Fintech is all the rage now. The fintech industry has experienced an extraordinary surge in recent years, with the number of startups globally surpassing 26,000. This exponential growth signifies a remarkable increase from approximately 12,000 fintech startups just a couple of years ago in 2019.
The rapid expansion of this sector highlights the immense interest and innovation happening in the intersection of finance and technology. These numbers not only demonstrate the attractiveness of fintech as a lucrative field but also the potential it holds for transforming and reshaping the financial landscape on a global scale. With such an abundance of fintech startups emerging worldwide, the industry is poised for further disruption and advancements in the years to come.
Yet, when you look around and see so many fintech companies out there that have fewer than 10% of their staff in IT or even completely outsource the technology function to agencies, you may think to yourself, “These guys are not fintechs. They’re just fin.”
What Determines a Technology Company First and Foremost?
What establishes a company as primarily a technology company, and how can this be recognized? Evaluate whether technology plays a central role in the company’s competitive advantage. If the company differentiates itself through technological innovation, research and development, or proprietary technology, it signifies a strong technology focus.
The distinction also lies in staffing: how much of your staff is developing software versus fulfilling other functions, like compliance. If you want to be a fintech company, make it a point to maintain at least 40% of staff expenses on IT. Of course, there are certain functions that will inevitably need to be delegated and outsourced. Nobody wants to reinvent the wheel, nor do you need to.
Outsourcing vs. Internal Development
One remarkable aspect of working in fintech nowadays is the extensive emphasis on collaborating and integrating with various service providers. There’s a word that is being overused in every fintech-related talk and at every conference – “ecosystem” – but it’s true that fintechs are very much about integration with other providers. You have to build in-house, sure, but you also need to build relationships with banking partners.
Speaking about this to other fintech founders, we inevitably come to the same conclusion: one of the most important (and early) strategic decisions that founders make is what kind of tech to focus on developing internally vs. what to outsource. This will more or less determine the business you form as a founder.
Let me share with you an example. Our UK fintech startup Silverbird focuses on a business-substance type of compliance and outsources everything that has to do with UBOs and documents. Silverbird doesn’t want to develop its own accounting system, even if it makes sense for it financially, because accounting is a commodity. At the same time, it builds a lot in-house and hires a lot of IT engineers from around the world.
When I was doing e-commerce and building my previous company Wikimart, we were very much an IT-first company from the get-go. We invested heavily in functions such as SEO, marketing, or software for working with B2B vendors. But as much as we wanted to be a “hands on marketplace,” we didn’t make our own WMS (warehouse management system). There was no need for us to do so because we found many cheap providers on the market with whom to integrate.
If a significant portion of employees are engineers, software developers, data scientists, or technology specialists, it indicates a technology-centric organization.
The Right Balance of “Fin” and “Tech”
When fintech founders talk about their business model, one idea invariably pops up: the reduction of IT costs as the company grows. But this is not a given. If you’re a true fintech, you have both parts of the business to maintain – your compliance team and your engineers building the product. There can be a 10-20% deviation, but more or less, every employee in your team will fall under one or the other umbrella. Your IT cost might go down as the percentage of revenue does – after all, scale is what makes a company truly global – but don’t think of IT cost reduction as a resulting percentage of your overall costs.
If you’re in the fintech business, you’ve got to have a balance of both “fin” and “tech.”