How to Invest in Fintech Startups: A Beginner’s Guide to Investing in Fintech
In the past, the term “fintech” was used to refer to the software technologies that were necessary to provide traditional banking or finance services. However, the term is now used to refer to all types of technology- and product-related innovations. Some popular examples are electronic wallets, blockchain, cryptocurrencies, biometrics, or even API banking. Since the idea of fintech entrepreneurship has been around for only a short while compared to most other industries, there are many things that need to be factored in while investing in fintech ideas or products.
The confusion around the term “fintech”
Let’s first start by addressing the confusion around the term.
Startup founders often describe their innovation as “fintech,” but a clearer definition would include the following: Innovation in technology that aims to replace existing ways of conducting business (bank and credit card, online payments, etc.) with a new digital platform (e.g., bitcoin, the blockchain, etc.) Innovation that creates or improves functionality of existing financial systems, but allows access for individuals, businesses, or other groups that cannot use the traditional banking system (e.g., credit unions, or the “Post Office Savings and Loans,” which were financial institutions which allowed people to save money in post offices without taking a bank-credit risk).
Why would one invest in fintechs today?
As the internet accessibility continues to improve, the world becomes more digitized and no longer limited by geography. Cloud-based applications, such as cloud computing, big data, IoT, mobile technologies, and social media, are revolutionizing industries and allowing fintech startups to address existing problems. Another major reason for investing in fintech is to benefit from the global tech boom. According to the World Economic Forum’s Global Agenda Council on the Future of Finance, there are two main ways that fintech businesses will be able to seize opportunities. They include innovating new ways to finance, and making sure financial services can be integrated into new technologies, such as blockchain, AI, and biometrics.
What is the most important thing to consider for investors?
For new investors in the fintech space, the most important thing to consider is the competition. Your new investment in fintech startups needs to be completely independent and unrelated to the existing services of your competitors. For example, some of the great innovations in fintech are not covered by companies such as PayPal, which generates 99% of its revenue from the processing of credit cards. However, PayPal itself is also considered one of the most innovative fintech startups in the United States and they are responsible for other innovations such as email, instant payments, and online shopping.
Where to start?
The good news is that there are more than one way to get into the world of fintech entrepreneurship. One thing you can do is to invest in the software or regulatory technologies that constitute the basis of most fintech products. These could be technologies like biometric recognition, document scanning, or even fraud algorithms. However, because many fintech startups generally very quickly scale their operations and become even more successful in new markets, your investment in technology will not scale as quickly as a service does. If your main objective is to achieve more exponential growth with your investment, you should consider investing in early-stage startups that introduce a new service to the ecosystem. It all depends on what your primary objective is for investing in fintech startups, but, investing in early-stage startups may be the best course of action for most investors.
Fintech has transformed the banking industry and challenged it to become simpler and more accessible to consumers. New ideas emerge daily around issues such as advanced security, consumer centricity, greater flexibility, and costs. On top of this, the speed fintechs grow and scale forced the government’s hand to put in place new regulations (e.g. PSD2) that are more accommodating to cutting-edge financial products. The average annual growth of the financial services industry is still inclining and it is still a good time as ever to consider becoming an investor.