Many hurdles trip up fintech projects. Building relationships with regulators helps only if you can get out in front of potential problems by asking an agency to issue a "no-action letter" or its equivalent. Firms with dominant market size can crush competitors with marketing spending, but that won't be enough to destroy a startup that truly hits pay dirt and builds a large market. The big firms will then try intimidation through lawfare. Charles Schwab built his brokerage the old fashioned way and the big wirehouse firms hit him with lawsuits. Schwab survived legal challenges because the firm built undeniable financial strength. Poorly financed startups today would fold at the first "cease and desist" letter from a large competitor's in-house counsel. Regulatory arbitrage is an advantage for those fintech startups that pick only one jurisdiction. Competing in multiple geographic markets or in more than one vertical means getting approval from multiple regulatory regimes. Founders must think about how much insurance and how many securities licenses they will need before starting their roadshows.
Fintech founders have figured out Customer Development. The data they get from the first 100 conversations within their target market gives them a better business plan. Investors have also figured out fintech founders. I have reviewed the template due diligence checklists found on the leading VC and angel associations' websites. The checklists don't prioritize intangibles like founders' personal integrity or problem solving ability. Evidence for those qualities is always anecdotal but frequently on display in due diligence conversations. Conjuring a phantom pain point by making easily disprovable claims about merchant problems will make investors check the NO block on character.
Someone brought up Bitcoin, of course. The panelists showed maturity by putting the concept in its place. The earliest Bitcoin exchanges have flamed out after massive fraud and security breaches. VCs are getting smarter about looking past Bitcoin's "store of value" fallacy. Pivoting to a transaction framework makes the most of Bitcoin's open source ability. It also means more regulation is coming. I would like to see Bitcoin fans addresses the protocol's irreversibility. Consider that a fraudulent charge executed in Bitcoin after identity theft will leave the victim permanently damaged if a payment processor cannot cancel it.
Financial startups are not like gaming or messenger app startups. Business plan homework starts with regulatory research. Payment processing fintech must start with the FTC or CFPB. Banking fintech must start with the FDIC and Federal Reserve. Brokerage fintech must start with the SEC and FINRA. Startup teams will need a Chief Compliance Officer very early in their formation.
Heavy disruption is taking its sweet time in coming to finance. I concur with the expert panelists that personal creditworthiness metrics need a 21st century makeover. FICO scores are ripe for disruption with all of the Big Data the credit bureaus can access. The financial crisis of 2008 proved that mortgage origination and institutional credit rating agencies also deserve disruption. The biggest disruptions getting traction right now aren't in the heavily populated spaces like payment processing, where coders seem to land once their gaming startups flame out. The real winners now are the AI brokerages that will eventually eliminate the highly compensated salespeople and relationship managers earning the bulk of the compensation in finance.
All of these other "disruptive" ideas are great within finance verticals but they must ultimately be linked to the IoT revolution. A new POS terminal developed in isolation risks failure if merchants can't connect it to in-store IoT tools like beacons and video tracking. Merchants want a whole suite of software and hardware that will tell them in detail where their same-store sales came from down to the minute, dollar, and square foot. The systems integration opportunity will be enormous for vendors who can plug compatible IoT things together.
I have spent several years mentoring startups both on my own and through a couple of California-based accelerators. I want to see what a Business Model Canvas looks like for a finance startup. Fintech accelerators know where to reach me if their companies need mentoring. Alfidi Capital is all about hot finance action.