If your company is looking to build a piece of fintech software or make a fintech investment, add "identifying risks" to your plan. Doing it before the fintech software development stage may save your team thousands of dollars and a few failed product efforts. 

In this article, we’ll share the top five challenges you should take into account before jumping into your new fintech project and the ways you can overcome them. 

Fintech Explained: How Is It Different?

Even if you’re not new to software development in general, your previous knowledge may still need refreshing. Fintech is an extremely competitive industry that requires a focus on:

• Software regulation compliance

• Strong data security

• Use of machine learning and other innovations

Most of the risks fintech startups may face are connected with the things on this list. Let’s discuss them in detail. 

What Are the Main Risks in Fintech Software Development?

It’s unlikely that you will face all the challenges on our list. But it’s good to be prepared since some are a threat even to accomplished fintech businesses. 

Security Risks

Security is a burning issue for lots of businesses. However, fintech companies are one of the most likely targets for cyberattacks, identity fraud, money laundering, and other types of financial crime.

According to the 2022 survey of 200 fintech executives, fintech firms lose, on average, $51 million per year to fraud. Nearly half of the surveyed claimed that fraud is the most pressing problem they face.

Apart from the financial losses, fraud is a major cause of poor customer service and operational issues, fintech development companies say. For instance, fraud impacts money mobility, aka the user’s ability to add or remove funds from their accounts.

Legal Risks

Since fintech software development companies create products that move around so much valuable data, the regulations for them are equally strict. A slight algorithm miscalculation can jeopardize the users’ privacy, hence, causing a fine from a state or other regulatory bodies.

For instance, one of the fastest-growing fintech companies in the US, Robinhood, was fined $70 million in 2021. FINRA, an organization that oversees brokerage firms, blamed the company for system outages and for communicating misleading information to users. 

Competitive Risks

Right now, only the Americas have more than 11,500 fintech startups. There are 15,000 more in the other parts of the world. Since banking, investments, insurance, and other transactions are moving to the digital space, fintech is becoming more and more competitive.

The pressure to bring innovation into the fintech industry is also intense. Financial software development companies use machine learning for fraud detection, predictive analytics, and creating chatbots. Fintech products are also equipped with fintech blockchain technologies, cloud computing, and gamification software.

So, fintech startups have much to compete with if they hope to stay on the market for a long time. 

Talent Shortage Risks

With so many fintech payment companies emerging around the globe, the demand for talent is fierce. Even the layoffs in the spring of 2023 weren’t enough to change the situation. According to the Velmie 2023 fintech report, finding and retaining talent remains the biggest challenge for the fintech industry.

There are several reasons for that. The digital skill gap and active fintech growth are at the top. 

Tech-related risks

Here are some specific fintech software development tech-related risks new companies may face.

Picking the wrong tech stack

The tech stack includes the programming language, servers, and APIs. If you don’t choose carefully, it may result in security vulnerabilities.

Inability to create a simple UX design 

Fintech applications development requires turning a complex financial process into a
few simple steps in the user interface. It’s not easy, especially if you’re a pioneer in a certain niche.

Now that we’ve identified the main risks let’s talk about mitigating them. 

5 Ways to Deal with the Risks in Fintech Software Development

Plan ahead and use the following risk-management strategies to avoid the bumps on your road.

Make Security a Priority

The bare minimum you should do is encrypt the data. That way, even if someone manages to steal the information, they won’t be able to use it. Some other ways to protect sensitive information are:

• Two-factor authentication

• Biometric authentication

• Real-time alerts

• AI solutions 

Apart from implementing tools, take care of proper operational processes. Update your software regularly, document any changes, and test your app for security.

Consult a Lawyer

Financial technology companies must comply with numerous data protection and privacy laws often imposed by different bodies. For instance, FINRA (Financial Industry Regulatory Authority) is in charge of rules for investing and trading apps. But OCC (Office of the Comptroller of the Currency) regulates banking and lending software.

If you’re operating in the US, you must comply with both federal and state regulations. Sometimes they contradict each other. If you plan on scaling your product abroad, you’ll get even more regulations to comply with.

So, hire a lawyer to protect your company against legal risks and guide you on regulatory issues.

Find a Room for Your Idea

The second most common reason fintech startups fail (after running out of money) is no market need. To make sure your fintech technology hits the spot, take your time and find the gaps in the market.

For instance, most fintech startups operate in the digital payments domain, but the least saturated niche is alternative financing. Does your idea fit into those? What are your main competitors? Can you bring something new to fintech software development or do something differently? Conduct a market analysis to make sure your idea is timely.

Train Your Employees

One of the most pressing issues in fintech is a gap between the skills that the market needs and the skills fintech application developers have. So, invest in your employees and their professional skills. Recruit people eager to learn and grow in the fintech niche. Find out how to train your fintech developers to boost their efficiency.

Consult a Financial Software Development Company

Consider hiring a professional team who has experience in financial software development services. Such companies can advise on cybersecurity and tech issues or help with custom financial software development.

We would be happy to answer all your pending questions, so let us know what type of software you’re working on, and we’ll lend you a hand.

Conclusion

Fintech software development does present some challenges. A saturated market and security issues call for creativity, unique fintech solutions, and enormous attention to detail.

This makes around 75% of fintech startups fail within two decades. However, if you are ready to work with the risks, your chances of ending up in the remaining 25% increase drastically, especially if you find this niche as exciting as we do. 

After all, the fintech market is projected to grow sixfold by 2030. For sure, this enormous industry will have room for your idea.