Similarly, Moven, a US neobank that offered lot of promise when launched, closed all accounts in its consumer unit due to funding that fell through because of covid. In the UK, popular players such as Royal Bank of Scotland’s Bó and Monzo also faced significant pressure moments, where Bó closed down just 6 months after launching owing to sunken profits, and Monzo withdrew its US banking licence application after regulatory discussions failed.
NEARLY 90% FAILURES
Fintech start-ups have been one of the most significant developments in the technological and financial services industry. They are today everywhere in the business realm highlighting the advantages of digital. However, it is a fact that nearly 90% of such start-ups are failing on account of reasons spelled out earlier. They render themselves to improper market fit and to management by incompetent partners. They face fund crunch, do not try to understand the customer needs and fail to take appropriate and timely corrective steps in case of slides. It is estimated that the total size of the fintech start-ups as of 2021 was over $112.5 billion, and the estimate is it could reach a value of $335 billion by 2028.
MAJOR SUCCESS STORIES
In spite of this, there are success stories.
There are several examples of fintechs that thrived in spite of highly competitive market conditions. For example, Stripe, founded in 2010, offers a SaaS payments platform for e-commerce websites. Though all-encompassing in the scope of its API, even today the platform is as easy to integrate with third-party websites. Subscribers have the liberty to customize their plans as per use.
Similar is the story of Robinhood, which today is valued at $6 billion. Its app allows retail investors to invest without any trade commissions. The UI is simple and lets users self-direct onto making in-app navigational decisions.
Lufax of China is estimated to be worth $14.65 billion. A peer-to-peer lending platform, it has now diversified operations into subsidiary financial services. Its ability to harness big data and predictive analytics has propelled it to do 200,000+ P2P transactions hitherto with more than 14 million platform subscribers.
Paytm of India has a market cap of $5.32 billion and is most known for its payment services. It has made use of its speed to act to become the leading aggregator for all kinds of payments, P2P or business. Its success is attributed to its identification with the common people by offering essential services.
HOW TO BE PREPARED
Many pundits, who have studied the sector and researched on the reasons for failure say the primary aim for any fintech startup is to strengthen customer relationships and backing client support services. This is irrespective of the prowess or utility value of the product or service. Customer engagement is the first and foremost factor that impacts the success or otherwise of a startup.
Secondly, they say the products that are developed should be marked for ease of use with minimal design and at the same time the objective of use is accomplished in the least amount of time.
Thirdly, innovation should be a continuous process. Banks and financial institutions today have option to make use of technologies like AI and ML, DLT, 5G etc and fintechs must be well versed in these breakthrough technologies and develop innovative solutions for the end users.
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This article has been compiled based on publicly available information on the web, particularly the bank’s own website.