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Fintechs Need Guts More Than Lawyers

In Part 1 titled “Fintechs Need Marketers And Lobbyists – Not Lawyers”, we saw why marketers and lobbyists play a vital role in a fintech startup’s success.

In this second part, we'll examine the following middleground approach suggested by some people:

Go to lawyers, listen to what they say, understand the risks and work out a mitigation strategy upfront before committing resources to building out a fintech product.

This approach hasn't been in the playbook of any successful startups I can think of in heavily regulated industries. I don’t know why for sure, but I can guess at least three reasons:

  1. Startups simply don’t have the resources to do anything other than what is critical to fulfill their core mission. And that needs marketers and lobbyists, not lawyers, as we saw here.
  2. Regulation is generally too ambiguous to guide a new product or service. According to the ET SUNDAY article titled Meet the alternative lending startups, “Around a year ago, the founders of altflo, a startup in Chennai, began the process of building a platform to match investors and investees, but discovered that India's regulators haven't defined the equivalent of an accredited investor …, so regulations around private investments involving issuance of securities are hazy.” Stateside, according to the American Banker article titled "Fintech Firms Hurt by Lack of Regulatory Clarity", it's not clear how many of the 50+ regulators have jurisdiction over fintechs! "That leads to confusion about how a firm will be subjected to regulatory oversight", observes the author of this piece, Richard Magrann-Wells, EVP for Willis Towers Watson Financial Institutions Group. (From personal experience and what Magrann-Wells told American Banker, UK seems to be an exception to this otherwise global issue).
  3. The ability to take risks is in the DNA of a startup. Risk-aversion is simply repugnant to the context and style of a startup. The whole “understand risk, mitigate risk” framework of doing things is enterprise-world luxury and mostly results in checking the “do nothing” box in the business plan. Even there, some of the progressive corporations have realized this and are motivating their inhouse accelerators to think out of the box, telling them "we'll think about regulation later".

In contrast, ignoring risk and mitigation has appeared to be the approach followed by successful startups in highly regulated industries.

https://twitter.com/whitneyhess/status/755782261950275584 

This approach comes with many hazards:

  • In its early days in 2010, Uber was served a cease-and-desist order in San Francisco and was threatened with 90 days in jail for each day the company remained in operation past the order (Source).
  • According to legend, Uber's Cofounder Travis Kalanick was once warned to skip office where two police officers were waiting to arrest him. Many years after they were founded, Uber and AirBnB are still mired in controversy in many cities where they operate.

So, it needs guts to take this approach.

If fintech founders have it, they should go for it. Not to a lawyer.

https://twitter.com/GTM360/status/754971673808539649 

If not, going to a lawyer won't help anyway.

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Comments: (3)

John Fitzgerald
John Fitzgerald - AIB - Dublin 16 August, 2016, 08:30Be the first to give this comment the thumbs up 0 likes

The level of regulation and legislation involved in the room renting business is a little lower than for financial services.

Also need to consider what risk you're taking - having the guts to put consumer deposits at risk probably isn't what you mean here.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 16 August, 2016, 09:37Be the first to give this comment the thumbs up 0 likes

@JohnFitzgerald:

TY for your comment.

Typically, the room renting business is regulated at city level and finserv, at country level. Therefore, it could be argued that the room renting business faces a more complex regulatory framework than finserv.

But we'll never know. If a company doesn't go around checking the regulatory framework - which is the central theme of this post - how'd it know if X is more regulated than Y or the other way around?

I meant only regulatory risks. While that's explicit in Part 1 of this post titled “Fintechs Need Marketers And Lobbyists – Not Lawyers”, I do admit that it's not clear from this Part 2 alone. Thanks for bringing it up.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 16 August, 2016, 16:56Be the first to give this comment the thumbs up 0 likes

I just read this apt line in today's FORTUNE DATASHEET:

"...I believe is happening at lots of much smaller startups that either don’t know any better or that have created a culture of flouting (in startup parlance, “disrupting”) the rules..."