Fintech wave: navigating fintech challenges amid growth

04 April 2024

Mpho Matsitse, executive: business & digital advisory, BCX

Mpho Matsitse, executive: business & digital advisory, BCX

Fintech’s impact on the financial services industry is multi-faceted, reshaping how financial services are delivered, accessed, and experienced.

It encourages innovation, promotes competition, and drives efficiency, benefiting consumers and businesses by providing more options, lower costs, and improved fiscal management capabilities.

In South Africa, fintech businesses are growing rapidly as they plug the gap left by the incumbent players in the financial services sector.

According to consultancy firm, McKinsey & Company, South Africa boasts almost one hundred fintech companies, which are innovative and filling a massive void left by the traditional banks, hence small business owners feel the support of fintechs more than anyone else.

Fintech’s provide firms with everything they cannot get from financial service providers, for example, seed capital, loans, financial advice, digital financial solutions, online services and many more.

While the fintech sector possesses these transformative powers, the bourgeoning industry also faces several hurdles that threaten growth.

Fintech companies have a problem of growing too fast, also navigating an uncertain environment.

Regulatory compliance is one challenge that these emerging businesses must face head-on. This, as fintech firms must navigate a complex and evolving regulatory environment, which varies from one district to another.

Ensuring compliance with financial regulations, data protection laws, and anti-money laundering requirements is crucial but can be resource-intensive to fintechs.

Fintech companies manage sensitive financial and personal data, making them prime targets for cyber-attacks and data breaches. Protecting customer data and maintaining robust cyber security measures is a constant challenge for these businesses.

Data security is crucial for fintech companies not only to protect sensitive financial information but also to maintain customer trust, comply with regulations, avoid financial losses, and ensure the ongoing success of the business.

Fintech companies must invest in robust security measures, including encryption, access controls, regular security audits, and employee training, to mitigate these risks effectively.

According to ISACA, enterprises that implement fintech face cyber security risks from integration issues such as compatibility and legacy technologies. Integration of fintech with traditional banking systems may raise concerns regarding data privacy, it adds.

The professional association focused on IT governance reveals that when banks establish formal relationships with fintech service providers to leverage their services, banks take on third-party security risks such as data leakage, service failures, litigation, and reputational damage.

It urges banks to consider the fintech relationship-related risk in their third-party risk management assessment.

Mobile devices play a predominant role in fintech banking services. If mobile devices without strong encryption algorithms are used for fintech services, integrity issues regarding the financial data that are communicated over the cluster of fintech interfaces may result.

Cloud computing is one of the major enablers of a fintech ecosystem. Payment gateways, digital wallets and secure online payments are some of the niche cloud computing services provided in a fintech ecosystem. For example, making payments is extremely easy and fast through cloud computing.

Maintaining the confidentiality and security of financial information is critical to banks and financial services. Lack of adequate cloud security measures can result in compromise and corruption of this sensitive information. This risk can be avoided with a strong encryption mechanism for the cloud platform.

Banks can effectively manage the risks presented by fintech by implementing a combination of initiative-taking strategies and risk management practices.

The banks must embrace collaboration with fintech companies instead of viewing them solely as competitors. They must also establish strategic partnerships to leverage fintech innovation for mutual benefit while sharing risk and expertise.

By adopting an initiative-taking approach, collaborating with fintech companies, and addressing risks head-on, banks can harness the advantages of fintech innovation while minimising potential vulnerabilities and threats.

It is essential for banks to continually assess and adapt risk management strategies in response to the evolving fintech landscape.

Besides data security concerns, rapid growth can strain the technological infrastructure of fintech companies. Ensuring that systems and platforms can scale to accommodate increasing volumes of transactions and users is essential.

Scaling a fintech company involves expanding its operations, customer base, and revenue while maintaining or improving efficiency and service quality.

However, scaling the business is a complex and multi-faceted process that requires careful planning and execution. It involves a combination of market understanding, operational efficiency, technological readiness, and customer-centric strategies.

Building and maintaining trust in a competitive landscape is also challenging for fintechs. This is mainly because convincing consumers to adopt new financial technologies and entrust their money to fintech platforms requires time and effort.

Access to capital is also another concern for these companies. Fintech start-ups often require significant capital to develop and market their solutions. Accessing funding, whether through venture capital, private equity, or other means, can be a challenge, especially for early-stage companies.

Another issue facing fintech companies is that traditional financial institutions are increasingly investing in and adopting fintech solutions. Competition from established banks and financial service providers can be fierce.

Amid this competition, fintech firms should focus on what sets them apart from traditional financial institutions. They must highlight unique features, user-friendly interfaces, and innovative solutions that appeal to customers.

By focusing on these strategies and leveraging their flexibility, fintech firms can effectively manage competition from traditional financial institutions and continue to thrive in a rapidly evolving financial landscape.

The path to success for fintech companies involves not only embracing innovation but also effectively navigating the myriad challenges that come their way. Fintech firms have disrupted traditional financial landscapes with their agility, customer-centric approach, and technological prowess. However, they must remain vigilant and initiative-taking in addressing various hurdles to ensure sustainable growth.

To successfully navigate challenges, fintech companies must prioritise robust risk management, cyber security, and regulatory compliance. They should continuously educate their customers and maintain transparency to foster trust. Collaboration and strategic partnerships can extend their reach and capabilities, while a relentless commitment to differentiation and innovation will set them apart in a crowded market.

Furthermore, fintech firms should remain adaptable, as the financial technology landscape evolves rapidly. By addressing these challenges with resilience and adaptability, fintech companies can not only endure but also thrive in an industry that continues to shape the future of financial services, offering innovative solutions and improved financial experiences for customers worldwide.