Part 1 of a series. Visit back for Part 2: Core FinTech Factors
Since the early days of marketplace lending, TransUnion has been supporting the development of new FinTech lenders. While certain characteristics of FinTech startups give them immense benefits, they can also create challenges during early periods of uncertainty and growth. Typically, startups are developing hypotheses, testing and refining—all in real-time.
In my experience, there are seven common characteristics of FinTech startups—which can work for or against your business. Comparing the key challenge and benefit of each, my top seven common characteristics of FinTech startups are:
1) Small management teams
Challenge: Smaller teams have a limited capacity to tackle a wide range of tasks necessary to stand up a new lending operation. Smaller teams often equate to skill gaps that are vital to setup and launch.
Benefit: Lean management teams mean FinTech startups are able to make decisions faster and execute quicker. They can effectively lead nimble companies that are well-positioned to change with the market, and pivot based on client needs and feedback.
2) Limited credit and/or startup experience
Challenge: Narrow credit experience could mean startups may not have a full understanding of the rules that govern extending credit to consumers from a regulatory standpoint. For example, limited experience or knowledge in using FCRA-compliant data versus using non-FCRA compliant data in assessing consumer creditworthiness could be a huge liability. On the other side of the spectrum, former executives with decades of consumer credit experience have never launched new lending operations or been involved in building out entirely new lending businesses.
Benefit: FinTech companies aren’t trapped in the framework of traditional financial services companies that predetermine how credit models are used or how they underwrite customers. FinTechs are able to think about a credit problem through a different set of lenses. This leads to innovations like using educational information or social media data to help establish risk parameters.
3) Tight financial resources
Challenge: The drawback is that tight financial resources can prevent startups from gaining scale. Oftentimes they can’t acquire the tools or talent necessary to move the business to the next level.
Benefit: Limited financial resources cause FinTech startups to run lean. They focus on the critical items that allow them to get right to a minimum viable product. And, because they are challenged in this way, FinTech entrepreneurs often think differently.
4) Unidentified target market or undeveloped business model
Challenge: Without a developed business model, a FinTech startup can’t bring a product to market. And without a defined target market, it is more difficult to determine the size of an opportunity and report that opportunity to investors. Furthermore, even with a developed business model and a defined target market, it’s crucial to know what that market looks like from a credit risk standpoint.
Benefit: Defining a target market and developing a business model are often the first things FinTech startups focus on. The advantage of not having done this yet is that startups can easily pivot to another concept, business model or target market should an opportunity present itself.
5) Nascent data analysis capabilities
Challenge: This could be a personnel or technology challenge. A company might have the most advanced system, but lack the right talent to analyze data and derive actionable insights. Conversely, technological capabilities could be immature, which could deter analytics talent in a highly competitive labor market. In addition, even with top analytics talent in place, inadequate systems may not support the need to quickly identify key insights. The bottom line is that if data analysis capabilities aren’t fully developed, both from a personnel and technology standpoint, it may not be possible to draw meaningful conclusions from data.
Benefit: Companies developing their data analysis capabilities may not have to deal with antiquated systems and integrations that potentially bog down traditional financial services companies.
6) Pressure from investors to quickly establish operations
Challenge: Pressure to quickly get into market, realize revenue and prove acquisition and risk models to investors could lead to products being brought forth prematurely in order to hit tight deadlines and avoid hurdles to future investments.
Benefit: Pressure from investors can lead to efficiency and focus on getting the minimum viable product out the door. It also helps direct financing to the most imperative initiatives, with the added help of experienced counsel on proper prioritization.
7) Limited practice with financial compliance and regulations
Challenge: Limited compliance knowledge or capabilities can be dangerous. In fact, we don’t see any benefit to this specific FinTech startup characteristic. Lacking compliance understanding opens FinTech companies up to potential litigation, fines and inquiries from regulatory bodies.
If this sounds like you, all is not lost. There are experts at TransUnion that can assist you on the path to compliance and help you derive positive impact from FCRA-compliant trended and alternative data. [Watch the Hybrid Approach Video]
If there’s one takeaway that spans all seven characteristics—it’s that challenges can be opportunities as well. There’s an upside possible in every endeavor, made incrementally easier when you rise to the challenge and focus on the opportunity in each occasion.
Over the course of our long history working with FinTechs—startups as well as established brands—we’ve gained a great deal of knowledge about the unique needs of these companies, which we can now apply while supporting our customers.
Common goals we’ve seen include the need to identify untapped market opportunities, develop differentiated business models, and stimulate these to focus on the highest opportunity segments and to gain investor buy-in. If you don’t have strategies in place to address these objectives or the challenges above, we’ll work with you to help you determine the best fit for your goals, and help you continue on your launch or growth trajectory.