The Price of Fintech Revolution
June 10, 2019
When we hear or read of failure, we usually remember our hard times or even some painful situations. Our unconscious fear of fatality raises in our minds. But we also know that failures happen, and if we learn from them, we gain experience. We learn from doing and become wiser by overcoming failures. The tricky thing is that we will rather see opportunities for growth and improvements from somebody else’s mistakes. Also, vice versa, we tend to dramatize the situation when it happens with ourselves. Businesses also often learn from competitors’ or ancestors’ mistakes. Financial technology is not an exception.
Dictionaries define ‘failure’ as the omission of occurrence or performance, a failing to perform a duty or expected action, a state of inability to perform a normal function, and abrupt cessation of normal functioning.
According to the definition, failure is not something unavoidable and unstoppable. It is hard to find a company that did not face some challenges. So, is a failure the end or just a lesson to learn when it comes to fintech? The same rules govern business. If a fintech company fail, it may not be the end, and it may be a lesson to learn with the chance to recover. Except for the fact that failures with finances may have serious consequences. Depending on who you are and where you are, fintech failures are perceived differently. When you are a customer, and something goes wrong with your money, you feel distracted and unprotected. It is your means, and it is always an unpleasant experience, seemed to a big failure from a personal point of view. It is one prospect. For a startup owner, there is another level of acceptation. If it is a single episode of someone’s device losing the Internet connection once a time, this case may be left unnoticed in the crash reports. However, if there is a series of repetitive issues with a number of users, it is a reason to investigate the issue and fix it. As well as for an investor. Investors will be bothered if something goes wrong on a big scale. For example, some sanctions will be introduced for the startup. If you are a global financial institution affiliating a conglomerate, it is the third story. There is even a theory that such giants are too big to fail. Yet, even giants DO fail, remember the Lehman Brothers’ bankruptcy and what effects it resulted. So, financial institutions sometimes collapse, and this article is on lessons to learn from the common failures. Let us highlight failures which are so common that become revolutionary trends.
Is ‘better service — more clients’ an axiom?
In a field of financial technology, newcomers usually try to enter the ocean of possibilities offering digital solutions opposite to the experience traditional banks offer. Just compare how satisfied you are after you visit the bank with your experience from an application. For example, Instagram, or Uber, or Tinder. Any application. You get it.
This gap is so huge that even non-financial companies enter the market. Startups are trying to provide convenience and better user experience. They commoditize services and deliver them in mobile devices. You may have seen e-wallets, digital banking apps, budgeting apps, investment advisors, to name a few. Though comfort may attract users, there is another side of the financial market. It is strictly regulated by laws and rules, and moreover, these regulations differ depending on the jurisdiction and localization. That is why there are not so many really global fintech products. The ocean of possibilities is still an ocean with a few fish-opponents and a lot of niches to fill.
Though apps offer users comprehensibility of numbers, assistance in analysis and visualization of complex data, gamification, and personalization, they also need to provide traditional operations. But sometimes fintech players forget about or ignore the complexity of regulating and legislation rules of the financial industry or deciding to expand to another market in a different jurisdiction. The consequences may become fatal. Below are some examples of companies that faced some challenges trying to offer technological convenience, and lacking regulatory support. Companies which faced challenges, but were strong and wise enough to learn from them and overcome them.
Robinhood, the online investing platform with stock, exchange-traded funds, options, and cryptocurrency trading services.
What goes wrong
Robinhood decided to extend. The company announced the intention to launch no-fees checking and saving accounts for brokerage. Their announcement entailed public concerns and discussions. It revealed that they had not even consulted regulatory and protection institutions before.
- One could not offer banking services just by the mere will. There are rules, licenses, and regulations. If you do not play by the rules, there would be consequences.
- The company has survived and stayed functioning as an investment platform.
- They still want to extend their functionality to cash management services. We hope, this time their approach will be profound. Robinhood should prepare thoroughly, not only with the tech solutions but with the compliance requirements of the finances and negotiate their business model with regulators.
Ant Financial (operator of Alipay)
Ant Financial Services Group is a financial technology service provider. The company gathered under the hood an online payment, insurance, lending and lifecycle platform, fund and asset management, credit scoring system, and digital bank.
What goes wrong
The company is a fintech giant in China, an affiliate of Alibaba Group. Their products are highly competitive and attractive. Ant Financial uses technology, AI, and ML to deliver a great experience. Due to the mix of technology, convenience, and individual approach, Ant Financial achieved the highest possible availability of financial services for almost all groups of customers. They have grown big, so big that turned to a cause of worry for policy makers. China Government wanted to regulate the risks for the national economy from such big players as Ant Financial. New regulations will restrict financial companies growth and protect the economy from the too-big-to-fail effect.
Though new rules are not approved yet and they will be applied not only for Ant Financial but to avoid unchecked expansion. It is Ant Financial that reports financial losses now. The company will survive and adapt to the new regulations, they are a giant that is supported by another giant. Moreover, they really make the difference for their customers.
Lessons to learn
- Aim well before you shoot, know the wind, laws, and rules, receive licenses, especially if you are a financial technology company.
- Scaling up is not only bigger profits, but it is also a bigger responsibility. You should have a plan for risks protection.
Is promise enough to fit the expectation?
Better experience helps to attract some of the previously unbanked users. But what about others? The target audience of traditional banks and financial service providers overlaps with customers of fintech startups to some extent. Existing traditional banking clients do not hurry to switch to virtual banking. The value of physical presence is underestimated, and the potential call for services is overestimated. In the financial sphere, risks coverage, trustworthy, privacy and security are crucial. Some startups offer solutions for pains that do not exist for real users, only in a startupper mind. Alternatively, they often use false “pain killing” features or attract customers with one thing while selling the other. As a result, a fintech startup will not develop as fast and successful as an owner or investors hope.
Wonga used to be a payday lending platform in the UK.
What goes wrong
Wonga offered attractive conditions for short-term loans for people who cannot get such loans from traditional banks. But then they faced regulatory clampdown. (Refer to the previous section of this article.) ;) And they tried to survive by getting smaller in a scale and setting new rules for their customers. They even tried to convince clients to pay their loan debts by sending fake “legal” letters from October 2008 to November 2010. Those letters were intended to make clients believe that their debts were passed to law firms and collectors, and threatened with legal action if debts would not be paid shortly. The law firms and third-party collectors were fictional, such organizations simply did not exist. No surprise that a wave of compensation claims aroused. Instead of their customers, it was Wonga that faced legal actions, and now they do not lend money to new customers anymore.
- Wonga had reported significant losses.
- Its investors had to lose even more money in a desperate attempt to save the fintech platform.
- Wonga’s customers stayed unprotected, their compensation claims unlikely to be fulfilled.
- Now Wonga is functioning only to receive repayment for previous borrowings. They do not accept applications for new loans.
TransferWise is an online platform for international peer-to-peer money transfers.
What goes wrong
The service promises a cheaper way to send money abroad. They state that it may be cheaper from 2x up to 14x times depending on a bank and country. In reality, they name average numbers from the analysis of their users’ statistics. These promises do not come from worldwide comparisons for all banks. Also, there is one more thing to note, the lower fees are applicable for transferring non-cash money from TransferWise account to another TransferWise account. But if a customer needs to withdrawal the amount or makes the further transaction to the other account or card, there may arise extra fees and charges.
TransferWise is a popular service, and it is expanding, but there is no technical innovation behind it. They set razor-thin margins for transfers and currency exchange inside their platform. Financial analysts doubt the platform is highly profitable. They suppose that TransferWise spends all they earn for growth.
Revolut — a challenger from the UK.
What goes wrong
Revolut had experienced massive app performance issues already several times for now. They promised to stop outages, but issues had continued.
The other story with Revolut is negative publicity about its corporate culture. Recently a wave of unfavorable employee reviews has been published.
There are a lot of alternatives among the UK challengers. Financial technology is about providing a better experience, not the worse one. No matter how convenient is a technological solution, if it lays down and customers cannot use their finances, it is far from an attractive and trust-building situation. Unhappy users won’t wait long, they will look around for other options. There are enough traditional banks and other digital banks wait for new customers.
Lessons to learn
- Test your business ideas on real users, and real markets, especially if you are a technology startup entering the financial industry.
- Be flexible to changes, but keep your business models fair and transparent. Trust is hard to gain, and much harder to recover.
- Keep an eye on your service performance, people switch to fintech in search of convenience, not of problems.
- Among services you deliver value in your products, your customers join you to share this value along with profits from products.
Is an offer of free products a real stimulus to act?
In a modern world, boundaries are diminishing, and not only between countries and cultures. There are more opportunities for traveling and connecting to different experience. Cost reduction in all spheres is one of the core demands now. A finance industry also should answer the call for lower prices. Fintech startups often choose the pricing model as a key advantage. A free-of-charge entry, lower commissions for payments, higher interest for deposits are the ever-attractive propositions. Unfortunately, the financial system is not that flexible. You can’t make money from the air and offer mystic cost reduction. There are regulators and licenses, and they exist for certain reasons. Users will join your application for free, but are they ready to pay for the same application and its services when it changes the pricing model? Some startups fail with the strategy to cover transaction fees for their customers. When they grow bigger, the fees increase too. The others choose the freemium pricing model when some products are offered for free, while the rest is commercial. They are slower to extend, but their growth may turn to be more sustainable. So, below there are examples of services that failed to be flying high with free propositions.
Number26 — a European challenger, a smartphone-only bank.
What goes wrong
The bank had closed accounts of those customers without any notice or any clear reasons for its clients. Later, after a bunch of complaints, explanations appeared. The challenger refused to serve those who made from 15 and up to 30 ATM withdrawals per month. The clients were disappointed and distracted. They thought Number26 offered free ATM withdrawals for customers. Reasons revealed to be not as easy and obvious for non-experts in the field of finance. As soon as Number26 is a digital branchless bank and does not have a network of ATMs, N26 should use third-party’s ATMs and cover the fees for withdrawals for their clients. By closing clients’ accounts, they wanted to make people use free ATM withdrawal feature wisely. They hoped customers will learn to plan and their cash expenses, instead of using ATMs every day. But if you offer some killing feature, don’t you suppose customers use it?
Customers were surprised with accounts closure because it was not the expected action. And trying to explain the closure, clients failed to find reasons in the user’s policy. The bank should deal with many disaffected customers and promised to provide more transparent policies in the future.
Monese is a UK online challenger bank.
What goes wrong
This digital bank offered a limited amount of services for free, and after reaching the limit, the customers were charged. Analysts from Monese noticed that users just stop using the banking app when they reach the cap.
Monese has changed the pricing and switched to the subscriptions that provide unlimited access to the services on a monthly paid basis. We will see whether it would help the challenger to become profitable.
Lessons to learn
- You can’t make something free by the magical power of promises only. If you offer free withdrawals and pay for your customers, make it a fair deal. When it comes to money, extra security, trust, and spotless reputation are advantages to attract clients. And remember that traditional banks are present at the market for a long time and already gained trust.
- Make all the calculations before offering some cost reductions. Do not stand on the average numbers. Expect the good scenario, but be prepared for the worst.
- Test the pricing model under real market conditions. Remember that you are not a single player, monitor your competitors, learn from others mistakes.
Is it possible to get into the unicorns list?
The tips for fintech startuppers are not unique or new. The main point is to make a difference. Offer value to share along with great technology to make someone’s life easier or make the world a better place to live. In our busy world, with constantly developing technology there is still a call for a cheap, coherent, and convenient banking solution. And the global market still offers a lot of opportunities for players. Such a combination may work if you prepare well.
Tips for startuppers
- Ideate your product. Find value, define a vision, set a goal. Draw a hypothesis. Generate more than one idea.
- Visualize your idea and hypothesis. Create design.
- Test your ideas and hypothesis.
- Think of the monetization model and plan scalability.
- Conduct a research on users, markets, available solutions, investors, competitors, and so on.
- Research the related industries and solutions for the best experience as well.
- Seek legal information about different jurisdictions, laws, and regulations.
- Find investors and gather funds.
- Find a solution development partner.
- Develop the first version of the solution.
- Check its performance, reliability, and security.
- Test it on real users and under real market conditions again.
- Launch a product. Do hotfixes and first improvements.
- Analyze the feedback.
- Improve, extend or withdraw the functionality.
- Try to foresee the issues and have a plan B.
- Be prepared for a long road to success.
Is fintech failure the dead end or the beginning of a revolution?
When a fintech startup fails, from the small scale it is a tragedy, but from the bigger scale, every failure lead a financial industry a step ahead. Big players watch startups and learn from their mistakes. Incumbents are slow with improvements. They are big and less flexible, but they have already earned trust. If a technology company challenges traditional financial institutions, a digital bank should not underestimate the value of physical presence. Incumbents are interested in the same clients that you do. Moreover, they have more resources to implement the successful experience which they could gain from startups and avoid not so effective solutions.
Every time a fintech company fails, it is a move forward to better services, to changes, and making a difference. Dashdevs is a software development partner that learns from effective practices and knows how to skip the others. We serve our clients as a partner that helps to navigate in the global financial market full of possibilities for development and growth.