Fintech—that breezy portmanteau of finance and technology—has rapidly grown into a mammoth industry. In fact, some of the largest fintech startups are already established multi-billionaire companies in their own right—both in the U.S. and abroad.
Though individual company approaches necessarily differ, the drivers of fintechs’ exponential growth have many foundational similarities.
First, there is the lower financial products and services costs for customers. Fintech enterprises are also typically able to undercut the existing banks and financial services companies via a lower cost-base unencumbered by the fixed costs of legacy employee programs—such as pensions and other benefits—as well as lower physical infrastructure costs made possible by tapping into the growth in the freelance or “gig” economy. (This litheness frequently allows fintech to be more scalable.)
The IT—built from scratch and for purpose on the latest code and run on cloud technologies—is often quicker and more efficient, too. The costs of storing and manipulating huge amounts of data have collapsed, opening up massive potential for business growth offered by technologies such as artificial intelligence and machine learning.
Meanwhile, incumbents toil with updating technology and integrating systems developed over decades of organic and acquisitive growth.
No wonder that many companies are switching to fintech providers to address a diverse array of financial needs.
Yet while the advantages offered by fintechs can be extremely compelling, it’s important to be aware of the potential pitfalls when making the choice of who to work with.
What Matters Beyond the Quote?
There are many non-price factors that companies need to consider when considering due diligence on any potential new financial services provider.
Longevity is arguably the most important consideration: According to Medici, a fintech information provider, the failure rate for fintechs is approximately 90 percent. Clearly, then, the key question when preparing to migrate to new fintech platforms is whether the fintech will still be operating within a timeline that makes the cost and effort of such a switch reasonable?
Another longevity issue centres on the technology itself. While it may be cutting-edge today, is the fintech in question set up to invest in maintaining and developing its platform to maintain its competitive position? Or will it be usurped by another fintech provider on the horizon, a best-in class-service provision today destined to be but a snapshot in time?
Analysis of the fintech’s management and investors will help address the quality and credibility to manage the longevity issue. For example, has the fintech emerged to take advantage of a temporary price opportunity? Or does it possess the track record that proves it is able to deliver over a longer period of time?
Alternatively, due diligence should also consider the outcome should the fintech partner become “too successful.”
The stellar growth of some fintech providers creates significant operational issues, including the need to recruit to maintain the same level of service early customers received. Asking simple questions—such as the retention rates of fintech’s employees—is a vital part of the selection process.
Avoiding Growing Pains
In the early days, your company might resemble a key account—pitch hard, make all the right noises — but tomorrow the fintech might win an account ten-times the size. Or ten more clients your size. And its commitment to your company can’t be—or simply isn’t—maintained at the desired service level.
Also, how do you price the intangibles from incumbents? Existing providers often provide access to research, data, and other services such as industry benchmarking information and access to industry working groups, events and market intelligence. Startups almost certainly won’t be able to provide the breadth of these services.
Fifth Third has experience in assessing the potential of individual fintechs to improve the efficiency and quality of internal processes — and have the successful partnerships to prove it. (See, for example, our work with Sibcy Cline, which offers automated accounts software for real estate companies.)
We help clients think through the key criteria for selecting partners and evaluating the intangibles as well as other non-dollar issues such as security and longevity to arrive at the correct, most cost-effective decision according to the unique needs and resources of a given business.
It's an exciting time in fintech. If you’re interested in exploring ways your company may benefit from it, don’t hesitate to consult with a seasoned advisor with expertise in the field.