The Fintech revolution

The last few decades have rocked the financial world with an explosion of technological innovation, globalization and changing consumer expectations. At the heart of all these changes? Financial technology, or Fintech.

Fintech businesses have been at the forefront of the digital revolution in the financial sector, pushing traditional institutions to keep up. Unlike traditional institutions, Fintech companies are able to be digital, agile and modern. Most Fintech businesses have fully integrated the ABCs of modern business: automation, bots and cloud.

Demand for digital financial services is at an all-time high. Investment in Fintech start-ups is booming, reaching a record $31 billion (£24 billion) in 2018, more than double that of the previous year. Fintech money service businesses have fulfilled the need for easy, accessible and affordable financial services and now play an integral role in the global economy. Fintech companies have even enabled new types of growth in the industry: collaborative disruption has enabled community banks to grow their customer base.

The future of Fintech seems limitless — even Amazon creating a bank doesn’t sound that far-fetched. In reality, the Fintech industry is still in its infancy, full of untapped potential and growing every day.

But it’s not all sunshine and butterflies. Fintech currently faces four key roadblocks, and to ensure long-term success, companies need to step up to the plate to address these challenges facing Fintech businesses. Fintech leaders that tackle these issues will open the door to truly revolutionary growth.

Challenge #1: innovation

Innovation is the strength of Fintech. It’s what gives Fintech companies a leg up: they’re a breath of fresh air and new ideas in the financial sector. New tech brings evolution to a challenging, often traditional industry. The impact is felt around the world (Fintech has spread all the way to North Korea, in fact).

But innovation can be a double-edged sword. It brings a constant state of flux and competing upgrades, and it’s easy to lose the human aspect at the core of financial services.

Staying on top of trends

Innovation and disruption is incredibly beneficial — to some. Banks are swiftly falling behind Fintech companies, while still playing an integral role to the world’s financial industry. This tech disparity causes friction as banks struggle to keep up.

Tech has changed customer demands and expectations, as well. Open banking and personalization are becoming essential, and trends like machine learning are making waves. But banks, and especially small to midsize banks, can’t easily adjust. Fintech businesses need to be aware of this struggle and see the opportunity for mutually beneficial partnerships: banks simply can’t be left behind in the current global system.

Balancing human and tech

Because innovation and tech are the strengths of Fintech, it’s easy to assume that all customers want newer, faster, more automated services. However, Fintech institutions that make that assumption risk drifting out of touch with customer needs.

The fact is, the vast majority of customers want to interact with a human when handling their finances — not to mention the security concerns and resistance to change that come along with digitalization. At the same time, digitalization opens the door to banking for customers around the world — as demonstrated by the experience of Fintech in Brazil — with enormous opportunities for growth and increased accessibility.

Fintech organizations need to keep the customer experience top of mind. It’s all too easy to lose sight of what your customers are truly looking for when upgrading to shiny new tech. When optimizing and upgrading, make sure you listen to your clients.

Challenge #2: regulations

One of the main Fintech challenges facing new institutions is managing regulatory risk and compliance. It’s a factor inherent to the financial industry, but one felt particularly keenly by Fintech companies.

New global regulations

The regulations issue has been at the forefront in the last few years with sweeping laws like PSD2, which regulates payment services, and GDPR, which regulates data usage. Regulations touch every aspect of the financial industry. As more global regulations are rolled out, Fintech companies are constantly challenged to keep up and stay compliant — which is essential for both partner and customer trust.

Instead, Fintech businesses should consider regulations as a framework for best practices: you can future-proof your Fintech business by doubling down on regulations, rather than viewing them as hurdles.

Anti-money laundering and KYC

Anti-money laundering (AML) is a set of procedures, laws and regulations designed to stop the practice of generating income through illegal actions. Fintech and money service businesses are subject to harsh levels of scrutiny, and those who do not comply face fines, suspension or revocation of license, and harm to brand reputation. In particular, money service businesses struggle to meet increasingly stricter AML and Know-Your-Customer (KYC) requirements.

Because digital financial services focus on rapid, frictionless processes, maintaining AML compliance tends to be more difficult. Any history of AML non-compliance is extremely detrimental to Fintech startups looking to gain funding and customer trust. Because this has been a major issue for the past decade, these failures have deteriorated the trust between correspondent banks and money service businesses, causing a reluctance to serve them.

Compliance struggles

Increased regulatory expectations and stricter enforcement of current regulations has been another challenge for Fintech businesses, whether it’s meeting those strict standards or effectively training staff to handle compliance. Without a strong culture of compliance and a documented training program in place, businesses can be subject to even more fines and penalties.

Because Fintech companies are so new, they often lack the solid, streamlined compliance processes that banks have. Although Fintech companies have more advanced, agile technology than traditional banks, banks have more resources — in the form of staff, expertise and established practices — at their disposal to aid in meeting compliance requirements.

Challenge #3: competition and risk

Establishing a successful Fintech company can feel like an uphill climb. It’s a constant battle against established, hefty competitors like traditional banks; it can be difficult to make headway or establish a foothold, making industry competition a serious challenge facing Fintech organizations.

De-risking and limited bank partnerships

Many banks see Fintech organizations as having a negative reputation: they see Fintech as risky and dangerous to support. Banks around the world are therefore are closing their accounts with Fintech by the masses and unbanking the industry. Due to this reluctance from legacy banking institutions, countless Fintech businesses are left fighting tooth and nail for the financial services required to operate.

Distrust from banks can be a massive barrier. Since de-risking has taken hold of the industry, Fintechs and money service businesses have faced reluctance from the banks they rely on to operate, especially internationally. This wave of de-risking leads to instability or even an inability to get a leg up in the market for countless Fintech companies.

Trust and customer expectations

The other side of the risk coin is customer trust. Fintech companies offer so many new advantages, but often suffer from a lack of reputation or industry trust. Customers may not know that Fintech companies are just as regulated as banks; money is such a sensitive subject that extra reassurance is essential.

To become a trustworthy financial resource, Fintech organizations need to be upfront and transparent with customers. Those steps are essential to begin chipping away at the barriers to trust and erode the different perceptions of Fintech and banks.

Challenge #4: international expansion

Challenges facing Fintechs, like risk and regulations, come together to create enormous barriers to international expansion. Expansion typically relies on developing local banking relationships, a long and cumbersome process that heavily stagnates growth.

Fintech companies often rely on banks to develop a network and gain access to “For the Benefit Of” accounts (FBOs) and International Bank Account Numbers (IBANs). Additionally, these businesses struggle to find banking solutions that can hold up in multiple states or countries as they scale.

In the U.S. especially, compliance is a huge barrier. In order to offer a tech-led solution for their customer base, Fintechs must be regulated in all 50 states, which is an expensive and time-consuming process. The cost of doing business globally — hundreds of thousands of dollars annually per country you are licensed and regulated in — is preventing startups from achieving international growth.

Without strong partnerships, international payments are a pipe-dream for many businesses, and foreign exchange is a major resource drain. Agile international payments are the goal — so how do you get there?

The solution: payment partnerships

Partnerships with payment technology companies (paytech) enable the next level of evolution for Fintech companies. Payments innovation brings seamless transactions, cross-border solutions and a link between the traditional and the innovative: global payment partnerships are the future for Fintech.

Currencycloud’s Payment Engine, for example, has already enabled Fintech companies to rapidly expand their business to include foreign exchange, payments and transfers. Crucially, it does so without forcing those organizations to invest in costly infrastructure changes, limiting access to certain countries and markets or jacking up fees for their customers, thus helping businesses overcome major Fintech challenges.

Going international

Of course, Fintech companies and money service businesses could partner with banks to aid in their international expansion, but those organizations would still constrained by the bank’s slow and traditional processes. Plus, the trajectory of globalization means that it is no longer enough to offer just one currency or to service just one local market; if one banking partner doesn’t provide the global network you need, you’ll be forced to work on opening up another banking relationship, which can take upwards of a year.

In this tumultuous economy, you can’t wait a year. You need to be able to provide quick, streamlined, scalable services to your customers — before they move on to your competition. The answer, then, is to partner with a non-bank provider of liquidity with the right technology, experience and network for compliant cross-border payments. You likely won’t find one provider who can fix everything, but finding solutions that embed well into your current workflows and automate your end-to-end payment processes is the way to go.

It’s clear that going global is a necessary next step for any business looking to survive in the future. When it comes to the stuff that really bites — including regulatory, risk and liability pressures — you need to make sure that the partners you’re dealing with understand the global payments world inside and out. A paytech partner can help you hit the ground running.

Ultimately, when Fintech businesses partner with paytech providers to bypass the strict regulations and crippling challenges associated with traditional banking relationships, they can skyrocket growth for clients and companies alike. Global businesses, local economies and, most importantly, individual consumers all benefit from the innovation, globalization and financial inclusion driven by Fintech companies.

Case study: the benefits of payments, delivered

Agility Forex is a Canadian-based Fintech company that offers currency pricing to all, at rates normally reserved for large corporations. Through its proprietary technology, Agility Forex helps users bypass the banks to access interbank market pricing without bank fees and commissions, so that money can be sent abroad at the lowest possible cost. At its core, Agility Forex removes complexities associated with foreign exchanges to make transactions simpler, faster and more affordable for small businesses and consumers.

By collaborating with Currencycloud, Agility Forex was able to grow quicker and achieve a new geographic footprint and a new level of efficiency, almost overnight. Currencycloud has built a network that can pay into 212 countries via SWIFT and over 35 countries via local-in country bank accounts. The partnership lets Agility provide a far more comprehensive solution to its customers.

In addition, payments and FX liquidity go hand in hand. When faced with a requirement to pay out in New Zealand Dollars, for example, Agility Forex generally doesn’t keep a great deal of this particular currency on hand. The partnership with Currencycloud has allowed for an opportunity to not only buy currencies at wholesale rates but also to make the payment concurrently.

The takeaway? Fintech and paytech are a powerful combination, and the right partnership can help you unlock the financial industry.

Check out more examples to see how Currencycloud can help you:

Contact us

Currencycloud brings you everything you need to build smart payment solutions. Check out our wide range of products and extensive experience partnering with Fintech, or reach out to us today for a personalized look into the benefits of a partnership!

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Chris D'Antuono

With over 5 years of experience in Fintech, Chris’s sales practice includes business development, enhanced partnerships, project scoping, implementation assistance and liaising with compliance. Well versed in both domestic and international money movement alike, Chris’s greatest strength is taking complex payment workflows and distilling them into easy-to-understand processes for companies looking to grow globally.