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There has been an explosion in the number of fintech companies in recent years. In 2021, global fintech investments were clocked at $210 billion with 5,684 deals being concluded. But it’s not just about the total size of the fintech market; we have also seen a major increase in the number of fintechs — the UK alone records the presence of 454 fintechs. The same thing is happening in Asia — 600 fintechs operate in Hong Kong. This development has even been referred to as the digital big bang.
This rise in fintech numbers has been matched by an increase in the variety and specificity of fintech offerings. As a general theme, we are seeing a move beyond consumer-oriented products towards business banking — particularly fintech solutions for small to medium-size enterprises (SMEs).
Here I look at the key things a SME should consider when choosing a fintech.
From neobanks and challengers to neo-niches
“Challenger banks” and “neobanks” were the first generation of fintechs to take on the big banks. The challenger banks went right for the jugular — directly offering banking services against traditional banks. The neobanks offered some similar services to banks, but without a banking license. The goal in either case was to provide a service that mirrored a traditional consumer banking experience, but with a more user-friendly interface and offerings. Regulators moved quickly to adjust their rules to enable the challengers and neobanks in jurisdictions around the world, such as through special sandboxes or specific virtual banking licenses.
As the fintech market has grown, unsurprisingly, we have seen an increase in market segmentation. A new wave of neo-niche fintechs has arrived, and they are making headway against the challengers and neobanks. Neo-niche fintechs go for selected, highly specific and underserved target customers.
The focus of a neo-niche fintech is often demographic: It might target its products at minority communities (e.g., Islamic banking), unbanked populations, LGBTQ+ customers, or high net worth individuals (so-called “wealthtech”). And this approach is starting to pay off —by addressing a more specific audience, neo-niches are developing loyal and dedicated customer bases.
Sometimes the niching is based not on demographics, but the fintech product itself. This is known as vertical banking. Through vertical banking, the fintech might specialize in business loans, foreign currency exchange, payments or investments.
For businesses, the proliferation of fintechs is, of course, good news. This means that there are increasingly bespoke options available to cater to their needs. But at the same time, they face the paradox of choice: How to choose a fintech provider when there are so many options available.
What are the most important factors when choosing a fintech?
While non-exhaustive, here are some of the most important factors you need to consider when choosing a fintech for your business:
Bundling of services. You will want a fintech solution that can provide the specific services that you are after. For example, if you intend regular spot trades on foreign currencies, you will need a fintech that offers that service. While neo-niching means that you can likely source a different fintech for each service if you wish, it will often make sense to choose the provider which can provide you with most of the services you need in one go.
Pricing. Although it is not the only variable to consider, price is still important. Don’t focus just on the number though, consider also how transparent the company is with its pricing. For example, does it require minimum deposit amounts? Does it charge a one-off fee for currency conversions?
Customer support. One of the biggest factors that drove consumers away from traditional banks was their shocking customer service. Has the fintech provider you are considering received good online reviews? Does it publish its average response times?
Multiple currencies. In our global world, it is increasingly common that a business needs to trade in multiple currencies. Where a fintech does provide a multi-currency wallet, check which currencies are available, and the FX fees that they charge.
Jurisdiction. Traditional banks often have strict rules relating to the residency of applicants. It is important to check that a fintech provider is allowed to offer products in your location. Also keep in mind what the consequences might be if you choose to shift your business to another country at a later point.
Paperwork. Key to the fintech value proposition has always been “doing it all online.” Check the fintech’s registration process, and if a time estimate is provided. Fintechs should offer a seamless and straightforward onboarding experience.
Security and data protection. Fintechs have custody of some of your most sensitive business assets and data. You need to check that they have all necessary protections and safeguards in place.
As the fintech market has grown, fintechs are no longer generic consumer alternatives to old-fashioned banks. There are now fintech solutions for virtually any potential demographic and any specific service that a business might need.