Like startups in any other industry, fintechs need to find a problem to solve, develop a solution and package it in such a way that it provides customers with a compelling reason to use.
SQUARE and PayZapp are two fintechs that have done a great job of this. To know why I say this, check out my blog posts here and here.
As an aside, here’s a partial list of startups that have done this successfully in other industries: Dunzo, Jigsaw, KeyRing, PillPack, RedLaser, WordLens.
This requires marketers.
As a tech marketer, I may be biased in saying this but I doubt if anyone will really dispute the role of marketing in a fintech’s quest to go mainstream.
Now, unlike many other industries, fintech operates in a regulated space. Therefore, at first blush, it might appear that fintechs should involve lawyers at the very early stages of conceptualizing their offering in order to ensure that it complies with prevailing regulations i.e. it is legal. Many pundits advocate this approach e.g. the author of this Finextra blog post.
With due respect to lawyers and these pundits, the playbook of successful startups in heavily regulated industries is diametrically opposite to this approach.
- We probably wouldn’t have a Uber today if its founders had taken the trouble to flesh out the legal status of their proposed car ride service amidst the regulated taxi industry.
- Ditto for AirBnB vis-a-vis hotel industry regulation.
Startup success in any industry is driven by speed and innovation.
More so in a relatively old industry like financial services, where traditional banks eventually wake up and do most things that can be done under the purview of existing laws, especially since they have a solid track record of partnering with technology suppliers for ages. Sometimes, when fintechs show the way to play footloose with regulation, a few banks have turned fast followers and figured out a way to deliver even better experiences e.g. PayZapp.
Therefore, opportunities for fintechs – and startups in heavily regulated industries – are often restricted to “Regulatory Gap”, which I define as something that lies in the twilight zone between “Not Legal” and “Not Illegal”. This is how these startups interpret these terms:
- “Not Legal” means there’s no law on it.
- “Not Illegal” means it does not violate any existing laws.
- “Not Illegal” does not mean “Legal” and “Not Legal” does not mean “Illegal”.
To put it colloquially, Regulatory Gap is something that’s neither permitted nor banned by law.
Very few mainstream lawyers will bless a core offering that lies in this twilight zone. Likewise, very few – if any – traditional banks and financial institutions will venture into it.
The scope of “regulatory gap” varies from country to country, depending upon its local culture and other factors, but it broadly includes regulatory arbitrage, legal ambiguity and areas on the fringes of the law.
Should fintechs forever be doing stuff that lies in the twilight zone between “Not Legal” and “Not Illegal”?
Absolutely not.
Like successful startups in other heavily regulated industries, successful fintechs will be the ones that launch a product on the back of a regulatory gap, gather enough traction, and use the momentum to shape legislation to their own advantage ex post facto.
This approach is described very well in the Fast Company article titled “The Food-Sharing Economy Is Delicious And Illegal—Will It Survive?”.
As startups launch in heavily regulated industries such as food, health, transportation, and housing, clashes with the law have become as common in Silicon Valley as office ping-pong tables. The MOST COMMON APPROACH to these regulatory battles – successfully embraced by lodging site Airbnb, ride-hailing app Uber, fantasy football site FanDuel, and DNA testing and analysis company 23andMe – is to IGNORE THE TROUBLESOME LAW as long as possible.For a long time, the advice was, just keep your head down, build the kind of network you need to be viable, and then once you have viability, NOBODY IS GOING TO BE ABLE TO SHUT YOU DOWN.If Uber had gone to the regulators first, the entrenched interests would have CRUSHED THEM IN SECONDS. What might have been easy for regulators to squash in a startup is another matter after the offending business becomes one of the most valuable private companies in the world.When New York City Mayor Bill de Blasio threatened to limit Uber’s expansion last summer, (Uber) … orchestrated a campaign… that showed users a dystopian world in which they must wait 25 minutes for a ride (“Blasio Button”). The mayor backed down.” (capitalization mine for emphasis).
To pull off this approach requires lobbyists.
According to Fast Company, startups are using them a lot: “…when Airbnb faced a San Francisco ballot measure that would have restricted short-term rentals, the company spent $8 million to successfully lobby against it.”
So, fintechs, and startups in heavily regulted industries, ask yourselves whether you need lawyers – or marketers and lobbyists!
