By Faye Maughan, Investment Manager at ECI Partners, the leading growth-focused mid-market private equity firm
As a fintech business grows, there are certain hurdles it will likely face, and in a highly competitive marketplace, recognising and overcoming these challenges will be essential to scaling up. So, what are these barriers, and how can fintechs break them down?
Winning the war on talent
The talent shortage is currently having a widespread impact on the fintech sector. As such, businesses need to think creatively to ensure they don’t lose out. One way in which businesses can achieve this is by creating a compelling culture to both attract and retain talent. Fintech companies often provide the opportunity to work with innovative and exciting products, however this is not enough on its own to attract the top candidates. Increasingly, applicants want to be able to understand a business’s mission, especially if it is focused on a social purpose.
It is also imperative for businesses to consider new routes for talent if they are to succeed. Hiring highly skilled individuals is not the sole route businesses can take when looking for new talent. One alternative is government apprenticeship schemes, another is utilising third parties who can source and train talent, place them in a consultancy capacity in your business and support them in becoming a permanent hire further down the road.
The most successful fintech businesses will invest in developing talent, both to complement their recruitment initiatives and reduce employee churn. Nurturing talent allows people to grow and develop together and sets the tone of constant improvement.
Fintech businesses have an added challenge of not only having to compete with each other, but also having to contend with large financial institutions and tech companies expanding into the sector. It means they need to work hard to differentiate their products and services to succeed.
The importance of having a long-term product development plan, especially with the market being so crowded, is essential to ensure constant product evolution to stay ahead of the competition. Linking back to the talent factor, hiring the right people is crucial to winning the product war, too, and a roadmap of skills needed within the team should be developed in line with the product roadmap.
Data security is one of the biggest concerns for stakeholders. Cyber-attacks and data breaches are a major risk for the financial services sector, as the data fintech companies hold makes them a major target for hackers, with 70% of financial services companies suffering cyber-attacks in 2020.
The growth of cloud adoption has brought with it its own challenges – ensuring security across all cloud networks is a growing concern. Attacks can have many negative impacts including financial and reputational damage. It is crucial that CTOs and board members have a risk management strategy in place to protect against potential attacks. ECI’s Head of Cyber, Ash Patel, supports our portfolio with cyber gap analysis, sharing best practice methodologies and frameworks to ensure businesses are prepared.
There are also specialist businesses that can help fintech firms manage the security of their cloud systems. ECI portfolio company, Content+Cloud, helps companies to assess their current threat landscape, protect IT operations and detect and respond in real time to help mitigate risk and prevent data loss.
While the pandemic may initially have put international expansion on the back burner, remote working has provided an opportunity for connecting with more clients and partners. It has also driven demand for financial technology, digital solutions and automation – something that has benefitted the UK particularly as a global fintech hub.
With this in mind, international expansion is becoming more of a priority, with 68% of fintech executives expecting to expand into new markets in the next 18 months and big UK fintechs such as Revolut and Tide already making progress on their international expansion plans.
To be successful, companies need to understand how they are going to launch into new markets. If launching from afar, staff will need to be trained in operational differences in new markets, and well-trained in pitching remotely. If boots on the ground are planned, companies will need to segment the market to carefully consider the best launchpad, and whether they are able to export talent as well as hire, to ensure the right balance of continuity and localisation. Businesses can also take advantage of opportunities for overseas M&A: acquiring businesses can give your business a good footing in a new market.
International expansion provides a clear roadmap for growth, although it does come with its own challenges, in particular the demands of multiple regulators and regulatory frameworks to consider. Brett Pentz, Vice President – ECI North America, supports management teams to navigate these complexities and consider the best route to market, and it can be helpful for companies to find a partner who has been through these challenges before, as getting international strategy wrong can be incredibly costly and time-consuming.
Regulation and compliance
It is critical that businesses keep up to date with regulatory changes and maintain best practice compliance within their own business as they scale. Implementing cost effective compliance systems and processes have become very real challenges for businesses – tech companies are at risk of falling behind the constantly changing policies and regulations, which ultimately could hinder the pace of innovation and growth.
For example, the developments in AI, and subsequent adoption of automation has given rise to increasing AI regulation including the EU Commission’s AI Act, which came into effect in April and represents an ambitious attempt to regulate AI technologies. Despite Brexit, UK companies will need to comply with these new regulations if they wish to sell their products and services into the EU. The UK’s new National AI Strategy also includes a planned white paper on governing and regulating AI within the next 6-12 months. These new regulations make it even more essential for companies to stay on top of legislation, and businesses should consider investing in compliance software and services to help them stay in line.
Regulators are working to encourage innovation and help educate new fintechs. For example, the FCA has developed regulatory frameworks that allow new products and services to be tested in a controlled environment, which can help balance regulatory concerns, as well as recently launching a “regulatory nursery” to provide additional support to fintech companies.
Businesses that can take steps to overcome these challenges, whilst continuing to innovate and plan for the future, will be well positioned to remain one step ahead of the competition and continue to scale.