The Ultimate Guide On What You Need To Consider Before Building a Fintech Product

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The Ultimate Guide On What You Need To Consider Before Building a Fintech Product
artur-bachynskyi

Artur Bachynskyi

COO @ Django Stars

The thing I like about finance is that this industry is as old as time – and yet, few people dare enter it. Luckily, technology helps to ease the everyday human engagement in financial activities. Financial technology aka fintech is a popular start-up sector for entrepreneurs, as more and more people are striving for financial literacy. The shift to treating one’s finances more intelligently has led the creators to apply the principles of human-centered design (HCD) when developing fintech products.

However, it is not enough to know good design to launch a successful product. In this article, I will tell you about the pitfalls that await almost anyone who has decided to build a fintech product.

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Table of Contents

1. Consider the target country

Fintech aims to substitute for (or improve on) traditional financial institutions by delivering more efficient methods of engaging in financial activities. Governments regulate all financial bodies and services, except cryptocurrencies. This makes it difficult to introduce new approaches to providing financial services, whether they are investments, online banking, or any other sectors unless they are lawful.

Before starting a fintech business, study the regulations of your target country. You cannot predict all the challenges along the way, but you can minimize losses by complying with the existing rules. Otherwise, you can be subject to resistance from the government, which may levy fines or ban you from doing fintech business. For example, eight countries in the world have launched a regulatory sandbox in their financial markets. This means that they have created a special framework set up by financial center regulation to provide testing of innovational technologies under the regulation’s supervision.

countries with official regulatory sandbox

It is not only fintech that must abide by strict, government-regulated policies. If you are doing healthcare business in the US, you have to comply with Health Insurance Portability and Accountability Act (HIPAA). Basically, it is a set of rules that every healthcare-related business has to follow, since they work with (or may have access to) protected patient health information. This is an obstacle for many healthcare start-ups unless they can afford multiple fines, ranging from $50k to $1m a year.

Study the financial sector you are going to enter, but better yet, hire a specialist. It would be a huge disappointment to learn that your start-up is breaking the law right before its launch.

Regulations for fintech startups

Without a doubt, fintech products provide a range of benefits both for investors and consumers. However, the rapid growth of fintech companies has also triggered different risks related to consumer protection, data privacy, and governance.

fintech-startup-regulatory-and-supervisoty-pressures

That’s why regulators and supervisors have developed standards and rules for everyone entering the fintech industry. These rules change frequently, so make sure you continuously review them and make this an internal part of your business strategy.

Let’s look at what regulations a fintech startup can be subject to.

Federal Trade Commission

The Federal Trade Commission (FTC) is a bipartisan federal agency that protects customers from deceptive practices. It conducts investigations, sues companies that violate the law, and collect complaints about data security and misleading advertising.

Recently, the FTC has paid much attention to the fintech industry. For example, in 2018 it sued Lending Club, which provided lons to customers with no hidden fees. As it turned out, in reality this club stated (often behind obscure hyperlinks) that it charges a 5% fee.

The key lesson from the FTC’s actions is that companies should always be truthful and transparent with their customers and avoid hidden fees.

Consumer Financial Protection Bureau

This government agency makes sure that lenders, banks, and other financial institutions don’t deceive people.

Recently, the Consumer Financial Protection Bureau launched a US consumer network for fintech. This network will promote regulatory certainty for financial innovators and help companies stay tuned for changes in the fintech space.

Europian Union GDPR rules

Here are the things that every fintech business should know about GDPR:

  • GDPR may affect your business even if you don’t have physical operations in the EU
  • You must document processes and policies as well as regularly review your security measures
  • You should only work with personal data for a specific purpose
  • You customers have the right to data portability (i.e., the opportunity to switch service providers and get back their personal data)
  • You must notify EU authorities about breaches within 72 hours

Anti money laundering laws

Anti Money Laundering Laws are created to prevent illegal financial operations.The purpose of AML rules is to detect suspicious activity such as money laundering, terrorist financing, securities fraud, and market manipulation.

Fintech solutions can reinforce the AML efforts of banks with the help of blockchain technology and machine learning. It’s an opportunity to make it easier for banks to comply with AML rules.

These are only some of the best-known fintech regulations. Make sure you do your legal research, read the acts, and rules before you push your product onto the market.

How a fintech startup can work with regulations

Before developing a fintech product, make sure it complies with recent fintech regulations. Here are some actions you should take:

1)Examine the legal norms of the country where the startup is going to work 

For example, as we have already mentioned, some countries such as Singapore, Australia, and UK have Regulatory Sandboxes.

Regulatory sandboxes are created by governments and banks as a space for fintech startups to conduct testing with temporarily adjusted regulations. Sandboxes help companies ensure that they are secure and won’t become subject to any rules.

However, in the United States, fintech companies must comply with both federal and state laws.

2) Answer the following questions:

  • Are there regulations today that control the company’s products or services?
  • If there are existing regulations, does the company adhere to them?
  • What licenses do you need?
  • Is it profitable to partner with another company that already has the required licenses?
  • If you are going to partner, what are the risks and conditions of such collaboration?

3) Reach out to the community and advocates for advice

Reach out to a network of entrepreneurs who deal with fintech niche. You can learn a lot from their experience and advice. It’s also recommended to have a financial lawyer specialized in securities law on your team who will analyze how different regulations can affect your business.

2. Find a team with experience in developing the fintech products

The popular slogan “to design good products, find experienced people” is the key to a successful release. Unlike many industries that software engineers deal with, fintech is stuffed with financial jargon – terms that non-financial people will not understand. In each fintech start-up, there is always someone from the finance world who can ensure that the team will not be confused by industry-specific terms, like APR and AER. If you do not know what these two acronyms stand for, I have made my point. When you build fintech engineering teams which are knowledgeable about a sector, say investments, you will avoid misunderstandings.

Plus, developing an online financial service gets easier with the experience, thus there will be fewer chances that an error will occur. Hiring an experienced fintech products engineers can (1) save you lots of money, since the team knows what they are doing; and (2) speed up the process, as you will spend less time telling the team about, say, the UK Bank interest rate. It does not mean that each engineer has to have a degree in finance, but the tech lead or senior engineer should be acquainted with the subject matter.

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building a fintech product 1

If you know an experienced team that has little or no knowledge of finance, you could teach them: say, by setting up recurring workshops or seminars. If the team does know a few things about finance, you should describe your vision of the domain and the problems your start-up is going to try to tackle. Just like when our Django development team was working on MoneyPark, a Swiss online mortgage service: our clients used to organize a workshop for our team so that they understood the terminology and felt confident with financial products. But I will return to MoneyPark later in the article.

MVP Development for the fintech app

Before reaching the scaling phase, every new business has to go through 4 main stages: prototyping, MVP, product/market fit, and business growth.

fintech-startup-mvp-development

Once you have a blueprint prototype of your idea, it’s time to test it on your audience. An MVP is a product that has the minimum set of features that allows you to find out what your customers want. MVP development will help you to analyze the pain points of your audience and figure out how your product can solve them. Here are our tips on how to come up with an MVP:

  • Create a version with minimum features

Don’t roll out a product stuffed with features that your audience might not need. First of all, you have to validate your idea and test your assumptions. The best way to do this is to create a version with minimum features to learn more about your end-user’s needs. You can read more about MVP development in our Guide to MVP, MMP, MLP, MDP and MAP Startup Stages

  • Gather feedback

Gathering initial feedback and analyzing it is the most important stage in the MVP development process. Your ability to analyze the results, observe the behavior of your users, and listen to their preferences will influence the success of your product roadmap.

  • Iteratively release new MVPs with improvements and new features

The MVP is a journey, not a destination. You should continuously identify assumptions, find new ways to test them on your audience, analyze the results, and make changes to your product. The fact is, you will never intuitively know what works in your strategy. The best way to check it is to put your ideas in front of your audience as soon as possible.

Need more in-depth information about creating a fintech product that will be a hit in the market? Download our ebook to learn what you should consider when developing a financial solution.

3. Choose the technology considering the future of your fintech product

One advantage of fintech over traditional financial institutions is its ability to quickly change, provide additional services, adapt to the customer’s needs and offer better solutions. Your start-up ideas must be implemented in a few months to find their market fit and be able to compete with traditional financial institutions. Plus, fintech is full of additional services, so your system has to be flexible.

If you are looking for technical partners for a fintech start-up, I assume you are not familiar with the technology required to actually build it. The point here is to trust the fintech development company when choosing the technology. The choice depends on multiple factors, one of them being the business goal you want to achieve with your product. Another one: they know the restrictions associated with using a particular technology. One outcome of the right choice is a minimized risks that your entire project will be shut down if a new law comes out and you need to change something in the system to comply with new regulations or customer needs.

fintech vs finance

Some programming languages are rumored to be better and faster; others have proved to be best suited for particular types of projects. Many consider Python a great choice for fintech development which is confirmed in HackerRank research. And using the Django framework, an MVP can be designed in a few months so that you can launch it ASAP. Python is flexible – it lets you adapt and change the finished product as much as you need.

Read more: How to build a unique technology for your fintech product with Python

Security for fintech products

Data breach – this phrasen is a nightmare for companies who work in fintech and a real threat to both their reputation and their customers’ trust. Security is an essential feature you should invest your time and resources into. Its neglect may lead to severe circumstances and cost you a lot.

For example, UniCredit recently reported a breach of three million records of their Italian customers: their names, cities, and emails. Since 2016, UniCredit has invested €2.4 billion in upgrading its IT systems and cybersecurity. The bank immediately began investigating and informed its customers.

When we talk about data breaches, the statistics are really impressive. According to IBM, the average cost of a data breach amounts to $3.92 million, and 66% of businesses that fall victim to a data breach aren’t confident that they can recover from it.

fintech-startup-development-data-breach

All this information indicates that cybercriminals actively attack banks and other financial institutions. Neglect of security measures costs companies not only money – it also costs them customers.

How can you deal with this? I’ll give you some tips in the next section.

How to maintain high-level security in your application

When it comes to fintech, security is your priority. The following tips will help you to come up with a secure product.

  • Use tunneling protocols

Tunneling protocols are used within a virtual private network, which makes them effective at fintech data encryption. Here are some of the most popular protocols you can use for your fintech product:

PPTP
IKEv2
L2TP / IPsec
Open VPN
SSTP

  • Incorporate tokenization

Tokenization is the process by which the primary account number (PAN) is replaced with a surrogate value called a token. Storing tokens instead of PANs can help to reduce the amount of cardholder data in the environment and limit the risk of a data breach. An example of the tokenization process is below:

build-fintech-startup-incorporate-tokenization

  • Use AI in fraud prevention

Fraud detection systems analyze the client’s behavior and buying habits, and when something falls outside the usual patterns, unique security mechanisms are triggered.

AI is also very effective at preventing money laundering. For example, HSBC partners with AI tech start-up Ayasdi to identify fraud patterns, reduce the number of false alerts, and analyze linkages between accounts, customers, and related parties. There are a lot of other examples of AI in financial services that prove how this technology can take the industry to a new level.

  • Consider blockchain for cybersecurity

A lot of enterprises today are starting to incorporate blockchain technology for data security. One way to implement blockchain in your fintech product is to use decentralized storage solutions. They allow you to keep all your data in the blockchain and give access to third parties. In this way, hackers cannot access entire repositories of your data in one place.

  • Make private messaging secure

Another use of blockchain technology is private messaging. Blockchain stores communication data across a decentralized network of nodes, removing centralized control of personal data and the possibility of personal data breaches.

4. Consider possible integration with third parties

One disadvantage of fintech is its dependence on traditional institutions. As the goal is to improve the user experience with financial products, you will need lots of integration with third-party services. What is integration in this case?

When using Molo (another online mortgage system we’ve been working with) users can choose houses they like and get a mortgage. When they want to get a mortgage, the system sends a request to organizations that can identify the users’ data (like Experian in UK), and another request to verify property and for identity verification. All these integrations make it possible to call Molo a fully digital mortgage provider and enable customers to go through the whole mortgage process online.

Read more: Implementing Third-party API Layers in Fintech Applications

molo

You need to predict as many needs as you can, for each will require time to implement. Remember that traditional financial services presuppose lots of bureaucracy, thus delays.
For instance, you will not reach the employees of a bank outside their working hours. Most likely, your users will not either. Your task here is to think how you can make the system work independently, or at least to seem to.

At some point when developing MoneyPark, we had to integrate an insurance company API into the system. However, the insurance company would not allow direct communication between us, so we had to first communicate to MoneyPark. Only then would our message go to the insurers. We wasted hours because of this bureaucracy, and it is still the same in 2018. Traditional finance services are not very agile, but your users do not need to know it.

5. It is not only for the end-customers

In the traditional finance system, there is always someone who gets a loan, and someone who gives it. In insurance, there is an insurer and an insured. The same applies to fintech solutions. The technology should suit not only for the end-customer, but the service provider as well. For that reason, most fintech start-ups are platforms that offer different functionality, depending on the role – just like Airbnb, which works one way for travelers, and another way for hosts.

For instance, a lot of fintech services give an access to their product to credit experts or financial advisors. That’s how they comprise both b2b and b2c segments – working with end-customers as well as third parties. In this case, fintech app development process includes formation of different interface and functionality for each party because each performs actions peculiar to their role. Basically, you need to consider a possibility of b2b interactions when choosing tech solution and building a business model. Even if you’re not implementing it in your MVP, it might be a thing later.

6. Have a product owner & communicate (a lot)

This point continues the ideas I briefly mentioned in Part 2. Fintech stands between two major fields: finance and technology. To launch a fintech product that follows the state regulations, does not confuse users and fits the market, you need to have a product owner with experience in both fields. Start-ups can fall into the pitfalls of finance by not knowing certain terms or laws. However, the product owner should be responsible for the key element of the fintech product development process, which I have also mentioned previously.

Communication is one of the elements that defines whether the product will be success or failure. I am not saying that proper communication between you and your team will immediately ensure success. But I am saying that it reduces the chances of failure. The more you stay in touch with your team, the easier it is to prevent bugs and stick to the specified requirements of a product. This is crucial if you and the engineers are in different time zones. Remember that most financial institutions work 9 to 6, so their APIs, tech support, and management are also available during those hours.

Bottom line

conclusion

The tips I have described will not ensure the success of your start-up, but they are a good way to avoid the pitfalls of the industry in the early stages of creating a fintech app and product development. To start with, find experts in building fintech teams who will help learn the nuances of the industry. That done, analyse the sector you are going to enter to better understand what sort of technical partner you will need.

As Don Norman, the author of the best-selling The Design of Everyday Things, once pointed out in his self-proclaimed Norman’s Law: The day the product team is announced, it is behind schedule and over its budget. However, you can still make it in time if you choose the right technology and work with right people to launch an MVP. But who is ever on time, anyway?

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