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According to the US Small Business Administration statistics, there were 30.2 million startups in 2018; almost one million of them worked in the finance and insurance industries. Unfortunately, only 50% of startups survive for five years. Why do startups fail? What do companies, particularly Fintechs, need to survive? And how can they remove stifling constraints?

Recipe behind the success of a Fintech business

It’s takes more than a good idea to make a Fintech business successful. In addition to being innovative, the idea should be backed up with the ecosystem and be launched at the right time.

Idea. An innovative idea has the chance to transform the entire industry. However, a Fintech business cannot succeed if its core idea doesn’t comply with regulations or the product is convoluted. To succeed, the innovative idea has to meet market needs, prompt interaction with other players, and initiate further ecosystem development.

Competitiveness. After coming up with a good idea, startups should consider another worry: competition. According to the latest research into the most likely reasons for failure, 19% of failed startups were outcompeted. To beat the competition, a Fintech startup needs to be the first on the market with its innovative product, services, or features. The startup should develop the product quickly to accelerate business growth. Otherwise, the business may shrink.

Team. The appropriate team enables a startup to think of a constructive idea, quickly implement it, gain the advantage of being the first to bring the innovation to market, and then keep developing the product. Actually, a team, particularly an engineering team, becomes the key mover on the way from idea to success to growth. In 23% of failed startups, the reason for their failure was their inability to create the right team.

Building a team in the way of business growth

It looks like the main ingredient of the recipe for Fintech business success is rather rare. According to the Fintech Talent Shortage: Risk of Inaction in 2020 report, software engineers with Fintech knowledge are becoming scarcer. Each year, more companies are experiencing challenges filling open engineering positions. Fintech startups face fierce competition for IT engineers. Those startups that get beaten in this round of the game have no chance to win the market.

This situation comes about as a result of a number of factors. On the one side, new Fintech startups open regularly, and each wants to grow and thus needs to expand its engineering team. On the other side, the education system isn’t improving the situation. The abovementioned report says that the number of newly graduated software developers accounts for about one-third of the open positions. Therefore, the number of applicants per open position is dropping dramatically.

In this situation, startups generally choose one of the following two strategies:

  • They hire any developer, even without relevant experience, skills, and knowledge.
  • They wait to hire until they find the right candidate, which matches Jim Collins’ advice in Good to Great: hire only the best people.

Unfortunately, both situations are rather risky and expensive. A long hiring process requires considerable time, money, and human resources. Instead of spending on business growth, these resources go toward searching for the right people.

However, hiring a poor performer incurs additional expenses for teaching and supervising. The report mentions hidden costs caused by stress, personality conflicts on the team, and failure to fit into the corporate culture.

Both cases prevent Fintech startups from scaling their business. Inability to hire IT experts leads to late releases, which means lost opportunities, a whole host of competitors, and customer attrition.

Case studies

Lack of expertise. Limited cyber-security expertise of software developers at 7-Eleven Japan Co. likely brought on hackers breaching accounts of users of the 7pay app and making purchases of $506,000, which led to suspending the mobile payments app. The release says: “The hackers apparently accessed the user account, impersonated the authorized user, and made fraudulent purchases on the card that was stored on the app.”

Late to market. MCX’s CurrentC is a prime example of losing to the competition. The innovative payment app was one of the last to market after Apple Pay and other competitors. Its initiative started in 2011 and went into beta in late 2015. Nicholas L. Johnson in his blog post about the case writes: “Before CurrentC could even launch its beta, major retailers like Best Buy were already announcing that they would support other payment apps like Apple Pay. If MCX had gotten to market much sooner, it may have smoked out some of the major issues with its business model before it was too late.”

Poor functionality. Promising Swell Investing also shut down after failed attempts to scale its business. David Bank in his article on ImpactAlpha notes: “Customer acquisition has been a challenge for new entrants in retail impact investing, despite market demand for accessible sustainable investing options.” NerdWallet in its Swell Investing Review 2019 mentioned that the platform lacked features offered by other robo-advisors. The platform didn’t meet customer expectations and thus lost out to competition, which might be caused by the lack of IT engineers able to create popular tools among investors.

How do any Fintechs survive?

Not every Fintech company suffers from the IT talent shortage in the US. Most of those that are unable to hire experienced software engineers on the US market look at the alternative workforce. The Fintech Talent Shortage report shows that using freelancers and outsourced teams has become mainstream.

Freelancers are a good option for short-term tasks. In 49% of cases, the use of freelance workers has a positive impact on performance. When it comes to long-term projects, startups mainly choose outsourced teams, and they improved performance in 53% of cases.

At the same time, the report mentions that only 8% of companies know how to establish processes to get the most out of a distributed team. If every startup that uses a remote workforce knew how to do it right, the success rate would likely be much higher than 53%.

Bottom line

A software engineering team has become one of the major movers of Fintech business success. With such a team, a Fintech startup can speedily create a product that is first on the market and then rapidly expand the product’s functionality to satisfy customer expectations and beat the competition. Without a good team of experienced software engineers, this continuous growth is almost impossible.

However, filling open IT positions in the US is becoming extremely challenging, according to the Fintech Talent Shortage: Risk of Inaction in 2020 report. Therefore, more startups are outsourcing, which has become mainstream in Fintech.

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