2015 is widely seen as the year that fintech came of age. Global investment in fintech companies totaled $19.1 billion in 2015, with VC-backed fintech companies raising $13.8 billion across 653 deals. This was a whopping 106 percent jump from 2014!
What were some of the highlights from 2015 for fintech entrepreneurs like you? More importantly, what are the key lessons that fintech entrepreneurs can take away from 2015?
Here are five major lessons for fintech entrepreneurs from 2015:
1. Move from Disruption to Collaboration
In 2015, fintech startups and banks were seen collaborating rather than competing for market share. JP Morgan, for example, partnered up with OnDeck Capital to issue loans to the bank’s small business clients.
According to a CB Insights report, six major banks, namely Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, made strategic investments in 30 fintech companies between 2009 and 2015.
Between 2011 and 2015, Citi Ventures was ranked as the most active bank investor in fintech. More recently, Citi made a recent strategic investment in BlueVine, an online provider of working capital financing to small businesses. With investments in ventures like Circle, PayPal, OnDeck and Square, Goldman Sachs came in second.
Banks need to innovate to stay alive. And it is fintech startups that bring in the innovation needed to make financial services more secure, easy and customer-centric. Therefore, banks have embraced fintech with fervor, and are setting up their own venture funds, accelerators and innovation labs.
Banking institutions continue to acquire and partner with fintech startups. Such a partnership can be mutually beneficial for both parties and fintech entrepreneurs must not be averse to collaborating with these traditional financial institutions.
Does your fintech startup believe in disruption or collaboration?
2. Compliance Cannot be Ignored
In May 2015, a fintech startup operating a virtual currency exchange was fined $700,000 by US Financial Crimes Enforcement Network (FinCEN)! The company was fined for not registering as a money services business; and for failing to execute an Anti-Money Laundering (AML) program or report suspicious financial transactions.
Since the 2008 global financial crisis, financial institutions have paid over $150 billion in fines!
There are 10 regulating bodies that oversee the financial sectors of the US. Additionally, each state has its own rules and regulators. Failure to comply with the relevant regulations applicable to your startup can prove to be extremely costly. In fact, regulatory fines can be financially devastating for any startup.
Many fintech startups are built around great ideas and next-generational applications, but are unaware of the regulations that may affect them. Successful fintech startups, on the other hand, make it a point to sort out all compliance issues from day one!
Remember that it is best to address these issues earlier on, in order to avoid serious roadblocks later. Moreover, being compliant with necessary regulations also boosts investor confidence and consumer trust.
Has your fintech startup dealt with compliance from the beginning?
3. Building Trust and Credibility is Key
According to the 2015 Edelman Trust Barometer, banks and financial service providers don’t really inspire the loyalty and trust of their customers. In fact, financial services and banks hold some of the lowest levels of public trust. On the other hand, 76 percent of individuals list technology as their most trusted sector.
With a focus on easing money transactions and reliance on transparency, fintech is seen as a reliable alternative to financial service providers. In fact, 73 percent of all millennials would be more excited about a new offering in financial services from Google, Amazon, Apple, PayPal, or Square than from their own bank!
However, fintech firms need to do more to inspire loyalty and build on that initial trust. In the words of Matt Oppenheimer, co-founder and CEO of Remitly:
Fintech startups should first focus on building trust and credibility with end-users, rather than bringing in immediate income. In fact, many fintech entrepreneurs are now looking at “trust as a gateway to other products.” Trust, not scale, is increasingly being perceived as the key to a successful fintech venture.
In the words of Vikram Pandit, former Citi CEO, “trust takes years to build and seconds to lose.”
Does your company, brand and product(s) have sufficient credibility to win each consumer’s trust?
4. Insurance is the New Frontier for Fintech
Insurtech is the newest kid on the fintech block! In 2015, we witnessed a surge in investments in insurance tech startups. According to an Accenture report, global investments in insurtech increased by 237 percent from approximately $800 million in 2014 to $2.6 billion in 2015!
In August 2015, Richard Branson came together with American Family Ventures to invest $28 million in an Internet of Things company called Ring. CoverHound, a digital platform for comparing and purchasing insurance, raised $33.3 million in Series C financing in September 2015. In fact, angel investors like Insure.VC are increasingly setting up insurance-focused syndicates.
The global insurance industry draws in huge revenues, with net premiums of more than $1.2 trillion! However, insurance companies fail to win the loyalty and trust of customers. Outdated services and lack of transparency in a world of smartphones are the primary reasons for this gap.
As Nigel Walsh, vice president of Capgemini, says,
Therefore, insurance is one area that offers a sea of opportunity for innovation. Last year, we saw startups leverage technology to improve the relationship between customers and insurance firms. Attempts were made to use technology to customize products, increase security and analyze individual customer behavior for better risk management.
Is your fintech startup exploring the next frontier of fintech?
5. Say Hello to Equity Crowdfunding
With an estimated market value of $34 billion in 2015, crowdfunding has come a long way since its valuation of $880 million in 2010.
In 2015, the US Securities and Exchange Commission (SEC) redefined the parameters of crowdfunding. The new SEC Regulation A+ now allows companies to secure investments via crowdfunding provided they are compliant with a set of very specific laws and standards. This regulation also increased the funds a company can raise to $50 million. Moreover, it allowed non-accredited investors to invest up to 10 percent of their income or net worth per year. This is great news for fintech entrepreneurs!
Prior to this announcement, the true potential of equity crowdfunding had not been realized. This landmark decision is widely seen as one of the most important fintech stories of 2015. According to venture capitalist Tim Draper,
Many fintech startups have already turned to crowdfunding. In fact, this new category of investment is projected to surpass even VC capital and angel investment in fintech in 2016.
Has your startup tapped into this new group of potential investors – the public – yet?
The year 2015 will be considered the year that fintech came into mainstream. What other key lessons did 2015 offer fintech entrepreneurs like you?
The rise of insurtech, equity crowdfunding and partnerships between banks and fintech startups are just some of the key trends to watch out for in 2016.