Success with a fintech startup requires more than the usual business savvy and basic organisation. It takes strategic planning and data-driven decision-making to reach profit and sustainable growth. Advapay’s expertise in the fintech sector allows us to
share these meaningful recommendations with you.
The roadmap and the business structure you choose first depend on the target audience for your offered services. Therefore, identifying geography of incorporation, incoming and outgoing payments and industry for the B2B sector, and demographics and identities
for the B2C sector is an essential first step in a successful fintech startup. They affect jurisdiction choice, design of flow of funds, partner selection, and more.
1. Licensing Considerations
Client Base and Advertising
Your customers’ geography is not the only thing that matters when deciding on a licensing jurisdiction; the methods used to attract clients to your fintech business are one of the key considerations when making this decision. Open advertisement requires
client-location licensing. Thus, if clients are primarily in the European Union and the company plans to actively advertise its services, it is essential to become an authorised electronic money institution (EMI) or payment institution (PI) in one of EEA countries
or become an agent of a BaaS or Embedded Finance provider.
The alternative comes if you plan on a more organic marketing strategy. If you rely on online searches, trade events, partnerships, and client referrals, you may benefit from greater flexibility in selecting a specific jurisdiction. When clients find you
themselves through organic search, partners, at exhibitions or within a closed community, it falls under the reverse solicitation principles. In this case, financial services regulators have no grounds to raise claims against the company, as onboarding of
such leads aligns with the reverse solicitation principle.
Jurisdictional Prestige and Banking Partnerships
When you have the freedom to choose, you can evaluate various jurisdictions based on factors like the ease of obtaining a license, the associated costs of acquisition and maintenance, and the prestige of the jurisdiction, which should not be overlooked.
The prestige of a jurisdiction reflects how banks perceive your fintech company when you seek to open accounts. It encompasses not only the country’s reputation but also the rigour of its licensing process and the strictness of its regulator.
In this context, from a banks’ perspective, European licenses are more significant than Canadian Money Services Business (MSB) registrations, even though Canada as a state is regarded with the same respect as EU countries. This comes from the fact that it
is incomparably easier to gain Canadian MSB registration than to get similar authorisation in the EEA.
Credibility also comes from things like general global economic standing, low corruption levels and FATF grey list exclusion. Thus, payment licenses in countries considered as financially offshore make it more difficult to build global banking relationships.
Meanwhile, for some companies with a high-risk profile, operating in alternative jurisdictions may be a viable solution, as European regulators are increasingly strict with fintechs handling high-risk activities.
At the same time, fintech startups planning to utilize the European banking infrastructure should consider obtaining licenses in a country with a strong reputation and a well-developed regulatory framework.
Personnel Requirements
The choice of jurisdiction should also take into account the intended business size and the number of local employees in the region. In the EU and UK, regulators require 5-10 local employees with relevant experience at a minimum. New Zealand and Canada have
lower requirements. In contrast, countries like Australia and Bahrain adopt a more balanced approach, requiring a reasonable number of employees and level of local presence. Research these factors well to determine what works best for your startup.
License Acquisition and Maintenance Costs
Consider the costs associated with licensing when choosing the most reasonable jurisdiction for your fintech company, too. Upfront fees often include legal support, consulting services, necessary personnel involvement, software expenses, and more. These
can vary from one location to the next.
Licensing maintenance costs also factor into the decision. These include meeting regulatory requirements related to reporting, AML compliance, security, customer support and other operations. Factor these essential expenses into your long-term budget.
License Approval Likelihood and Timeframe
One of the key factors to consider when applying for a license is the anticipated approval timeframe. It can vary greatly. For example, obtaining a license in the Netherlands can take up to 12 months after submitting all required documents, which is relatively
fast compared to some other EU countries, where the process maysometimes take two or even three years. Canada offers one of the quickest timeframes for an MSB registration: just three months.
Therefore, it is advisable to verify the current timelines in the target country before applying. Gaining insights from market participants, practicing lawyers, and consultants—rather than solely relying on official estimates—can offer a more accurate understanding.
Time matters, but the likelihood of license approval also factors into these decisions. Some countries approve registration as long as you meet their formal requirements and accurately prepare application documents. However, this is not always the case.
In the UK and EEA, meeting these conditions is just the first step. Regulators carefully assess other facts like potential value of the product for the local market, consumer benefits, the viability of the business model, sufficient funding, the integrity
and experience of the team, the reputation of the UBO, and other factors. They will refuse your application for a license if you do not present a compelling case for licensure. In fact, in the EEA, a significant proportion of applications are rejected. Official
statistics should not be misleading, as regulators often do not refuse applications, but ask the applicant to withdraw the application.
2. Flow of Funds Considerations
Payments Flow
Design of the flow of funds is the cornerstone of the organisation of a fintech business. Therefore, you must design and organise this early on to cement your company’s financial model, appease partners, and manage many other factors of success. Each aspect
needs careful research and consideration. Business challenges in the payments sector operations come with varying complexities, speeds, and costs.
For an example, there are different types how to organise international money transfers:
- Traditional SWIFT transfers
- Opening correspondent accounts in both the sending and receiving countries and holding cash balances in the receiving country for instant payouts
- Using crypto for remittances as an intermediate store of value
- Netting (matching) counter flows of money — from country A to country B, and from B to A
- Leveraging third-party payment rails
There is no standard approach that works across all corridors and currency pairs. Depending on the client types and the specific sending and receiving countries, you may need to combine various methods or select the most appropriate channel based on the
prevailing conditions.
Thorough planning of the funds’ flow is crucial. This involves identifying your clients, defining the required payment types, and specifying the countries involved in these transactions. Proper planning ensures you can optimise the flow of funds and choose
the most effective solutions for your business needs.
3. Selecting the Right Partners
Primary Principals
No fintech operates in isolation. It should be integrated into a payment ecosystem. Therefore, bank and payment partner selection matters more than in other niches. Things like the flow of funds design and licensing type will affect your choice of principal
partners. Of course, choosing the proper ones plays a large role in overall business success.
Relying solely on one partner, no matter how reliable, is not always the optimal strategy. The industry, regulatory compliance factors, and rates may change unexpectedly. Having multiple partners as backup provides a much greater degree of agility so your
business does not get left behind. When you diversify banking partnerships, you reduce overall risks associated with these fluctuations or sudden upheavals.
Also, you need partners who have the ability to handle payment processing for your diverse client base. This includes international payments to and from different countries. I recommend maintaining open and transparent communication with potential partners
to ensure they align with your clients’ needs. Sharing examples of potential clients and sample transactions can help anticipate and address potential challenges in advance.
Tariffs
You must understand tariffs and associated fees when choosing your banking partners. No standard tariffs exist, which is an important thing to understand when you develop your financial model. Rates change considerably depending on the circumstances. For
established businesses, tariffs can be much more favourable than for companies that are just starting out.
Banks evaluate the risks and potential profits of partnering with a fintech before deciding whether to collaborate. The higher the risk profile of your customer base is or the fewer transactions you make, the greater the chance of facing high initial costs,
stricter controls, and limited options when it comes to services like individual IBAN issuing. Accept a reasonable balance. You may not receive good tariff rates at the very beginning. However, you can get better rates over time as your fintech company reaches
higher transaction volumes. It is recommended to negotiate tariff reductions based on increasing volume right from the start.
4. Planning Considerations
In order to avoid mistakes and delays in establishing and growing your fintech startup, consider these key business planning factors.
Step-by-Step Development
In the very competitive fintech sector, success comes to those who focus on progressive, gradual growth and development. Your company will not get the best rates and services immediately no matter how unique your concept is. Focus on a steady, step-by-step
process of growth over time.
Starting the company with a wide variety of services may be challenging, for example, providing payments in dollars and offering individual IBANs for crypto customers. This is a highly complex requirement that needs careful setup to perform successfully.
Starting with fewer services makes sense. Implement the rest during the step-by-step growth process.
Diversification Is Essential
Being licensed in more than one jurisdiction is not just for geographic expansion, but greater stability and the ability to serve various payment flows.
Diversification is also absolutely required when it comes to partnerships with banks. Having multiple options safeguards your business against unforeseen changes. Relying entirely on a single partner exposes your services and business continuity to potential
risks.
Thorough planning of the flow of funds
The planning process for ensuring the flow of funds matters for every aspect of your business. This includes choosing the right partners, determining the payment schedule for these partners, and analysing the associated costs.
5. Budget Considerations
Operating Expenses
All fintech companies must budget for things like payment service costs, IT infrastructure setup, maintenance, and upgrades, personnel, AML compliance fees, and more. Remember that the costs associated with compliance and general operating expenses will
increase as your business scales. Furthermore, IT-related expenses, including hosting, software development should be thoroughly planned for.
Cost of Customer Acquisition
I find that customer acquisition is one of the most often underestimated expenses. In such a competitive market, costs of customers acquisition can exceed the projected budgets. This is particularly important for low-risk companies aiming to reach a wide
audience and attract customers through extensive marketing channels.
It’s essential to recognise that customer acquisition costs arise not only from the average cost of initial registration but also from the conversion rate to active users. Understanding these dynamics and accurately forecasting these costs is critical. Since
marketing channels can be expensive, comprehensive market research is necessary for realistic budgeting.
While companies targeting high-risk customers may set higher service prices that cover acquisition costs with a significant margin, fintechs aiming for a broad audience must closely monitor the Lifetime Value (LTV) to Customer Acquisition Cost (CAC) Ratio.
Conclusion
The ever-increasing competition in the fintech industry has made it more challenging for new companies to achieve success. However, more room exists for unique strategies, business models, and effective products. While developing a strong product, creative
marketing, and an original concept are key, it’s equally important to work carefully on payment infrastructure, licensing, compliance with regulatory requirements, and budgeting.
By following these recommendations, you can successfully navigate the challenges of launching a fintech startup and establishing a solid foundation for long-term growth and sustainability.
Source: Latest Finextra Research Start-ups Headlines