May 29, 2015
2014 was a big year for financial technology. It was the year that “fintech” became a buzzword as popular as “big data” and “mobile.” It was the year that venture capital and private equity poured billions of dollars into the financial services industry. It was the year that finance gained a new edge. Move over Twitter and Facebook; the technology companies attracting bright, young graduates are now fintech players, including WealthFront, Robinhood, Betterment and Square.
As a provider of financial market data to the fintech industry, we are flooded with a dozen or more inquiries a day from fintech entrepreneurs from around the world who are looking for access to the data necessary to fuel their revolutionary ideas. We have seen many of them succeed, while others have struggled and fallen short. This has given us a bit of an appreciation for the things you should know when starting a fintech company. Here are three of our findings.
1. Little Changes Can Have a Big Impact
It is almost guaranteed that your original idea—the one that got you to leave your cushy job or drop out of college for the uncertainty of the startup world—will not work, and sticking to it without flexibility, without listening to potential customers or trying out different angles, will most likely not get you very far. There is a difference between persistence and stubbornness and you need to decide if you are looking for vindication or success. Fintech entrepreneurship requires a huge dose of humility.
Some of today’s most successful digital wealth management companies attempted many business models before they found success. They wrote off big original ideas and they took turns in directions they did not anticipate. Overall, the process required a lot of fine-tuning.
We even experienced this at Xignite. We used to pride ourselves on the “open book” nature of our published pricing. This was something that showed we were different from our legacy competitors, whose opaque pricing was an ongoing source of frustration in the market. However, we found out through iteration and testing that removing pricing from our website had a huge impact on our growth, allowing us to better engage with our clients and help them succeed.
If you want to be successful in the fintech landscape, be ready to iterate, change, try, test and optimize in such a way that positions you far from your original idea.
2. Don’t Sell Your Secret Sauce, Help Them Make Their Own
We see many fintech entrepreneurs with great potential, and the vast majoritymany of them come to us with a big idea focused on predictive market analytics. They are convinced that they have developed a unique model that provides retail or institutional investors with an angle on how to discover alpha in the market. However, we have found those ideas to be the least likely to succeed. You will always find a few hedge funds focused on high-frequency trading that are willing to throw big money at unique data sets from which they can extract alpha, but that is generally short-lived. You can also always find a few hundred or thousand individuals that are willing to try something new, but that does not make a market.
Therefore, the secret to success in fintech is to focus on addressing existing challenges or fulfilling needs not yet met in the market. Consider a company such as Motif Investing, for instance. They have done extremely well by addressing the simple need among investors for personalized access to investments. Motif Investing responds to themes and ideas that people can relate to. There is no secret sauce as to whether the investments will succeed or not, but the company solves a gaping need in an elegant fashion. This business model has led to a high customer success rate. So instead of trying to market your recipe, try to extrapolate your experience and find ways that you can help people make their own.
3. Market Data Is Not Free
We never cease to be amazed at the number of entrepreneurs entering the fintech space with no idea about how market data works. This is a surprising trend, as market data is the lifeblood of many fintech businesses. Market data is less critical for those companies focused on payments and lending, but it is crucial to all those operating in capital markets. Many companies scrape data from Yahoo! Finance or Google Finance and assume that since it is “public data,” it is suitable for usescraping. That of course is not true. Not only are there legal issues involved in the non-personal use of data from a financial portal, but there is also the risk of retaliation and back charges from exchanges and data vendors who are the original owners of that intellectual property. In addition, the investors backing those companies would probably be terrified to learn about funding a business that is feeding on stolen intellectual property. The display of real-time or delayed data for instance is subject to very strict rules from exchanges and almost always entails the need for exchange agreements and the payment of fees. This is a very complex area that many entrepreneurs enter into unknowingly, and it can really throw a wrench in your business plan.
At Xignite, we do our best to help our budding entrepreneurs start off on the right foot, and we find them accepting the helping hand with enthusiasm. But it will certainly help you get ahead if you first do your homework and educate yourself about market data, exchange agreements and fees as you get ready to throw your life at financial technology –and if you don’t know where to start, ask your vendor to help.
There has never been a better time to start a fintech company than now. The mortgage crisis of 2008 has left large institutions solely focused on cost and regulation for many years with very little budget allocated for innovative products. This has generated a huge innovation vacuum that fintech startups are rushing to fill. But as you venture down this road, keep in mind that it won’t be an overnight process. You will need to iterate and pivot toward success. Make sure you address real market pains and opportunities. Lastly, educate yourself as much as you can about market data.
Stephane Dubois is CEO and founder of Xignite and a sought-after observer and contributor to the fintech community.
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