The tipping point
Fintechs often start with a core, monoline business model. But they don't end there. Instead, there comes an inflection point – often when there's been a significant capital injection – after which they seek to grow vertically (into new segments or geographies) or horizontally (into new products). This kind of rapid growth brings significant risks, which fintechs need to take proactive steps to mitigate.
Five key challenges for fintechs in rapid growth mode
Fintechs typically face five key challenges as they grow:
1. Regulatory complexities: With rapid growth, fintechs can underestimate important regulatory requirements, or worse, miss them entirely. For example, requirements for explaining pricing and deadlines for responses to queries or complaints vary from product to product and geography to geography. But awareness of these variations is not enough. Instead, fintechs need to make changes – both upstream in customer-facing processes and downstream when reorganizing operations – to accommodate them. Such changes are not always immediately apparent, posing a regulatory risk.
2. Reputational risk: Customers expect seamless omnichannel experiences. In the startup phase, fintech customers are often OK with a 'beta' experience. However, as the customer and product mix expand – and channels become less digital-only – fintechs may not adequately prioritize their experience strategy for their non-digital channels. That can turn customers off and damage a fintech's reputation. When launching new products and processes, many fintechs encounter more exceptions to business rules than they expect. For example, when a fintech launches a new lending product and customers begin submitting loan applications to its automated underwriting system, surges in 'refer decision' responses are common. This type of exception requires a human underwriter to take a second look at the loan and perhaps underwrite it manually. In most cases, fintechs do not have the staffing capacity to manage such a surge. That's a big reputational risk, especially in new product sales.
3. Compliance of new processes: With growth into new products or segments comes the need to quickly deploy new processes, with the appropriate controls. Established banks face the same challenge. Some traditional enterprise banks have even tried to offer new products using the know-your-customer process for an existing product. Such approaches could expose fintechs to costly fines from regulators.
4. Delays and cost increases: With all this complexity, deploying new processes securely, robustly, and quickly may prove difficult. Poor planning and design upfront will inevitably cause delays down the road. And plugging gaps with contractors on day rates can rapidly and exponentially increase costs. Though big banks might be able to afford such a stopgap solution, fintechs don't usually have the same margin for error.
5. Technology: Building in-house technology to support new processes and products is often prohibitively expensive. At the same time, finding third-party systems is risky. Integrating and testing them is riskier still. Assessing best-in-class technology and deploying it on the cloud or on-premise can become very complex and time-consuming. And it requires dedicated specialists to manage it.