Millions if not billions pour into the sector, and for good reason. This is not the “easiest” nor the cheapest of businesses to start up. I’m here to reveal the truth of big money. From regulatory requirements to capital deposits, launching payments or lending business isn’t just about having a great product idea or initial funding—it demands a serious commitment of time and resources. Here’s what you need to know before diving in.
Licensing and Compliance: A Long, Costly Process
Regulations are there to protect consumers. In FinTech or financial services, having to get licensed means not being able to operate or operating under very strict restrictions until you have obtained the necessary licenses and permissions.
In some cases, you might get “in-principal” approvals from regulators, allowing you to operate on a limited basis while your application is pending.
But these permissions typically don’t allow for your full scope of services, which can be frustrating if you’re eager to get started. It’s a long process, and during this time, there’s a major financial factor you need to consider: capital deposits.
Let’s say you’ve gotten past the initial hurdles and have customers who love your payment platform and are asking for it in new countries—maybe India, Cambodia, or somewhere beyond your current market. You can’t just set up shop in those locations overnight. Each country has its own regulatory requirements, and obtaining a license can take up to two years. That’s two years of waiting to find out if you’ll even get the green light to operate fully or if you’re rejected and have to try again elsewhere.
Capital Deposits: Your Money, Locked Up
One of the biggest surprises for new fintech founders is the requirement for massive capital deposits. Some regulators ask you to deposit $1.6 to $2 million into a separate account that just sits there while they process your application. This isn’t money you can use to run your business or expand; it’s essentially locked away as a guarantee.
Imagine raising funds for your business and then not being able to touch a huge portion of it for two years—it’s an inefficient use of capital. And even after you receive your license, some countries might keep a portion of that deposit indefinitely. These costs can significantly impact your cash flow, and it’s something you absolutely need to budget for.
Legal Costs Aren’t Cheap
Let’s talk about lawyers. In fintech, you’re dealing with complex financial regulations, so hiring legal professionals with a specialty in finance is essential. These specialists aren’t cheap, but they’re necessary to ensure you’re following every regulation down to the last detail. Mistakes here can cost you not only in fines but also in the trust of regulators—something invaluable in a high-stakes industry like payments.
Why You Need Capital—and a Lot of It
The payments industry requires heavy capitalization to demonstrate to regulators that you’re stable and resilient. Unlike a small business where only you or a few people are affected by financial setbacks, a fintech company’s challenges could impact hundreds or thousands of customers and their funds. Regulators want to ensure that you have the capital to operate sustainably, so you’re not seen as a risk to your customers or the financial system.
This isn’t something to take lightly; having a strong balance sheet is crucial not only to get approved by regulators but also to run efficiently. Under-capitalized businesses can easily get crushed by the industry’s demands, so you’ll need to make sure you have enough funding from the start.
The Challenge of Low Margins in Payments
Even after all these hurdles—licensing, capital deposits, legal fees—your profit margins are still razor-thin. The payments industry often operates at margins below 1%, meaning you need serious transaction volume to break even. This low-margin environment can be challenging if you’re a new entrant without the scale of a major player.
At the same time, the cost to acquire customers or clients for new startups can be high. The frictional costs of switching to a new digital bank for businesses, the additional compliance checks that your users have to go through, and the strict rules around how you market or sell your offerings all add up to higher acquisition costs.
Because of this, many payment companies try to boost earnings by offering add-ons like loans or other financial products. But adding these services brings additional regulatory requirements, which means more capital and more compliance. Essentially, it’s a balancing act: you’ll need enough scale and volume to make a profit, but getting there requires a lot of upfront investment.
So, Is It Worth It?
Entering the fintech space, especially in payments, is no small feat. From securing licenses to tying up millions in deposits, hiring top-notch legal talent, and trying to scale up in a low-margin industry, it’s a challenging road. But if you can navigate these costs and complexities, the potential is immense. The hurdles in getting started in the industry - regulatory and user acquisition costs - eventually form part of your defensible moat against new entrants over time.
So while having a great product is important in business, having the right expectations and a solid financial plan from the beginning will make all the difference in whether you succeed in this highly regulated and competitive industry.
If you're considering entering the fintech space or need guidance on navigating the complexities of regulations, capital requirements, and market dynamics, schedule a discovery call with us. Our experts are equipped to help you develop a strategic approach that aligns with your business goals and ensures a successful launch in this competitive industry. Let's work together to turn your fintech vision into reality.
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