PREVENTING COMMON PITFALLS AND BUILDING TRUST – THE FINTECHFORCE WAY
Early issues and how we tackle them
Josh Hachadourian, Contract CFO
Today I want to talk about some of the issues that early-stage Fintechs run into as a matter of course, and how we at FintechForce go about solving those issues for them. I won’t be able to cover them all, but hopefully there’ll be enough for you to get a feel for it.
I started working in the financial services sector back in 2002, right on the heels of the ignominious collapse of the dot-com bubble. In other words, I started working in Fintech before it was cool – or even had a name.
In 2013, I finally jumped ship from public accounting firms and started working in Fintech proper, consummating the happy marriage between my extensive knowledge of finance and many years of experience working with financial service institutions and technology companies.
What I soon realized, though, was that my path was by no means a typical one in the ecosystem. This brings me to the first common pitfall of fledgling Fintechs, namely overplaying the tech side of the equation. You may have the slickest UI (user interface) in the world, but if the back end isn’t doing what it’s supposed to in terms of the fin component, the whole thing can shift massively off balance.
For this reason, one of the first things we do is work on internal controls over financial reporting and in particular over cash transactions. At times this means making sure that our client does cash account reconciliations every single day. Many companies simply use an omnibus account with tons of cash moving every which way, and eventually find themselves mystified by the underlying treasury activity at their own enterprise.
Put another way, it’s crucial to first understand every transaction in detail, and then build a platform capable of effectively tracking this activity at the transaction level. This way, you’ll know exactly what’s happening and have no problems with regulatory compliance and reporting.
Speaking of compliance, another issue that we regularly see is that Fintechs either don’t pay enough attention to regulation during setup, or fail to account for new (emerging) regulatory frameworks. By and large, this is further complicated by the difficulty of figuring out who their regulator even is. Sometimes, it’s best to just focus on who the regulator is likely to be tomorrow, and prepare accordingly.
The last thing I want to mention is the importance of understanding cash flows and making sure there’s plenty of operating capital. Unfortunately, it’s not always as straightforward as it may seem. A mistake that we see time and again in the ecosystem is Fintechs starting to worry about capital the very moment it becomes necessary. The problem with this is, of course, that last-minute capital is much more expensive.
In order to avoid the high cost (or worse, an abrupt end to the venture altogether), you need to map out your cash runway as clearly as possible, including specific amounts, timelines, and sources of funding. Our task here is helping Fintechs to figure out which types of capital they need, where to get it, and which investors to pick (by the way, our good standing with investors makes this process a lot smoother than it otherwise would be).
Okay, so all that sounds great, but how do you get Fintechs to trust you in the first place? These are highly sensitive issues we’re talking about here, after all. And we do need unfettered access to all information to do our job properly.
The resistance to this comes from two main sources: 1) having a team of outsiders start mucking about in your company’s business can feel overwhelming (even though contracting the fractional time of 10 or so people is far easier and less expensive than hiring a bunch of new employees); and 2) private companies typically like to hold their operations rather close to the vest.
Our experience shows that building trust usually comes down to adding value, communication, and delivery. The first one we’ve already covered. And the secret to the second was unlocked many years ago by… teachers, actually. Teachers normally do everything three times – first, they provide an overview of the material; next, they give their spiel; and finally, they summarize what’s been said to reinforce retention. This approach is incredibly useful in building trust with clients. As for the third element – delivery – the good old “under-promise and over-deliver” rule of thumb is as good as any.
So, in keeping with the whole teacher thing, here’s a neat little summary of the key takeaways:
- Fintechs often put too much emphasis on the tech while neglecting the fin (e.g., failing to put in place effective transaction level controls and performing regular cash flow reconciliations)
- They may not pay enough attention to regulatory compliance, which gets them into hot water sooner rather than later. This is also, in part, related to the previous point – a back-end incapable of tracking daily operations leads to reporting issues (and a general lack of focus)
- Cash runway modeling can at times be haphazard in the ecosystem, forcing startups to raise expensive last-minute capital
- Fintechs aren’t always super excited about giving an outside contractor full access to their business (including financial) information. Building trust requires precise communication, (over)delivery, and capacity for adding tangible value