Fintech start-ups must work harder to stand out

Despite the sector as a whole securing record levels of investment, fintech start-ups need to work harder than ever to stand out and attract the attention of bigger brands in the financial services sector, especially the rapidly growing FinTech market.

Investment in the UK fintech sector rose by 18% to a record 3.3 billion in 2018, according to the latest research by Innovate Finance. Attracting more investment than the fintech sector of any other European country, the UK is ranked third globally, behind China and the US.

Whilst this is good news for fintech businesses of all sizes, there are still concerns that some start-up and early-stage businesses aren’t attracting the investor attention they deserve and could fail to realise their commercial potential as a result.

The most prominent fintech companies are inevitably those with the highest valuations and the most compelling growth stories. Unicorn companies such as Monzo, Revolut and TransferWise are among those attracting the headlines and driving investor interest. For start-ups, there are lessons that can be learned from the routes these businesses have taken.

In an industry that is not short of good ideas, the businesses that stand out from the crowd are those that have done the groundwork in terms of testing their technologies and demonstrating their efficacy. The FCA’s sandbox initiative has proved popular with UK fintech businesses as a testbed for new products, services and business models. The recent launch of a new cross-border sandbox, run in conjunction with the Global Financial Innovation Network (GFIN), which is a network of 29 regulatory bodies chaired by the FCA is also expected to attract a large number of applicants. Those who are successful will be able to take advantage of an opportunity to test their solutions in safe environment, whilst opening the door to potential industry collaborations.

Beyond this initial research, early-stage fintech companies should also demonstrate their commitment to consumer interface research. Businesses may choose to do this in different ways but in an industry where speed to market is critical, the ‘Monzo model’ of launching a finished product or service and refining it based on consumer feedback is usually preferred. Of course, efficient customer service in terms of handling complaints is critical if this option is taken, as is open and honest communications from the company to its users.

Careful planning and structuring are also important to secure investor attention and position the business favourably for big brand collaborations. Even the smallest of start-up businesses, with just one or two people on board, need a robust business plan, which makes it clear how funds will be spent to deliver its growth strategy. Adopting a tax structure that will offer benefits to investors can also help to demonstrate strong planning. For example, an Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) will allow investors with a minimum 5% shareholding, to dispose of shares tax-efficiently after two years.

The ability of the business founders to take a step back and evaluate gaps in their skills or knowledge, which might need to be filled, could also make the difference between success and failure. This is not as easy as it sounds and those involved in driving the business in the early days may have become used to doing everything – from online accounting to marketing and selling. This way of working quickly becomes unsustainable however, and start-ups need to demonstrate an ability to attract talented people into the business and/or outsource key functions to improve efficiency. Putting in place an Advisory Board comprising non-executive directors with diverse knowledge and experience can also be particularly reassuring to potential investors – providing invaluable support and advice to the business as it grows.

One area that is often under resourced in the early stages is data analytics and its role in streamlining management decision-making. Start-ups need to be clear about what data they need and make sure systems can deliver it, as and when required. This is likely to involve identifying clear KPIs to measure business performance against. Data insights showing where the greatest profit potential exists, by customer or geography for example, could influence investment decisions.

Another area that should not be ignored is good governance in terms of business processes and reporting, which is increasingly viewed by investors as an area of compliance risk. For fintech businesses, it is important to demonstrate awareness of the Financial Reporting Council’s (FRC) enhanced assurance standard, as well as the Client Assets Sourcebook (CASS), ensuring that their systems and processes are compliant.

Among the latest UK fintech success stories is digital-only bank, OakNorth, which has attracted a record $440 million investment from SoftBank’s Vision Fund and the Clermont Group. Early-stage businesses have also been attracting investment, including the financial management platform, Moneyhub, which recently secured an undisclosed sum from Nationwide’s fintech fund.

There is much that start-up and early-stage fintech firms can do to increase their profile among potential investors and drive value in their businesses. Standing out in a sector that attracts a high volume of new entrants each year is never going to be easy, but the right planning, systems and structuring can pay dividends.

Mike Ayres is a senior manager specialising in working with financial services firms at accountancy firm, Menzies LLP.