JULY 7, 2020
6 min read
COVID has reshaped the global economy, and fintech startups are not immune. The enormous global downturn has put pressure on businesses in every sector, and many are struggling to survive.
But the pandemic is not the only crisis fintech has faced or will face. Some of those crises are external, as with COVID, but many are caused by internal factors. Risk assessment and risk management are key for startups looking to avoid failure, particularly in the unpredictable and sometimes untested world of fintech.
Here we’ll look at some examples of fintech startup failures, some from during the pandemic and some from before, to identify some of the major risks faced by fintechs, and some of the ways startups can protect themselves.
Wirecard: compliance is king
The failure of German payment processing giant Wirecard is the biggest fintech story of 2020. The company filed for insolvency in June, and its CEO was arrested, after a Financial Times investigation revealed that it had a €1.9 billion black hole in its accounts.
Ironically, Wirecard offered fintech risk assessment services as part of its slate of products. But in fact, risk assessment and risk management were eclipsed in the business by a complete flouting of compliance - and sheer criminality. As the FT reported in July 2020, consultancy McKinsey warned Wirecard almost a year before its collapse that it must take “immediate action” to remedy the lack of legally-required controls in operation in its business. Amongst other issues, Wirecard was understood to have partnered with a third-party business that was carrying out payments processing in a territory in which it did not have a licence to operate.
Wirecard represents perhaps the most severe example of a fintech compliance failure, but it underscores the importance of compliance for all businesses operating in the sector.
Moven: first-mover startup failure
When US fintech startup Movenbank launched in 2011, it was one of the first digital-only banks on the market. It pitched itself as a rabble-rousing alternative to the legacy banking sector, focusing on convenience and customer-centric service.
It could be said that Movenbank paved the way for the next generation of challengers, including N26 and Revolut. But in March 2020 the company announced that the service was closing. While Moven Enterprise’s software wing continues to grow, Movenbank became a victim of coronavirus. As the company’s founder Brett King explained to American Banker, the parent company had hoped to sell off its consumer business but the pandemic meant that funding quickly dried up, and Moven wasn’t prepared to absorb the losses it was enduring.
But while COVID catalysed Moven’s failure, it wasn’t the main factor in its demise. As King himself has said, Movenbank suffered from first-mover disadvantage. “We were just a little bit early with the challenger bank,” King told American Banker. Encouraging the necessary shift in consumer behaviour and perception proved too challenging, and investors had long pressured Moven Enterprises to spin off the consumer side of its business as a condition of investment, wary of a product that did not yet seem to have a market.
Swell: failed to scale
Swell Investing launched in 2017 with a compelling proposition: it allowed clients to invest in companies that it determined were operating with social responsibility in mind. By the middle of the following year its users had seen an average return of 30 per cent, and it completed a further funding round.
But all was not well with Swell. In August 2019 the company announced that it was closing its doors after it had failed to “achieve the scale needed to sustain operations in the current market.” As Impact Alpha reported at the time, new entrants in the retail investment sector have commonly faced difficulties in acquiring customers at the rate required in order to maintain survival. With investors seeking decent returns on their fintech investments, a failure to scale the product is often the death knell for fintech startups.
Nodal: fintech startups need a product
UK blockchain payments startup Nodal promised to help freelancers get paid quicker. Late payment is a huge problem for freelancers, and the company hoped to address it through a new recruitment platform that used proprietary blockchain technology to ensure accuracy and transparency in billing and settlement.
The company remained obscure until March 2019, when it announced a huge £250 million contract with another UK firm, Minstrell Recruitment. Nodal quickly grew from around a dozen employees to more than 30, along with a number of contractors worldwide. They were also reported to have engaged communications giant M&C Saatchi for a PR push, at a cost of £500,000, and were planning an ICO.
But the cracks soon started to show. Just six months after announcing the Minstrell deal, it was reported that Nodal’s headcount had fallen to just half a dozen employees, and it had missed payment runs for contractors and agency workers. Speaking anonymously, employees said the problem was simple: the company didn’t have a product. Staff members told AltFi that the technology touted to Minstrell and the press simply didn’t exist, and Nodal had not been able to build it fast enough. A month later, the company collapsed.
Fintech risk management strategy: 5 steps to avoid fintech failure
So what can we learn from these fintech startup failure stories? Some of the company collapses we’ve looked at were caused by a single, often simple, factor. But others involve a number of different factors and problems that, when combined, were fatal.
These examples lay bare a few crucial considerations for fintech risk management and fintech risk assessment. These include:
- Focus on funding
Funding isn’t just about finding enough cash - although that is, of course, vital. In identifying the right backers, fintech startups need to find investors who understand and are sympathetic to the product. As Movenbank showed, this is especially crucial when the startup is trying to break new ground or explore entirely new markets. Moven Enterprises’ potential backers had encouraged the company to sell its B2C business long before the COVID crisis struck, but it took the pandemic to finally force the parent company to take action.
- Don’t ship a broken product
If the Nodal story shows one thing, it’s that you can’t rely on a product you don’t have. Fintech startups tend to make bold claims about their products and services but, as Nodal learned, over-promising and under-delivering is a huge risk - especially if you’re relying on just one client or customer.
- Be realistic about adoption
Many fintech startups are premised on the idea that business or consumer problems can be fixed through a change in behaviour. Often, as with the rise of digital-only banks, that change in behaviour also requires a shift in mindset. As Movenbank learned, some mindsets are deeply ingrained, for example the assumption that banking services will be provided by traditional banks. Today, of course, the banking landscape is very different, and the next wave of digital-only challengers are capitalising on that. But it is vital to be realistic about the potential adoption of your product or service when conducting your fintech startup risk assessment.
- Comply, comply, comply
Regulatory compliance is an absolutely crucial consideration if you want to avoid fintech startup failure. The regulatory landscape for fintech businesses is complex and still developing, as legislators struggle to understand these new businesses and their products. But failing to comply with regulatory obligations in your chosen markets poses an existential risk. Wirecard showed what happens when compliance failures are taken to the extreme, but the company’s collapse should be a lesson for every fintech startup that has not nailed down the legal side of its business.
- Understand the market
Market research is a crucial part of business planning for any startup, and that remains true in fintech. Even with a great product, fintech startup failure is all but guaranteed if you can’t find a market for what you’re selling. As Swell demonstrated, it can be easy to overestimate the demand for a new fintech product or service. But scaling is crucial, especially if you have substantial investor backing. Realism about the size of the market is an absolute prerequisite for avoiding fintech startup failure.
DashDevs can help you build a great fintech product. Our dedicated fintech consultancy provides end-to-end development, security, and advisory services. Get in touch today.