Investments in Fintech surged in 2018, reaching US $55 billion worldwide and doubling that of the year before, according to Accenture. Fintech companies are also getting bigger. Currently, 19 out of Forbes’ 50 Most Innovative Fintech Companies in 2019 have valuations of US$1 billion or more.
With fewer barriers to entry than larger, more established financial institutions, Fintech startups are scaling up quickly in their local markets and abroad. Fintech startups with a strong international growth strategy appeal to both local and foreign investors who are pouring money into the sector. However, rapidly growing and expanding in the financial industry is not without its challenges.
Fintech startups face a unique set of challenges to expand across borders. The financial industry is one of the most regulated in the world, with different tax, labor, and reporting regulations to consider in each city, state, and country.
Though some countries are making it easier for fintechs to operate on a large scale, fintech startups still face other complex challenges, including language barriers, cultural differences, and limited resources to scale quickly and survive. For example, many people consider Latin America to be a unified region where it’s easy to do business across borders. However, only 19.6% of nearly 400 fintech startups operate in multiple countries, according to a recent IDB and Finnovista report on Latin America.
Here’s a look at the key challenges of scaling a fintech company across borders and how fintechs can overcome them.
1. Navigating local regulations
Many Fintech hubs around the world, such as Switzerland, Mexico, London and Singapore, are passing regulations which make it easier for fintechs to operate. For instance, authorities are permitting fintech “sandboxes” which allow startups to test new technologies without adhering to all of the regulations that govern existing financial institutions until new regulatory frameworks can be discussed and implemented.
However, financial technology regulations in most other countries have yet to catch up with the rising number of startups. Consequently, most Fintech startups choose to innovate faster than regulators can pass laws in order to stay ahead of their competitors.
Of course, this is a risky game to play. Should legislation change one day to the next, a fintech company’s entire business model can take a hit. For example, the Chilean Supreme Court allowed state-owned banks to close the accounts of local startup cryptocurrency exchanges Buda.com, Orionx, and CryptoMKT from one day to the next, leading to an ongoing battle between the local startups and state banks.
Rather than risk being blindsided by changing regulations, it’s best for fintech startups to comply with current regulations, and if possible, work with lawmakers to improve the industry overall. Fintech startups should work with local governments to apply for the appropriate licenses to operate in each new country.
Understanding the local market and laws is not easy, so establishing a local office and team who understand the market and language to comply with local regulations is also crucial. Having a local country manager can go a long way in not only ensuring that the company is compliant but that it is handling its expenses efficiently as well.
2. Overcoming language and cultural barriers
Language and cultural barriers are some of the biggest hurdles a growing fintech startup will face. For one, perceptions surrounding money and banking vary tremendously from country to country. While fintech startups may be able to thrive fairly easily in the US and UK, the situation is much different elsewhere. Subcultures and multiple languages can exist within each country as well, making scaling up for fintech startups a real challenge.
Overcoming these language and cultural barriers requires special attention to the company’s messaging and communication strategies in each market. For instance, London-based Monzo uses simple, inclusive, and reassuring language to describe its services. Monzo’s friendly tone and lack of financial jargon in its communications and branding show that they are real people and helps them to establish trust with everyday consumers.
In Latin America, financial literacy is still very weak. In fact, only half of the adult population in Latin America has a bank account, with a majority of people spending and saving in cash only.
When introducing a new financial product or service to a new market, special attention must be given to these cultural norms and expectations. Financial education may need to play a more prominent role when introducing a service to countries in Latin America than in the US or other Western Europe countries. Therefore, it’s crucial for fintech startups to work with a local partner that can communicate their brand’s unique selling point in a way this is meaningful to the local market.
3. Limited resources and time
While many fintech startups operate entirely online without physical branches or offices, they can still face challenges when it comes to accessing enough capital, talent, and the other resources necessary to compete against established incumbents.
Scaling across borders is complicated and expensive regardless of a company’s size, and the process can take time and resources away from other opportunities. That being said, startups should evaluate whether or not expansion is indeed beneficial, or it will only take away from their core business. In other words, it may be better to serve one country well than several countries poorly.
To give an example, only 30% of Brazilian fintech startups currently have operations beyond national borders. Brazil is the largest fintech ecosystem in Latin America, and approximately 1.5 times larger than Mexico and three times larger than Colombia. It’s also one of the largest emerging economies in the world. Combined with the language barrier (the official language in Brazil is Portuguese while the rest of Latin America speaks Spanish), there is little incentive for Brazilian startups to expand across borders while there are still significant opportunities and potential for returns for those focusing their efforts solely within the country. Startups are better off using their resources and time to focus on the local market.
The same may be true for companies in other large emerging economies around the world, such as China and Subsaharan Africa, where massive mobile penetration and younger, tech-savvy populations are fueling the local fintech industry’s growth.
Solutions to scale
Few fintech companies have managed to expand rapidly across borders efficiently enough to acquire large customer bases and achieve profitability in each individual market. Because of the difficulties, some startups choose to eliminate many of the barriers of scaling internationally by forming partnerships with established players, rather than competing against them.
Not only do the formal institutions have deeper pockets and understandings of the local markets, but they can also provide the ability to tap into massive, established consumer bases. Though there is no one-size-fits-all approach to a fintech and traditional banking partnership, these collaborations are on the rise around the world.
Trust and reputation are also key factors when dealing with financial services, and startups can’t afford to risk any security issues or data breaches. By partnering with a local, stable player in each new market, startups can build local trust and credibility much faster.
Fintech startups must be realistic about the challenges of scaling their product or service internationally. The financial industry is one of the most regulated in the world, and the competitive environment makes it incredibly difficult to maintain secure and stable operations in each new market entered. However, by working with local partners, regulators, and existing players, startups can eliminate many of these barriers and scale across borders successfully.
Diego Caicedo is the Co-Founder and CEO of OmniBnk, a neobank that provides financial services to small businesses in Latin America.