What is Fintech?

Fintech, short for financial technology, refers to the use of innovative technology to improve, streamline and automate financial services. It aims to make financial processes more efficient, accessible, and user-friendly for businesses and consumers by utilising specialised software and algorithms that are used on computers and, increasingly, smartphones. It encompasses a wide range of applications, from mobile banking and digital payment systems to robo-advisors, blockchain technology, and cryptocurrency platforms. Fintech is a rapidly growing field that is changing the way we interact with money and financial institutions.

Timeline of Fintech

The evolution of fintech can be traced through several key developments:

Early Developments (1950s-1990s)

· The introduction of credit cards in the 1950s, which allowed consumers to conduct cashless transactions, could be considered the earliest form of fintech.

· The rise of ATMs in the 1960s provided unprecedented access to bank accounts and financial services.

· The electronic trading, which gained momentum in the 1980s, revolutionised the way stocks and other financial instruments were traded.

· Online banking, introduced in the 1990s, enabled customers to manage their accounts and conduct transactions online via the Internet.

The Internet Age (2000s)

· PayPal, established in the late 1990s, popularised online payments and became a cornerstone of e-commerce.

· The growth of peer-to-peer lending platforms started to offer an alternative to traditional loans.

The Mobile Revolution (2010s)

· The advent of smartphones has brought mobile banking and payment apps, such as Venmo and Square, making financial services more accessible and convenient.

· Cryptocurrencies like Bitcoin emerged, introducing a new form of digital asset and payment system.

Recent Trends (2020s)

· The rise of robo-advisors, which offer automated, algorithm-driven financial planning services.

· The increasing adoption of blockchain technology for various financial applications, including decentralised finance (DeFi).

· The adoption of open banking, which enables banks to securely share customer financial data with third-party providers through APIs, allowing for the creation of new financial products and services. Open banking facilitates direct payments from bank accounts, bypassing traditional card networks.

· The increasing use of instant payments for cross-border transactions.

· The increased leverage of innovative technologies, such as AI, Machine Learning, Blockchain, and alternative data sources, in evaluating an individual's or business's creditworthiness.

· The increasing use of Digital ID to verify, authenticate, and manage individuals' identities in a secure and efficient manner.

· The rise of neobanks - digital-only banks that offer banking services entirely through mobile apps or online platforms, ensuring convenience and accessibility.

· The increasing adoption of Peer-to-peer (P2P) payments, which allow individuals to transfer money directly between each other using digital platforms or apps.

· The advent of split payment options provides flexibility and convenience, allowing customers to spread out their payments without incurring additional costs.

Areas of Finance Covered by Fintech

Today, fintech covers a wide array of financial services sectors, including:

· Banking: Mobile banking apps and online banks provide user-friendly, efficient, and accessible financial solutions directly to consumers or businesses.

· Payment Processing: Digital wallets, mobile payment systems, open banking, and contactless payments facilitate easy and secure transactions.

· Digital Lending and Credit: Peer-to-peer lending platforms and online lenders provide quick and accessible loan options, as well as credit assessment services.

· Insurance: Insurtech companies leverage technology to offer personalised and efficient insurance services.

· Blockchain and Cryptocurrencies: Cryptocurrencies and blockchain technology offer new methods for transferring and storing value, transforming how we think about currency and decentralised finance.

· Investment and Wealth Management: Robo-advisors and online trading platforms enable individuals to invest in stocks, bonds, and other assets and help manage investments and financial planning.

· Regulatory: Regtech helps companies efficiently comply with financial regulations.

· Banking-as-a-Service (BaaS): A model in which traditional banks or licenced financial institutions provide their infrastructure and services to third-party companies via APIs, enabling non-banking entities to offer banking services without becoming licenced banks themselves.

· Cybersecurity: Protecting sensitive financial data is a critical focus in fintech.

· Fraud Detection and Prevention: The digital nature of financial technology makes it a prime target for sophisticated fraud tactics, including identity theft, payment fraud, account takeover, money laundering, and investment scams.

· Risk Management: This area leverages advanced technologies to identify, assess, and mitigate various types of risks effectively

Problems Faced by Fintech

Fintech companies face specific challenges that arise from the nature of the industry, which involves delivering financial services.

Regulatory and Compliance Challenges

Fintechs operate in a highly regulated industry, requiring adherence to complex and evolving laws, such as GDPR, AML/KYC, and PSD2. Regulations and compliance requirements vary significantly between different jurisdictions. Ensuring compliance with local laws, particularly in areas such as consumer protection, data privacy, and anti-money laundering, can be both time-consuming and costly.

Security Concerns

As fintech services involve the handling of sensitive financial data, robust cybersecurity measures are essential. Companies must protect against hacking, fraud, and data breaches, which require continuous investment in advanced security technologies and protocols.

Moreover, customers expect financial services providers to maintain demonstrably high standards in this area, which necessitates obtaining security certifications such as SOC 1, SOC 2, and ISO 27001, among others.

Adoption and Trust

Building trust with consumers and convincing them to adopt new financial technologies can be challenging. Many people are wary of new, untested technologies, especially when it comes to their finances. Fintech companies need to demonstrate reliability, security and added value to gain widespread acceptance.

Challenges for Fintech Startups and Scale-ups

Fintech startups and scale-ups face unique challenges as they strive to establish themselves in a competitive and highly regulated industry.

Challenges in Raising Capital

Raising capital can be difficult for fintech startups due to the perceived high risk associated with the sector. Investors may be cautious about investing in new financial technologies without a proven track record, and startups must present a compelling business case to secure funding.

Some governments present various tax regimes aimed at incentivising investment in research and development, as well as encouraging smaller businesses, including fintechs, by providing tax relief for their owners, incentivising employees, or supporting early-stage investors.

For fintechs, access to capital remains a make-or-break issue. Legacy lending models often rely on outdated credit scores, collateral-based lending, and rigid approval processes, which are not well- suited for high-growth, asset-light fintechs seeking to access the capital they need to scale.

Moreover, traditional funding structures, such as bank borrowing or equity financing, entail significant trade-offs. Ideally, companies would like to access capital without compromising ownership or control.

Non-dilutive funding solutions may be more accessible and better suited to the needs of fast- scaling fintechs that require capital to invest in marketing, inventory, and expansion.

Challenges in Selecting Proper Corporate Structure

Choosing the right corporate structure is crucial for fintech startups, as it affects everything from taxation to regulatory compliance. A proper corporate structure can separate risks and protect assets for fintech ventures, offer flexibility for investors and partnerships and increase complexity and costs. There is no one-size-fits-all solution. Founders need to carefully and holistically consider their venture’s specific circumstances and short- and long-term goals. They need to consider the unique regulatory requirements of each jurisdiction when establishing a regulated entity in another

jurisdiction, as well as corporate and international tax implications, the company’s liability protection, management structure, and transferability.

The chosen company structure should be able to support a fintech venture’s rapid expansion and

provide a flexible and efficient framework for its growth and scaling up.

Challenges in Defining the Business Model

A company’s business model outlines how it creates, delivers, and captures value. Fintech startups must clearly define their business model to attract investors and customers. This involves identifying their target market, differentiating their service offerings, and establishing a sustainable revenue model.

Defining a business model is closely tied to selecting the corporate structure and evaluating pricing models.

Challenges in Choosing the Pricing Model

Determining the right and flexible pricing strategy is critical for the success of a fintech startup. Companies must strike a balance between profitability and competitive pricing to attract and retain customers. This often requires experimenting with various pricing models and continually adjusting them in response to market feedback.

A pricing model is an integral part of a business model, focusing on how a company sets prices for its products or services to generate revenue. One aspect that is often overlooked in this process is the importance of tax considerations. Taxes can significantly impact a business's overall financial health, influencing decisions related to pricing strategy.

Tax consideration is an integral part of choosing a pricing model for a business. The tax implications of using various pricing models can vary significantly based on the revenue streams and geographical locations.

Fiscal Challenges Related to Financial and Cross-Border Activities

Fintech startups often operate across multiple jurisdictions, which can result in complex tax challenges. The taxation rate can vary depending on the activity type and jurisdiction. Managing crossborder transactions, currency exchange and compliance with various tax laws require sophisticated financial planning and expertise.

Regulatory Licencing and Compliance

Most fintech ventures aim to conduct regulated financial activities. Before they commence those regulated activities, they need to become authorised and regulated. Licensing and registration are critical components of the regulatory framework for fintech companies. This ensures that fintech entities comply with relevant laws and regulations, maintain operational standards, and prioritise consumer protection.

Obtaining the necessary licences and maintaining compliance with regulatory requirements is a significant challenge for fintech startups. This process can be lengthy and costly, and failure to comply can result in severe penalties and loss of trust.

LEXeFISCAL

Fintech has revolutionised the financial services industry, offering innovative solutions that enhance convenience, efficiency, and accessibility. The potential for growth and impact in the fintech sector remains immense, promising continued advancements and opportunities in the years to come.

According to a recent FT report, 6.4% of the European fastest-growing companies operate in financial technology, with a compound annual growth rate ranging from 50% to 652%.

However, navigating the fintech landscape requires specialised knowledge and a strategic approach, given the complex regulatory environment and rapid technological advancements. LEXeFISCAL stands out as a premier provider of comprehensive advice and services tailored to fintech startups and small businesses, guiding them from the initial idea through to the scale-up stage.

LEXeFISCAL offers comprehensive advisory services to fintechs:

· Company Formation: Our expertise in company formation ensures that the process is efficient and compliant with all legal requirements.

· Advice on Corporate Structure: We offer guidance on selecting the most suitable corporate structure to optimise tax liabilities, protect intellectual property, and facilitate future investment opportunities.

· Operational Framework Setup: We assist in developing a robust operational framework that supports business objectives and ensures efficient management of resources.

· Regulatory and Licencing Applications: We provide support in applying for licences and ensuring compliance with regulations in various jurisdictions, which is crucial for maintaining operational legitimacy.

· Development of Detailed Regulatory Business Plans: We help create comprehensive business plans that satisfy regulatory requirements and demonstrate a clear growth path.

· Fundraising Support: Our services include pitch deck creation, refinement, and facilitating introductions to potential investors.

· Development of Financial Forecasting and Analytic Models: We develop models that provide insights into your business's financial performance and growth potential.

· Business and Pricing Models Review: We analyse and refine business and pricing models to ensure they are competitive and sustainable in the long term.

· Company Valuation: Our valuation services offer an accurate and fair assessment of your

company’s value.

· SEIS/EIS Schemes Setup: We assist in setting up Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS) to attract investors by offering tax reliefs.

· Shareholding Structuring: We offer expert advice on the most effective strategies to achieve business objectives.

· Investors’ Due Diligence: We conduct thorough due diligence to provide investors with the

confidence they need to invest in fintech startups.

· Regulatory and Compliance Reporting: We assist in preparing accurate and timely reports to meet regulatory requirements.

· RCD Applications: We apply for Research and Development (RCD) credits and grants to help your business reduce operational costs and secure funding for research and development projects.

· EMI Scheme Set-Up: We assist in setting up EMI (Enterprise Management Incentive) schemes to help your business attract and retain top talent by offering them the opportunity to purchase shares.

· Comprehensive Tax Advice: Our tax advisory services ensure that fintech startups comply with tax regulations and optimise their tax liabilities.

LEXeFISCAL provides fintech startups and small businesses with the strategic support needed to navigate complexities, ensure compliance, attract investors, and achieve sustainable growth. Our tailored approach ensures that each aspect of the business journey, from inception to scale-up, is expertly managed, empowering your venture to thrive in a competitive industry.

Invest in your fintech startup's success by partnering with LEXeFISCAL. Let us help you turn your innovative ideas into a thriving business.

Email: fintech@lexefiscal.com

Article by: Victoria Pikovsky (LinkedIn)

Chartered Accountants

Understanding Fintech: Impact, Trends and Challenges