If there’s one industry that seems to have weathered the pandemic and economic crisis fairly well, it’s the fintech industry! In 2021, European fintech companies raised more than 125 billion euros (2.8 times more than in 2020)!
Since the European Union implemented the Second Payment Services Directive (PSD2) in 2015, the landscape has changed dramatically for financial players. With the advent of Open Banking, entrepreneurs have benefited from a regulatory framework that is particularly conducive to creating fintech companies. These startups combine a high degree of innovation with offering services in one or more financial areas.
Here are 5 key steps to start your fintech company!
#1 Clearly state what you offer
The major principles of entrepreneurship apply to fintech companies, just like any other entrepreneurial sector: defining a business model, targeting marketing personas, conducting market research, drawing up a business plan, and so on. When launching an innovative product or service, don’t overlook the main steps involved in most entrepreneurial projects.
Is your product or service intended for a B-to-C, B-to-B, or B-to-B-to-C market? Where do you fit in the value chain of your industry? These are some of the many questions that need to be answered before you get started.
Compared to other entrepreneurial projects, the uniqueness of your project will be based on the financial nature of the services or products you’re offering. Therefore, you’ll need to clearly diagram how the money will flow so it can be visualized. This schematic will help you make technical and regulatory decisions and also allow you to better describe your offer.
#2 Make sure you comply with regulations
If there’s a highly regulated industry, it’s the financial services industry!
If your startup fintech company deals with financial transactions, you have three options:
- Go through an authorized player such as Treezor, and become registered as an agent of a payment institution (a list of authorized institutions is available on Regafi);
- Become a licensed payment institution (in France, the French Prudential Supervision and Resolution Authority (ACPR or Autorité de Contrôle Prudentiel et de Régulation) is in charge of issuing licenses);
- Apply to be exempt from needing a license
So why should you choose one solution over another? Here are three main questions that will help you choose the best option.
a. “Am I in a hurry?”
It’s important to note that the application process for payment services authorizations is long and time-consuming. Once the request is submitted, the ACPR has 3 to 6 months to respond to the request. Between file preparation and the back and forth inherent in the process, expect to spend a year on it if you choose to apply for a payment authorization.
For those who don’t want to wait that long, there’s another solution: team up with an authorized Payment or Electronic Money Institution (such as Treezor) that has already gone through the aforementioned process and will handle the regulatory requirements for you.
b. “Do I have the internal resources to ensure compliance?”
Several regulatory requirements impact Payment and Electronic Money Institutions: PSD2 and strong authentication, Anti-Money Laundering and Counter-Terrorism Financing Directives, KYC and KYB procedures (respectively “Know Your Customer” and “Know Your Business”), General Data Protection Regulation (GDPR), and mandatory reporting to supervisory authorities (TRACFIN, FICOBA, CRS, FATCA, Bank of France, and so on).
These regulatory constraints require expertise and resources that a young fintech company doesn’t usually have when they are getting started. Moreover, when launching a new project, it’s better to focus on ensuring your “time to market.” These are all reasons to become an agent of a Payment or E-Money Institution rather than a Payment Institution.
c. “Does my project have international aspects?”
If your goal is to expand your fintech company internationally, be aware that you’ll have to request authorization to operate in each country where you set up. This is called a “passport.” By going through an international player like Treezor, you can benefit from its broad license which allows it to operate on behalf of its customers (“agents”) in 25 countries, and you won’t have to worry about the specific steps required to become authorized to do business in each country.
#3 Choose your tech partner carefully
The banking sector has not escaped the democratization of APIs, interfaces that allow two computer systems to communicate with one another. Banking-as-a-Service (BaaS) solutions such as Treezor offer a set of APIs that guarantee access to banking system functions (core banking): account opening and maintenance, KYC, payment methods, transaction processing (checks, cards, transfers, or direct debits).
Therefore, there’s no need to get involved in lengthy technical developments; others have already done it for you! Using a BaaS solution such as Treezor, can accelerate your time to market considerably. Other successful fintech companies such as Lydia, Pixpay, Swile, or Shine have already done so and some of them have even become fintech unicorns.
#4 You’ll need financing; that’s the name of the game
If you launch an ambitious project, you’ll need capital right away to acquire users, hire talent, expand internationally, and so on.
Fortunately, whether you need a few thousand euros or a few million, there are many ways to finance growth:
- “Love money,” borrowed from your friends and relatives
- A bank loan
- Regional or public subsidies (for example, through Bpifrance in France)
- Raising funds through investors such as business angels and investment funds
#5 Put the right team together and get advice from your peers
For a long time, investors have evaluated projects based on the Product/Market Fit, but today projects are also being analyzed based on another set of criteria: the Founder/Market Fit.
Early investors have little data to go on at the pre-seed, seed or even Series A stage. Therefore, they tend to look at other criteria such as the profile of the founders, their professional background, and their ability to understand the ins and outs of the market they’re entering.
And for good reason, two similar ideas can have very different outcomes depending on how well the founders run the company and the quality of work of the initial team members!
So be extremely careful when picking a partner because one of the most important things is to get along with them, not necessarily build a team of clones who come from similar backgrounds or who have the same skill sets.
McKinsey’s report, Diversity wins: How inclusion matters, came as a reminder that diversity is a business-performance driver. So don’t fall into the trap of staying within your inner circle, or you’ll lack resilience and creativity, two very beneficial assets you’ll need if you’re hoping to break into the ultra-competitive world of fintech.
With 92% men and only 8% women as founders of fintech companies, the road to equality is still long. But now that you’ve read this article, you can take matters into your own hands and make change happen with your future fintech company!
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