5 Unique Risks of Fintech Start-up Investing
FinTech is flourishing, changing the banking system and drawing billions of dollars in investment from across the world. In the first quarter of 2018, more than €2.7 billion was invested in European fintech, while US FinTechs raised $12.4 billion. Furthermore, the UK has approximately 1,600 FinTech firms, with the number predicted to treble by 2030.
• In the previous decade, private venture capital has exploded, as has the amount of money invested in fintech.
• Large incumbents including banks JP Morgan Chase & Co., Banco Bilbao Vizcaya Argentaria, Banco Santander, and others have introduced fresh approaches to their product-led solutions in order to stay competitive.
• For the possibility to service the presently unprofitable Millennial client, investors like Softbank have poured billions of dollars into direct-to-consumer fintech startups.
• Simple automation has sparked fierce vertical rivalry across numerous industrial sectors.
• Tech firms are making a beeline towards finance, funnelling billions of website users to partners and providers.
These technology-driven financial services organisations are enhancing transparency and efficiency, lowering service costs, and giving financial solutions to the most vulnerable. Whether it's app-based banking, online lending, investing platforms, trading platforms, or AI-led wealth management, they empower individuals and organisations with new tools and solutions to manage and control their money.
FinTech companies face a distinct set of risks that aren't addressed by conventional financial institution offerings.
The most significant risk to consider is the rise in "operational risk." According to the BIS, operational risks posed by fintechs may be both systematic and idiosyncratic. With the rise of fintech, there are more technological interdependencies between market players (banks, fintech, and others) and market infrastructures, which could lead to a systemic crisis if an IT risk event escalates into a systemic crisis, especially where services are concentrated in one or a few dominant players.
New goods and services, on the other hand, are complicating the supply of financial services, making it more difficult to monitor and control operational risk. Under the operational risk umbrella, banks must evaluate new product development, approval, and change management procedures. Legacy bank IT systems may not be up to the task of dealing with new product and service difficulties.
People/staff are one of the most important aspects of operational risk. This is commonly neglected, yet it has an influence on every bank procedure. Managing this risk is critical, and banks should explore staff development initiatives to ensure that bank employees are aware of and capable of managing fintech concerns at all levels.
Fintech Start-ups Come with Special Risks
Fintech services and products may seem to be an excellent investment opportunity on the surface. Before getting started, it's important to understand the particular dangers of investing in fintech firms.
1. Transactional Velocity
The speed of transactional services is one of the key advantages of fintech products. Not only must these technology companies produce quick and efficient financial goods and services, but so must the businesses that use them. Firms must commit to investing in new technology that can effectively run fintech products if fintech is to succeed.
2. Inequitable Results as a Result of Algorithmic Decision-Making
Automation and machine learning are critical components of fintech solutions. It often makes commercial judgments using specialised algorithms. Firms may utilise technology to evaluate eligibility for particular services, for example. As a result of this automation, unfair or even discriminatory behaviours may emerge. Firms should undertake periodic audits to check these algorithms and validate that the technology will eliminate bias to guarantee this does not happen.
3. A Higher Chance of Product Incompatibility
Fintech, particularly in beginning enterprises, runs the danger of product unsuitability. Fintech development must take into account the target audience and end user. The user experience might be hampered by technologies that are not user-friendly or have too many functions. If the technology is too complicated, it may delay down the deployment of services, which is one of fintech's main advantages.
4. Cross-Border Business
Fintech technology should be used with caution by businesses that rely on cross-border transactions. It is crucial to highlight that just because a technology works well in the United States does not guarantee that it will perform similarly in other nations. For technology investment banking, not all nations have the same structures in place. Fintech might raise the danger of security vulnerabilities and make it impossible to monitor some transactions if sufficient controls for global technology are not in place.
5. Regulatory Procedures
Fintech businesses are not always subject to the same level of regulatory scrutiny as investment banks. While the absence of regulatory control helps fintech businesses to deliver speedier services, which is appealing to many investors, it also increases the company's risk of fraud. Furthermore, many people feel that fintech regulation is just around the corner. Fintech legislation, if implemented, might drastically affect the services that fintech businesses can provide.
Along with all these, Technology investment banking services and products, especially those in the fintech industry, increase the risk of malfeasance and fraud, including money laundering. To secure the firm, it is critical to have protections in place. Fintech businesses, for example, might collaborate to create a list of possible dangers and devise strategies to counteract them. Having a framework in place to detect and address possible fraud and misconduct risks may help the company avoid reputational harm.
The fintech revolution is undeniably beginning, and banks must and will profit from cooperating with fintechs. Banks must prepare for the risks that come with embracing new technologies as they rethink their goals and adapt to more tech-savvy operations.
While the COVID-19 epidemic and shutdown propelled financial services into the mainstream, additional factors like as worldwide acceptance of fintech services, fintech awareness, and a focus on new technologies are all impacting the fintech industry's future. These elements will have a big influence on how banking develops in the future. Fintechs are at the forefront of the emerging financial system in every country. The Indian fintech sector has risen to prominence.