Carta Worldwide Team

Four challenges facing fintechs right now and the solutions

Start up team sat in office

Things have changed markedly since fintech’s first generation of startups entered the fray and disrupted a sleeping financial services industry. These startups popularised products which have revolutionised the way we spend, save and invest. They raised the bar of consumer expectation, challenging banks to revamp their apps, add more functionality, and open up to an ecosystem of third-party services.

Now, the vast majority of consumers on both sides of the Atlantic use fintech – 88% in the US and 86% in the UK. Today, over 10,000 fintech startups operate in the Americas region – the most of any region – while the UK houses more than 1,600 fintechs which contribute over 76,000 jobs to the economy.

Valuations have also soared over the years. At the beginning of 2022, there were 207 fintech unicorns with a valuation of £1bn or more worldwide. But with huge growth comes great responsibility. Many fintechs are now entering the scale-up stage, but the age-old challenge of funding is ever-present. As a Revolut employee said in September, just because a company has passed the $10bn valuation mark does not mean the investment environment gets any easier.

All the while, it is getting harder for fintechs to retain staff as rival firms grow bigger and amp up their hiring searches. Regulatory scrutiny over fintechs – particularly in the cryptocurrency space – has increased. This, in turn, has heightened every firm’s vulnerability to compliance shortfalls. And a global focus on sustainability has raised the question of whether the fintech industry is doing enough to limit global warming. There’s a whole lot to consider, so where should companies start?

1. Regulation and compliance

Perhaps one of the most significant banking industry challenges of all time is regulation and the consequent compliance measures these rules require firms to put in place. Firms must have oversight over who uses their services, which means having anti-money laundering (AML) and Know Your Customer (KYC) procedures in place is paramount. Compliance crackdowns on large fintechs over this issue have been well publicised. This year, PayPal revealed it had found 4.5mn “illegitimate” accounts on its network.

The form fraud takes is always evolving, as compliance firms will often remind us. If systems stand still, they will fail when confronted with new threats. And as a recession looms, an increase in fraud is to be expected. In the UK, the 2008 recession resulted in a 7.3% increase in fraud offences. Authorised push payment (APP) fraud has already started to spike, with losses up 39% in 2021 on the same period in 2020. The threat of fraud is so great today that the UK government is currently trying to pass The Economic Crime and Corporate Transparency Bill through parliament, a piece of legislation designed to drive dirty money out of the UK.

Against this backdrop, it is crucial fintechs either build their own systems, or work with partners who can identify fraud and block suspicious activities altogether. Ultimately, a customer would much rather a payment didn’t go through if it meant the correct fraud management processes were in place. This is a challenge even big banks are yet to master, having lost millions to fines and failed to block fraudulent transactions worth thousands of pounds over the past year.

An array of companies have cropped up throughout Europe and the US to help companies tackle fraud. In the US, VC funding flowing into compliance companies jumped from $1.7 billion in 2020 to more than $5 billion last year.

If you’re building a fintech, you should check what you need in place to be compliant before developing an application. Hire a compliance consultant, or create a fintech evangelist within your business so you have expertise at your fingertips. Consultants have a deep knowledge of technology and the market. They can pick up trends in the fintech landscape, ensuring you are proactive rather than reactive.

2. ESG – can it be ignored?

ESG – which stands for environmental, social and corporate governance – is a well-coined phrase, but rarely fully understood. It refers to both how companies invest, and how these investments then impact the world. It’s a topic which has been gaining traction at the very top of the industry. In August, the Financial Conduct Authority established an advisory committee to help it oversee ESG in action across the financial sector.

A wave of fintechs have emerged to cater for those investors who want companies managing their money to take into account environmental considerations. From the ‘world’s first net zero pension’ to tracking your carbon offsets as you spend, ESG sits at the core of some really positive innovation.

But it’s not just about the products. Fintechs should prepare for higher disclosure requirements. Because ESG is also about how a business governs itself. It isn’t enough for fintechs to brand a product line as ‘ESG’. They need to take a look ‘under the hood’ of their operations. And if firms exaggerate the environmental value of a product, they could leave themselves vulnerable to accusations of ‘greenwashing’. Consumers don’t want to feel mis-led.

One solution could be to simply target those investors who already have an appetite for green and sustainable finance. Or, if you don’t want to refine your target market, you could invest in more transparent data tools which can better bank-up your ESG claims.  Another solution could be to assess where more automation could save on manual, emission-heavy processes.

Selecting technology partners which align with your values is a particularly crucial decision to make. A company can still fall down on ESG if its business relies heavily on inefficient third-parties. Build these checks into your due diligence process so you don’t find yourself trapped in contracts which negatively impact your net-zero targets.

3. Investment and competition

Fintech investment of any kind is never easy to come by. But it seems particularly hard to come by in the current climate, where companies’ growth strategies are being scaled back as they pull out of global expansion and cut staff. As a result, the number of venture capital deals has shrunk. But this doesn’t mean there is no investment to be had. In fact, the value of deals is increasing.

In a previous blog post, we looked beyond the current economic climate to understand what other challenges are facing fintechs which are vying for investment. It noted that the VC mentality has shifted towards cash generating fintechs which are addressing a tangible problem and can weather a down valuation climate. It also highlighted an opportunity for founders to re-focus their energy away from constantly trying to secure funding.

Competition in the fintech space is rising. A survey conducted by fintech Canecom found the majority (58%) of respondents are already fully satisfied with the financial solutions they use. The challenge is two-fold. While funding is important, so too is innovation in order to stand out over your competitors and remain current against a backdrop of constant technological advancements.

It can be easy to fall for the latest fad, so be careful not to invest time and money into technology which won’t stand the test of time. Make sure the Research comes before the Development (R&D). It’s easy to bolt on services to meet a need which isn’t core to your business with the hope of catching a certain investor’s attention. But interviews with investors have shown, quite to the contrary, that they are looking for businesses with clear use cases and not a super-app with every feature.

4. Talent

As more and more fintechs scale up, talent has become harder and harder to hold onto. Rival companies’ employee packages have only grown in value, making that neon exit sign seem all the more alluring. But it’s not just a battle between firms equivalent in size. New upstarts are challenging old upstarts. Crypto payments startup ‘B.V.N.K’, for example, is reported to be poaching talent from both Revolut and It’s not just about the money. An early startup culture can also act as a siren for fed up executives and middle management.

Whether the industry likes it or not, staff discontentment is unavoidable. Some 50% of fintech employees are planning to move jobs. This is a problem, Especially when you consider having happy product and engineering teams is key if you want to run things online smoothly. Otherwise, the pressure cooker that is customer expectation can weigh on staff heavily.

Offering flexible working is one simple way to retain staff. Most companies should know that you don’t have to have everyone in your office at all times, Hybrid work is benefiting companies big and small. Klarna, for example, has embraced remote work for its 7,000 employees. Like others in the industry, it offers a number of ‘work abroad’ days at an international office, giving workers the opportunity to enjoy more sun without the catch of using up annual leave.

You also don’t have to hire everyone in-house. Sometimes, outsourcing specific projects to third-parties can be the best way to gain the credibility and dedication of someone far more experienced than your company can afford to hire, and save on operation costs. This also means saving on hiring and training new employees. Specialist partner companies are an option here too. Often they just need to plug into your systems and then they’re ready to help.

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Carta Worldwide

The Carta Worldwide team has over 100 years of payment experience advising both established businesses and disruptors. Going beyond bits and bytes, Carta Worldwide’s team supports everything from accelerating time to market to working towards sustainable disruption strategies, ensuring its clients are set for success.