The five success factors of FinTech (2024)

Financial services are fundamentally intangible and therefore susceptible to digital disruption. It is therefore no surprise that FinTech companies have attracted a lot of investments in recent years.

IT is of course nothing new to the financial industry. The financial industry is the sector that spends most on IT, apart from the IT sector itself. Depending on region (and depending on which market intelligence firm you ask), up to one in every five dollars spent on IT is in the financial sector. In some parts of the world, financial services have already moved to a large extent into digital channels. For example in the Nordics, nearly every citizen uses online banking. But lately also other financial services beside basic bank accounts are moving online, including mortgages, insurance, and investments. There is still great variation across countries, however, especially within Europe.

When comparing different jurisdictions, we can identify five key factors (in no particular order) which influence the success of FinTech businesses: talent, ecosystem, market, regulation, and funding.

1. Talent

The skill set needed in FinTech is a cross-section of finance and computer science. Each of these domains is highly valued in the job market in its own right, so it’s not surprising that anyone with a combination of the two is a rare and highly sought after resource. Countries that have good educational programmes in both finance and computer science are well positioned to provide the skills needed by the industry.

2. Ecosystem

The ecosystem consists primarily of large incumbent firms, as well as of other related actors in the value-chain, such as vendors and distributors. For a small FinTech company it’s important to work together with incumbents early on, in order to acquire industry specific knowledge and access to markets. Incumbents can be seen as competitors, but they are also good sources of talent, funding, customers, and advice in critical issues such as compliance and security. FinTechs are therefore more likely to thrive in jurisdictions which already have a well-established and relatively large financial sector.

3. Market

While FinTech startups are often born global from the outset, it is helpful to start in a market where customers are open to new innovations and new market entrants. This would ideally be a market where customers are tech-savvy and which has a good infrastructure for mobile and online services. Interestingly, customers may be receptive to new offerings either because they previously have had good experiences with incumbents (e.g. the Nordics), or because they previously have had bad experiences with incumbents (e.g. the UK).

4. Regulation

Financial services are a highly regulated industry, and while regulators are trying to make the business environment more innovation-friendly by applying the principles of proportionality and technology-neutrality, there is no escaping the fact that also FinTechs are heavily regulated. As financial regulation is becoming more harmonised, a development which is particularly rapid in Europe, possible motivations for regulatory arbitrage are gradually disappearing, and from a regulatory point of view the financial industry is becoming a more level playing field on a global basis.

5. Funding

Because it's a highly regulated sector, and because its business models often rely on scale economies, FinTech startups tend to require very long runways before they grow profitable. It's a business characterised by high up-front investments and low marginal costs at later stages of growth. FinTech startups are therefore ideally established in jurisdictions where ample early-stage funding is available, and where ambitious investment rounds later on can be secured.

Finally, one has to keep in mind that FinTech is not only about technology, but equally about customer experience and data. The biggest impact from new technologies often comes not from the technology itself, but from how they enable to reorganize production, as well as consumption, in a completely new way. That is why, perhaps surprisingly, FinTech may have less of an impact in regions where people and businesses already have good access to financial services, and more of an impact in places where people previously haven't had access to any kinds of financial services . This includes the unbanked, rural regions, as well as small and micro businesses. On a global basis, that amounts to a market of over two billion individuals and hundreds of millions of businesses.

The views and opinions expressed in this blog are entirely my own and do not necessarily reflect the views of the Bank of Finland.