Fintechs, particularly burgeoning scaleups and startups, must navigate many challenges to succeed in an increasingly competitive industry.
In this Top 10, we round up the leading risks for fintechs that can hinder their path to success and pose significant hurdles to sustained growth.
10. Strategic Risks
Emerging fintechs face a series of strategic risks when scaling their business. Differentiating products and services is key, particularly as global competition intensifies, and incumbent financial players enter into the digital ecosystem. Creating a unique brand is critical for fintechs seeking vital funding to fuel their growth, as venture capital becomes all the more competitive, particularly as the rate of new market entrants expands.
9. Third-party Risks
As fintech players join the digital ecosystem, they must rely on third-party vendors and partners for numerous services. Due diligence on all parties involved in providing products and services is crucial – with the prospect of partners failing to meet their obligations a real one. Indeed, third parties may face their own operational or security issues, which can breach the data of fintech customers. Risks such as these, which sit outside the control of a fintech, must be quelled in the partner onboarding process.
8. Credit Risks
For fintechs involved in lending, there is always a risk that borrowers may default on their loans. To mitigate this, fintech lenders need to ensure the data quality they leverage is reliable, particularly if they rely on alternative data sources and new credit scoring models. Many emerging lenders like to support the underbanked and unbanked, demographics where little financial data is available. Due diligence on gathering a full picture of a potential customer’s financial health is therefore paramount.
7. Technology Risks
While the introduction of new technologies can help revolutionise customer services and streamline back-end processes, technology implemented at haste and without foresight can lead to data leaks, operational failures and outages – disrupting services and eroding customer trust. Indeed, those who fail to innovate may find their solutions soon become obsolete, so it is vital to innovate with security and compliance front-of-mind.
6. Market Risks
Fintechs, particularly those involved in cross-border trading and FX, are all exposed to market risks. This includes fluctuations in interest rates, currency exchange rates, and other external factors that can impact financial performance. For most of 2023 and the first half of 2024, fintechs have had to grapple with high interest rates as a result of soaring inflation, putting a strain on resources and finances. Fintechs should plan for all manner of economic environments.
5. Operational Risks
Fintechs should always be wary of operational risks and the effect of potential outages. Operational risk extends to malfunctioning internal processes, system failures and human errors. In recent times, the reputation of tech firms has taken a notable hit. ERP solutions provider CrowdStrike incorporated erroneous code in its latest update, disrupting Microsoft Windows, and thus, the operations of many businesses. Cases like this serve as a reminder to maintain effective risk management and operational resilience.
4. Regulatory Compliance
As technologies continue to evolve in the fintech space, regulations must frequently adapt to keep pace with the newest solutions on the market. PSD2 heralded an era of Open Banking in Europe, which is now being refined under PSD3, and the EU has just released its AI Act, the first comprehensive regulation detailing correct use cases for the burgeoning technology. Fintechs must adhere to new regulations as they come into effect, and for those operating in multiple jurisdictions, products must be delivered in a way that complies with local laws.
3. Fraud and Financial Crime
Fraud and financial crime are one of the largest threats to fintechs today, with hackers more equipped with the latest technology than ever before. Leading investment bank JPMorgan revealed it faces up to 45 billion hacking attempts daily. Fintechs must ensure they have the correct processes in place to mitigate these threats. Indeed, if providing financial services direct to customers, they have a duty of responsibility to safeguard customer accounts, leveraging biometric authentication, dynamic CVV codes and other innovations to ensure consumers remain protected.
2. Cybersecurity Threats
The gateway to many fraudulent acts being undertaken is, of course, cybersecurity attacks. In the process of handling sensitive financial data, fintechs are prime targets for cyberattacks. These attacks include data breaches, hacking and ransomware strikes. Today, one of the most common form of attacks is distributed denial-of-service (DDoS) attacks, which disrupt web traffic to a web property and can hinder consumer access to financial services. Ensuring robust cybersecurity measures is therefore critical for fintechs.
1. Reputation Risks
Should any of the above risks not be adequately managed by fintechs, the reputational damage could be extensive – particularly if the company in question is dealing with consumer data under a B2C model. Negative publicity, whether from security breaches, regulatory issues or poorly executed customer service strategies, can have a detrimental impact on a fintech’s customer base. High-profile fines for non-compliance are among the most common failings for fintechs, and for those with tight financial margins, this can be significantly more detrimental than for larger organisations.
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