Starting a company in such a competitive industry like Fintech, which is also an object of scrutiny of governmental regulators, is no easy task. However, a successful Fintech start-up that becomes a leading solution in its sphere can potentially help millions of people all over the world and turn into a profitable business.
INTRODUCTION
Fintech is one of the rapidly developing industries worldwide. Cutting-edge digital solutions and trends, such as cloudification, block chain, machine learning and artificial intelligence have changed the way we manage our finances, pay for purchases and services, invest and save.
The COVID-19 pandemic sped up the process: more people used mobile banking apps, contactless payments and invested in cryptocurrencies, while bank branches saw fewer visitors, and paying in cash became less popular.
Starting a company in such a competitive industry like Fintech, which is also an object of scrutiny of governmental regulators, is no easy task. However, a successful Fintech start-up that becomes a leading solution in its sphere can potentially help millions of people all over the world and turn into a profitable business.
In this article, we will explore some of the major problems in Fintech that arise before almost every finance start-up:
1. Regulatory Failures
The innovative and disruptive nature of technology-led financial services has resulted in a rapid pace of change in financial services markets and has thrown a challenge to policymakers and regulators around the world to keep up. Uganda is no exception to this, with many of the Fintech products, services and business models described in the chapters above emerging over the last few years. Limited regulatory understanding of Fintech Policymakers must respond and move quickly to understand Fintech – only by doing so can the appropriate regulatory responses evolve.
As Homer and Michaels (2018) note, “Building knowledge about Fintech and digital finance among regulators is essential to effective supervision.”
However, levels of awareness levels and understanding of Fintech are currently low among policymakers and regulators in Uganda. More specifically, there is little knowledge of, and data on, the number of Fintech companies operating in Uganda. There is little data available on which sectors the Fintech companies operate in, their business models, and the products that they offer.
2. Maintaining High Security
Cybercrime is one of the main challenges the banking industry faces today. According to researchers, banks become targets of malware attacks in over 25% of all cases across industries.
A single successful attack can result in losses of millions of dollars and, what is even more important, the trust of users. Just think, would you ever entrust your assets to a company again if you have been robbed using its services?
A hacker attack can come on the company’s infrastructure and servers, as well as a mobile app.
There are many kinds of cyberattacks on apps, including pirate apps, man-in-the-middle attacks and clickjacking. In most cases, code quality, insufficient use of cryptography, or insecure app elements play critical roles in the success of such attacks.
3. Keeping Up With Modern Technology
One of the key benefits of Fintech is how it relies on the latest technologies and early adopts new solutions. To be on top of the game, companies must use technologies, such as machine learning, cloud solutions and block chain to cut down costs of day-to-day operations, risk management and compliance.
As more people use smartphones to manage finances, the “mobile-first” approach gains widespread popularity — opening a bank account via an app, without a single visit to an office, gradually becomes a new norm.
Cybercrime is one of the main challenges the banking industry faces today. According to researchers, banks become targets of malwareattacks in over 25% of all cases across industries.
A Fintech start-up needs to invest wisely into its app for customers — a smooth working interface and beautiful design play a significant role in user retention.
The development of native apps for iOS and Android requires significant resources: in fact, one will be paying two separate development teams for building two separate apps. For many start-ups, a better choice might be to build an app with a cross-platform framework.
4. Trust
Trust is a hard commodity to come by in any business. It is even harder for fin-tech startups because they are primarily involved with money. Fin-tech is about handling people’s money and when it comes to money, people take time to trust you[1].
Earning the trust of people is a long journey that requires patience but only if you have a great product, are consistent and committed to the long term. Even when you have checked all these boxes, you still have to address yet another form of mistrust that comes from Ugandans’ inability to use products developed by their own because of a predisposition that they are not secure or up to the task.
[1] Ivan Mworozi, Co-founder: Akiba
5. Acquiring Long-Term Users
Choosing the most effective channels of acquiring new users is one of the challenges in fintech: experiment with search engine ads, social media, content marketing and affiliate programs to find out what works better for you.
In contrast to streaming platforms or food delivery apps, people are less likely to try out multiple banking apps and switch them often. Most customers choose their fintech software solutions once and for a long time.
For fintech startups that interact with customers via mobile apps, the stability of an app plays a crucial role in developing longterm customer relations. A frozen for 30 seconds app is no big deal if it is a game, but if it is a trading platform, you can expect not only losing investors, who were unable to close their positions in time, but also receive legal demands to pay damages.
Most customers choose their fintech software solutions once and for a long time.
6. Competing with banks and big corporations
Fintech startups face fierce competition not only from established banks and other financial corporations, but also from the socalled BigTech companies — Google, Apple, Amazon and Facebook that gradually introduce their financial products.
To make customers choose its services instead of a well-known large brand, an emerging startup needs to be able to offer more convenience, faster processing and lower fees. Another ace up the sleeve of fintech companies is, of course, easy-to-use and reliable mobile apps.
While apps of banks often have poorly designed UI and might lack responsiveness, apps of fintech companies are developed to provide a perfect experience when managing finances from home, office or on the go.
7. Finances
The 2016 start-up funding report by Disrupt Africa revealed that South Africa, Kenya and Nigeria were the top three destinations for tech investors in 2016, both in terms of numbers of deals and total amount of funding. The song of lack or insufficient funding for Ugandan fintech start-ups has been sung for now over 5 years but there seems to be nothing much changing.
Mabel Ndawula, a director at Deloitte (Uganda) Limited, stated that 57 per cent of the fintechs were self-funded with minimal investment coming in from other sources of funding such as venture capital, private equity, grants and government support[1]. A few startups, like Poketi.net, have had access to both local and regional investment.
But where does that leave the majority of others? The solution to this urgent issue still remains a mystery. However, one would advise Ugandan fintech start-up founders to start networking outside their circles and areas of comfort.
[1] Mable Ndawula, a Director at Deloitte (Uganda) Ltd, observer.ug/businessnews/73888-low-funds-hold-back-fintechgrowth.
8. Market Power Competition
The disruptive nature of FinTech presents a particularly powerful mechanism to promote competition in financial services.
However, FinTech can also present competition issues of its own. In Uganda, an early example of this may be the concentrated nature of the mobile money sector, reinforced by strong network effects and significant barriers to entry.
There is a danger that, “Continued light-touch regulation may result in an entrenched concentrated market structure, with a dominant leader in the form of MTN Uganda and a smaller follower in Airtel Uganda[1].
The National Financial Inclusion Strategy also acknowledges that “Weak competition in financial services has led to high prices and insufficient customer experience.” The nature of some technologies has characteristics similar to public utilities, through which they might be considered essential services in Uganda.
For example, payment systems form a vital part of the financial system and underpin the services that enable money to be transferred between consumers and institutions. Access to payment systems is essential to enable competition and innovation in financial services in the country.
Similarly, channels for accessing financial services via the mobile phone, such as via USSD, might also be considered to be utilitylike in nature. The competition framework with respect to financial services in Uganda is generally underdeveloped, as there is no competition regulation regime or competition authority in place.
The only authority with any jurisdiction or tools with respect to competition issues in the financial sector is the telecommunications regulator, the Uganda Communications Commission (UCC).
[1] Macmillan et al (2016)
9. Intellectual Property and Technology Issues for Fintech Companies
Fintech investors are particularly interested in a company’s software, technology, and underlying intellectual property. Intellectual property issues often are among the most important considerations that a technology start-up will encounter.
A start-up will face numerous issues involving developing a product, hiring qualified employees, raising capital, and more. With all of these issues, intellectual property can feel distracting, expensive, or contrary to the goals of just getting a product to market before someone else does.
However, intellectual property is often the most valuable asset of a Fintech start-up. Protecting intellectual property can be essential to obtaining venture capital funding or preventing competitors from unfairly competing with you.
Finding people with the skills to develop and navigate through different software remains a big challenge, a factor that is holding back growth.
10. Inadequate skilled personnel
Finding people with the skills to develop and navigate through different software remains a big challenge, a factor that is holding back the growth of the information, communication and technology in Uganda. Skills such as software and development of internet apps, infrastructure, cybersecurity, data science, machine learning, cognitive computing, design, marketing, and regulatory and risk management, arguably the most sought-after in the discipline of ICT, are also the most difficult to find amongst the emerging financial technologies (Fintech) subsector.
IN SUMMARY:
- Regulatory failures
- Maintaining high security
- Keeping up with modern technology
- Trust
- Acquiring long-term users
- Competing with banks and big corporations
- Finances
- Market power Competition
- Intellectual Property and Technology Issues for Fintech Companies
- Inadequate skilled personnel
COUNCLUSION
In order to support technology-enabled innovation in the financial services space, Bank of Uganda (BOU) has deemed it pertinent to ensure new, more flexible ways of engaging with the financial services industry. One of the options being the use of a Regulatory Sandbox Framework established pursuant to section 16 of the National Payment Systems Act, 2020.
The Regulatory Sandbox Framework is a tailored regulatory environment for conducting limited scale, live tests of new, innovative products, services, solutions, delivery channels, or business models in a controlled environment, with regulatory oversight, subject to appropriate conditions and safeguards. This would enable BOU stay abreast of innovations while promoting safe, reliable and efficient payment systems to foster innovation without compromising on the delivery of its mandate.
The Fintech phenomenon is here to stay, and will continue to grow. In the end, however, it is not about Fintech but about creating vehicles to support innovation in the economy and the financial sector. It turns out that Fintech firms just happen to be the key agent through which we are moving towards a more dynamic financial sector.
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