By Daniel Tammas-Hastings, RiskSave, for The Fintech Times.
Traditional finance careers are currently in short supply whilst fintech gets more and more interesting. So, if you have a fintech concept, then we’re here to help. We ask how can you create your own fintech?
First we assume that you have the skills necessary to create something usable. In start-up land (and Level 39) they call this an MVP or Minimum Viable Product. What should you do next?
The first question: To fund or not to fund?
With large institutions flush with money and excited by fintech, finding the right funding partner can be the start of a relationship that takes you all the way to IPO. But get it wrong and it can lead to a total loss of control. Another worry, if you pick the wrong corporate partner, you may alienate potential clients. It’s always worth asking whether you need professional funding. If you have minimal cash needs and /or have access to friends, family and angel networks you may achieve product market fit without being overly diluted and compromising your vision. VCs and entrepreneurs will often disagree on when to first seek outside investment. Most founders will say that you should remain independent as long as possible using your own resources, this is commonly known as bootstrapping.
By bootstrapping you can avoid dilution and have more time to work on their concept without the distraction of funding and investor meetings. Most VCs I know say that in many sectors winner-takes-all applies and that speed is important. First time founders particularly should be aware of the complexities of even running the smallest businesses. Professional investors cannot only help accelerate traction, they can also help with risk management and operational concerns that entrepreneurs often overlook. Frustratingly both viewpoints are partly right. But if you find a VC you like, earlier is better in my opinion.
Once you have begun developing the product, mundane matters of operations and compliance become more and more relevant.
The second question: Regulated or unregulated?
Whether you sit under the FCA’s watchful eyes is not always clear. The first step is to consult the FCA Handbook in particular the Perimeter Guidance Manual. Regulations can be confusing and on the surface contradictory so you may have to contact a consultant or the FCA to help. Fortunately, with The FCA have a dedicated team to help you with this. Known as Project Innovate.
The third question: Which route to market?
Here are the three routes to market for an AltFi proposition.
- Project Innovate: The Financial Conduct Authority (FCA) as part of its mandate of stimulating competition and lowering consumer prices has been at the forefront of stimulating innovation within its markets. As such it has created the Regulatory Sandbox to aid novel propositions to market. The sandbox is a way for companies to test propositions in the real world, which makes it easier for younger companies to go to consumers and with more clarity. The Sandbox has had firms as small as Bud (UK startup) to HSBC (slightly larger) receive regulatory guidance as they test innovative product.
- Full Authorisation: the traditional approach. Direct authorisation has the advantage that FCA employees will have taken to analyse your business model and that you will have a direct relationship with your regulator. The drawback can be the cost and the lack of control over timings. Authorisation can often take up to a year, with little control over costs or timeframes. For this reason many start-ups and even established firms entering new markets choose.
- Becoming an Appointed Representative: To accelerate their route to market, some fintechs utilise an ‘FCA Umbrella’. Here they don’t apply for authorisation direct. Instead they are supervised by another regulatory firm (such as RiskSave) which has the relevant permissions. The regulator will hold the principal (FCA Umbrella) accountable for failings in the AR’s activities. The process for becoming an AR is measured in weeks rather than months, and the regulatory hosting firm will often advise on compliance and operational issues lowering the fintech firms’ employees’ requirements and costs.
In practice the most appropriate approach will depend on the proposition, and the budget available. Once the MVP is complete and you authorised (directly or indirectly). Then it’s time to see if the idea made sense.