As with any business, being aware of risks can help you make better decisions about the future, improving the probability of success. Head of Compliance and Risk for JUMO, Robert Nel, has observed a number of common risks financial technology organisations are facing this year. However, with the right plans in place, the risks can be avoided. This is his list of the most common risks fintechs should monitor and manage.
1. Unstable capital markets
‘Inflation has become a global problem and is increasing at an alarming rate, which is causing several central banks to rethink their monetary policies and raise interest rates. Consequently, the cost of borrowing has suddenly gone up, which has put downward pressure on company valuations. At the forefront of this is tech companies who have up until recently seen valuations far outpacing any other sector. A market correction seems to be afoot. Where possible, make sure your company has enough cash runway to outlast a market downturn.
2. The battle for tech talent
The battle for talent is intensifying. Foreign companies and large international companies are snatching up local talent and paying a premium for good software developers, putting pressure on local supply. To mitigate the increased risk of losing top talent, look at alternative value propositions for employees.
Employees value freedom and being able to work remotely, within a strong and meaningful work culture. Look at your company’s offering holistically and attract talent by offering something different.
3. Cyber security threats
It seems as though every month a new company is in the media for a data breach or cyber incident, and 2022 has been no exception, with breaches being reported at Crypto.com, Microsoft, Red Cross, Press Reader and many more. Ensure that you’re not one of the statistics by making sure that your cyber security team is well staffed and that they follow international best practice such as ISO 27001. When it comes to protecting your company’s information assets, consider running an incident simulation to test your company’s preparedness. For those looking for even more security, there is also an option of taking out cyber insurance which would pay out in the event of a breach and can help mitigate the potential financial loss of such an event.
4. Regulatory uncertainty
Whether your company is involved with payments, crypto, financial technology or anything in between, regulators have gone fishing and are casting their net wide. No one is spared and it seems regulators across the world are working harder than ever to catch up to technology. If you are in a highly regulated market like most fintechs are, it would stand you in good stead to be proactive with regulators, build relationships, give feedback on policies and proposed regulations and join a consortium or industry group through which to voice your opinions and protect your interests.
5. COVID-19 variants
For many of us life is for the most part back to normal, thanks in part to the effectiveness of COVID-19 vaccines, but let’s not forget how quickly things can change. As the resurgence of the Omicron variant has shown, we are not out of the woods just yet. Any future mutation could put us right back in a hard lockdown and economic distress, especially if the variant proves to be vaccine resistant. Companies who have adapted and learned from the pandemic will be better prepared, should another more deadly variant emerge.
6. Transfer pricing headaches
If you are an international company or one looking to grow internationally, you should be aware of the recent actions taken by regulators and tax authorities to address perceived base erosion and profit shifting abuses. It’s also become a highly politicized issue due to its impacts on where taxes are paid, people are employed, and intellectual property is kept. To mitigate against this risk, it is always advisable to work with reputable accounting firms who have a lot of experience in this area and to think carefully about your structure and transfer pricing policy to avoid problems later.
7. Vendor management
These days companies outsource ever larger parts of their business to reduce costs and to keep focus on what they do best. However, using vendors and outsourced service providers comes with its own set of risks. For instance, you have a lot less oversight on what a vendor or third party’s processes and internal controls are. Making sure you have robust agreements in place to protect your company’s interest and contingency plans for disruptions in service delivery is important.
8. Competition is heating up
The rate at which companies are innovating is impressive. Make no mistake, competitors are always on your heels and waiting for the right time to strike.’
The only way to stay ahead is to innovate faster, know your customer better, and to stay two steps ahead of the competition. With the recent downturn in capital markets, there is also the increased pressure to prove profitability and defend your share in the market.