Four key strategies of successful fintech startups

Most fintech startups will fail in the first five years. New UNSW Business School research reveals the strategies that distinguish successful fintechs from those that won’t make the cut

Fintech startups have revolutionised how we handle money by using technology to create new and innovative financial products and services, making it easier for people to manage their finances. The fintech industry receives US $50 billion in yearly investments, valued at $310 billion in 2022. However, with all of the buzz and excitement surrounding fintech startups, estimates show that roughly one in ten will fail in their first five years.

The five-year mortality rates for new ventures in advanced economies are historically around 50 per cent, explains Professor Barney Tan, Head of the School of Information Systems and Technology Management (SISTM) of UNSW Business School. By contrast, he says the failure rate of fintech start-ups is estimated at 90 per cent. Professor Tan and a group of researchers recently studied why the failure rate of fintech start-ups is so extraordinarily high. Their research paper, The strategic options of fintech platforms: An overview and research agenda, explains why the failure rate of fintech platforms is disproportionately high and uncovers four essential ingredients for success.

Competition and over-saturation in the fintech market

A recent example of a fintech start-up that has not been successful in the Australian market is Latitude Financial. On the surface, Latitude has all the makings of a successful start-up, the backing of established partners like Harvey Norman, a sizeable customer base, and an experienced leadership team. However, it could not effectively differentiate itself from the other Buy Now Pay Later (BNPL) platforms, and with the anticipated uncertainty surrounding the regulatory environment in relation to the BNPL sector, Latitude made the decision to exit the market. An effective set of strategies to help Latitude stand out from its competitors and stay nimble and responsive to market and regulatory shifts could have made the difference. 

One of the most exciting aspects of fintech startups is their ability to disrupt traditional financial institutions. Being more agile than traditional banks, fintech startups can focus more on customer experience, often providing more personalised and user-friendly digital services and platforms. Another benefit of fintech startups is their ability to bring financial services to underserved populations. By leveraging technology, these startups offer financial products and services at lower costs, making them more accessible, affordable, and user-friendly.

Read more: How AI can help solve the pressing problems of banking and finance

According to Professor Tan, the global fintech sector is already saturated and hyper-competitive, and this level of competition means that the forces of natural selection are incredibly high. In addition, the economic climate and uncertainty post-COVID has amplified the forces of natural selection already present within the global fintech sector.

To survive, Professor Tan says fintech start-ups have to adopt and defend an attractive market position, leverage any unique strengths and capabilities that they possess, continuously innovate and be ready to pivot their business model in line with market trends and expectations and work effectively with the other entities within their business ecosystems. “And they will have to juggle all of these priorities concurrently while staying ‘legitimate’ in the eyes of their stakeholders, such as their investors, customers and regulatory authorities,” he says.

To better understand how successful startups manage to stand out against their competition, Professor Tan and his co-authors recently set out to conduct a comprehensive review of the literature on fintech and fintech strategies to get a snapshot of what the key signs of success are in the global fintech market.

Four keys to a successful competitive strategy

Past research shows strategies are vital to the success of businesses. So Professor Tan and his research team hypothesised that the high fintech failure rate might be because the fintech industry is unique. There isn’t enough information yet about what makes a ‘successful’ strategy.

“We wanted to take stock of the existing knowledge about fintech strategies and propose an agenda to inspire future research in this area,” he explained.

The study involved a comprehensive literature review of the existing research on fintech and fintech strategies. After carefully curating the articles through manual refinement and elimination, 154 journal articles were analysed and reviewed. Through this approach, the researchers identified four unique characteristics of fintech platforms that can have profound implications for their strategies:

1. The hybrid nature of fintech platforms: Because a fintech is both a tech and a financial firm, fintech platforms can face conflicting demands. This hybrid nature can create conflict, which means the pursuit of growth must be tempered with caution to minimise risks and ensure the welfare of customers. So it’s the fintech platforms that can balance growth with caution (unlike many tech firms that prioritise growth and network effects) that perform the be

2. Fintech customers are often from vulnerable segments of society: Customers of fintech platforms often belong to vulnerable and marginalised groups, such as low-income individuals, young adults and students, micro-business owners, and new migrants, who may lack credit history. This often requires fintech startups to charge additional fees and interests to compensate for the higher risks of offering financial services to these segments.

3. Fintechs operate in a fast-changing and heavily regulated industry: Because the emergence of fintech platforms threatens to disrupt the heavily regulated financial sector, they also require socio-political legitimacy. This means that the success of fintechs is also largely dependent on their regulatory environment.

4. Fintech platforms are competing with large, well-established firms: Lastly, fintech platforms face more considerable, established, and influential incumbent firms with various options to respond to their strategies, and this can make competing with such large institutions, like traditional banks, difficult.

Read more: Why Southeast Asia is the next hotspot for fintech

According to Professor Tan, these findings mean fintech platforms must learn to balance growth with caution, account for unpredictable regulations, and have comprehensive, long-term strategies that account for the measures of incumbents.

He says effective competitive strategies are needed even more than in startup areas to help the fintech start-ups ensure their survival and navigate the adverse market conditions surrounding their businesses. “There are strategies that differentiate fintech start-ups from their competitors and strategies that coerce fintech start-ups to conform to certain societal expectations,” explains Professor Tan. And so, a successful fintech start-up is likely one that can effectively navigate the tensions between the need for differentiation and conformity.

Because the study is based on research conducted worldwide, and given that the current state of fintech research is dominated by studies conducted in the context of developed financial markets like Australia, the implications of these findings are relevant globally.

Implications for startups and policymakers

For any fintech startup, the first and foremost consideration has to be the regulatory framework surrounding the fintech sector. "There has to be alignment with the policies and regulations or a start-up’s business could be outlawed and forcibly shut down very quickly. The key is to always seek to act on the side of social good because any business that is detrimental to this will always come under regulatory scrutiny," explains Professor Tan.

Once there is alignment, a fintech start-up then needs to look carefully at the industry conditions, the existing market offerings, and the anticipated responses of its competitors in response to any strategic initiatives it launches. 

Professor Tan explains: "This could be in the form of disruptive innovation, catering to the needs of an underserved segment, or nurturing an ecosystem of partners to pool resources and capabilities together. In doing so, the state of optimal distinctiveness may be achieved where the start-up is deemed to be sufficiently unique and differentiated, while at the same time deemed legitimate by the market and regulatory authorities because they are conforming to societal expectations."

Subscribe to BusinessThink for the latest research, analysis and insights from UNSW Business School

Finally, Professor Tan says better policies are needed to establish a more level playing field for start-ups while protecting the interests of the consumers, particularly those from the most vulnerable segments. “Policies must protect these customers and prevent opportunistic behaviours from the fintech start-ups. But at the same time, the policies should not be restrictive to the extent that they stifle legitimate innovation and overly protect the established financial institutions,” he says.