Tips for Fintech Startups

fintechtips

In the fast-developing fintech sector, a strong grasp of roles and responsibilities will help companies grapple with the finer details of regulation and strategy. From the Companies Act 2014, which places the onus on directors to fully understand their role and responsibilities, to the raft of financial regulation, directors in the fintech industry have a lot to contend with. So where to begin? This guide, aimed at start-ups, gives an outline. Here are tips for fintech startups:


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 Highlights

    • Businesses are advised to put ‘airtight’ contracts in place from the outset, to avoid problems arising during later periods of success or failure

    • The grey area of regulation requires careful consideration, as compliance can be a costly and time-consuming process

    • Activity is particularly intense in the payments subsector, where companies are subject to the full menu of financial regulations


Start with the basics

As in any industry, the failure to plan can mean the failure to succeed, but among fintechs some claim this is a particular weakness with respect to funding and finances. David Newsome, managing director of Monalin Management Services, says: “We set up companies for start-ups and advise them on the practicalities. Our big bugbear is that many times start-ups are too enthusiastic in their dreams and this is particularly true in the fintech industry, where ideas and projects are often innovative and new. The founders can get carried away in their own enthusiasm.”

Write a Business Plan

Newsome advises his clients to sit down and first write a short-term business plan. “Write one for six months, then 12 months, then three years and on up to five years,” he says. “And then answer the question: how will you fund that?”

He is a big believer in founders taking a salary, but adds a caveat. “While directors can pay themselves from the beginning, they also need to recognise that if more funds are needed, that will dilute their equity.”

He argues that, while only one director is a requirement with a limited company, if funds are received from an angel investor then it’s a good idea to invite the investor to become a member of the board.

“It’s also important that the roles and responsibilities of each director be written out from the beginning, and that these roles are strictly maintained.”

He argues that this diligent approach should extend to shareholder agreements. “Set up the responsibilities for everyone, identify clearly how decisions are made and follow those rules. Anyone who becomes an investor should get a shareholder agreement.”

Newsome likes to act as formal adviser for start-ups. “Getting it right at the beginning can ensure when things get a bit tricky that there is little room for maverick finger-pointing.”

Recommended reading: Tailoring Your Business Plan For Different Readers

Put contracts in place

If a business falters, then the unhappy founders and business can end up in court. Fran Rooney, ex CEO of Baltimore Technologies, has been a practising barrister at law for the past 10 years and sees many start-ups when they have a problem that cannot be resolved at boardroom level.

As an experienced contract barrister, Rooney is also present at the difficult point of disputes between shareholders, directors and/or investors.

“A contract in time would have saved nine,” he says. “Putting in place airtight contracts at the start of any business is crucial. It is all very easy to be happy-go-lucky when setting up business with friends or colleagues; it’s not until the company goes under or conversely flourishes that the lack of contracts at the beginning can cause issues.”

He is an advocate of boards with a clear sense of direction. “Have a strong board with directors who are able to deliver on key milestones. If you need investment, then you need people that investors can believe in.”

The regulation question

John Salmon is an experienced technology lawyer and partner with Hogan Lovells in the UK, where he has been advising on digital and online legal issues for more than 20 years. In the last 15 years he has spent most of his time advising major financial institutions on strategic technology and digital projects in what is now called fintech.

“I now spend my time advising financial institutions and technology companies on innovative digital projects in the fintech area. My work covers IT procurement and outsourcing, cloud projects, cyber security, mobile payments and digital platforms,” he says.

“However, the first thing I do when I encounter a fintech is to understand their objectives – to go directly to the heart of their strategy.”

And in the world of finance, that inevitably includes an approach to regulation, and Salmon points out that many fintech start-ups that enter his office have already made up their minds with respect to regulation: sometimes in favour of compliance, and other times totally against it.

“It is obvious that opting to be regulated can be helpful – it can confer trust – but if it’s not necessary then it’s an expensive and costly route to go down. Conforming to regulation is not for the faint-hearted and it can take months and be an expensive process.

 


“We will be increasingly called upon to apply our regulations and processes in the context of new business models, products and services. We need to keep pace with these innovations to do this effectively”

Derville Rowland, Director General Financial Conduct, Central Bank of Ireland


“Conversely, some fintech may reject regulation based on the cost and time but not be aware that they have no choice. Good advice at the start is paramount.”

And it’s worth keeping tabs on how regulations are changing.

According to Derville Rowland, Director General Financial Conduct at the Central Bank of Ireland, fintech activity is at its most intense in the payments sector. This has been driven by the second Payment Services Directive (PSD2) and requirements to enable open banking, which allow account holders to authorise third-party services to access account information.

But as Ireland adopts no light touch with respect to fintech, companies are subject to the full menu of financial regulations, including the Markets in Financial Instruments Directive (MiFID) II, the Packaged Retail and Insurance-based Investment Products (PRIIPs) and the European Market Infrastructure Regulation on derivatives, central counterparties and trade repositories (EMIR). But the desire – some may argue the need – to address the sector with specific oversight is on the cards, and mirrored by the EU’s publication of an action plan for fintech.

“We realise that the increased adoption of advanced technologies in the financial services sector raises challenges for the Central Bank as a regulator,” Rowland said in April in a speech at Cork University Business School. “We will be increasingly called upon to apply our regulations and processes in the context of new business models, products and services. We need to keep pace with these innovations to do this effectively.”

Understanding the nuances

The added complexity is that regulation is not a standalone issue, and feeds directly into the business strategy.

“There are other issues, too, such as IP and what type of company to set up,” adds Salmon. “I like to understand the fintech’s strategy, objectives and vision. Does the start-up want to provide payment services or account aggregation services, for example – both will require different regulation.”

Not many fintechs want to be a bank or an insurance company at the beginning. Many may provide services or act as a broker, and that may be a moving goalpost over time. In addition, most fintechs aspire to be global, so the question of which jurisdiction can be an issue.

“Naturally, here in the UK, we are looking at the Brexit impact, but even across the EU regulatory conditions are not harmonised. Picking the right country and rules can be a make-or-break result,” he says.

Alternatively, the fintech start-up may wish to collaborate with a corporate such as a bank. If such a union means that the bank can now offer greater services or different services then that can have a knock-on effect on the bank’s own regulatory permissions and it may have to apply for new ones.

“Then everyone has to be aware of digital data, especially in the light of GDPR,” says Salmon. “We need the appropriate technology and the right data. This is another layer of rules that faces any wannabe fintech start-up.”

 

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