Like any other actively developing industry, fintech carries several risks that everyone who wants to work in it should be aware of. It is especially important to consider the fact that financial technologies are fundamentally changing traditional services that have long become traditional and habitual for people and businesses. This may mean that cutting-edge technologies may face some resistance as well as some implementation issues. Therefore, for a fintech company to succeed, it is important to constantly monitor the risks and challenges associated with this industry.
The Main Risks in the Fintech
Activity in any quickly developing industry carries a lot of risks. This statement fully applies to the fintech sector. According to the forecasts of most experts and analysts, this industry will grow 6 times by 2030, and its annual growth rate will exceed 20%. Accordingly, the opportunities that open up in such a market attract a huge number of entrepreneurs. However, not all of them will succeed. Here are just a few examples of the biggest risks associated with fintech.
Unforeseen market events, due to their unexpectedness, pose a significant operational risk for fintech companies. They can cause problems with solvency and liquidity. For example, the market may display the following:
- excessive volatility;
- an unfolding crisis;
- other risks disrupting the work of both banks and fintech services.
Failure to Meet Regulatory Requirements
Reducing the risk level of financial transactions is the main focus of the fintech business. Given that it deals with significant financial flows, its activities are subject to regulation. Regulators at various levels are working to create rules and procedures for this market sector. Their goal is to make fintech companies provide correct assessments of their financial transactions in order to identify and neutralize the risks associated with money laundering and terrorist financing. In addition, technology companies are required to comply with the requirements for the protection of personal data.
Unfortunately, regulations in many countries do not keep up with the pace of technological progress. Sometimes this means that regulatory standards change rapidly, making it extremely difficult to standardize compliance practices.
If the regulator’s requirements are not met, sanctions are applied to the fintech company. The severity of the sanctions directly depends on the degree of violation.
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Personal and Professional Responsibility
Fintech companies work with financial services. They either provide them or provide access to them. Any negligence, failure in the system, and exposure of fraud by ordinary employees or top management can irreparably damage the company’s reputation. In this case, an outflow of customers will certainly happen, and as a result, the company will face bankruptcy.
In addition, fintech companies often go beyond their operational limits and fail to standardize new operating procedures, which leads to additional errors. On the other hand, consumers tend to use fintech apps carelessly and do not take preventive measures to protect themselves, their data, and their finances. And even if the trouble is the clients’ fault, fintech companies are held responsible in 99% of situations.
Data Theft and Cyber Attacks
Fintech companies handle massive amounts of sensitive financial information. Naturally, their databases are prime targets for cybercriminals. Identity theft can lead to fraud and financial loss.
There is no one-size-fits-all cybersecurity system in fintech due to the diversity of business and operational structures. One important step in building a system of risk mitigation is building competent IT security and cyber risk management teams. In addition, the quick development of fintech has also provided a great impulse to the development of user data protection technologies, which can be used to ensure risk mitigation.
Read more about the most successful fintech companies in the world
Traditional financial institutions have been protected by the national conditions of their particular markets for many years. Each jurisdiction has its own set of corresponding financial rules and procedures for financial companies that provide services tailored to local requirements.
However, with the rise of fintech, these geographic restrictions have collapsed due to the rapid emergence of technology companies offering financial solutions around the world. To stay in the market, traditional financial institutions have had to adapt to the new rules. They began to create similar products.
As a result, a global competitive landscape has emerged, and participants who want to win the fintech race must carefully choose and build their strategic relationships.
Not all the risks that are typical for the fintech industry are listed here. However, this list already shows how difficult it may be to survive in the technology market.
Fintech companies must be aware of the risks and take appropriate measures to mitigate them. This requires creating an integrated management system, which would help the company to identify, assess, mitigate, and monitor risks. By detecting and fixing the problem promptly, the company owners can build a sustainable business and maintain the trust of their customers.
Examples of Bankruptcies of Fintech Companies
The quick growth of the fintech industry has brought about not only cutting-edge technologies and significant achievements, but also the collapse of some large companies that failed to adapt to the changing rules and manage the emerging risks.
The German payment processing and e-commerce company Wirecard was one of the largest fintech players in Europe until its bankruptcy in 2020. The company faces allegations of financial fraud and misreporting.
British real estate lending platform Lendy announced its bankruptcy in 2019. The company faced liquidity problems and blocked the investors’ access to their funds.
The company Better Place was founded in Israel in 2007 with the goal of creating infrastructure for electric cars. However, after several years of expansion, the company went bankrupt in 2013 due to problems with financing, squandering, and the wrong development strategy.
The French company Hello offered banking services. It filed for bankruptcy in 2019 despite having over 300,000 customers. The company was accused of failing to comply with the requirements of the regulators.
The British company Powa Technologies was founded in 2007. It provided payment solutions for retail companies. Powa Technologies received significant investments but went bankrupt in 2016 due to financial stability issues and low demand for its products.
The American company Zenefits founded in 2013 offered an online platform for business management and insurance services. However, in 2016, the company faced accusations of violating insurance laws and providing inadequate accounting, which led to its bankruptcy. In February 2022, Zenefits was acquired by TriNet (owned by Francisco Partners) and renamed Trinet Zenefits.
The American company OnDeck was founded in 2006 and provided online loans for small businesses. Despite the strong demand for its products, it faced liquidity problems and could not cope with a deteriorating economic environment, which led to its bankruptcy in 2020. In the same year, OnDeck was sold to the fintech company Enova.
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