The Fintech Honeymoon Is Over — Now What?

Young fintech companies are facing a harsh new reality. After years of unbounded growth fueled by billions in venture capital, the market dynamics that made it all possible have changed.

Two trends underscore this market recalibration. First, new fintech investments are tapering off as the broader funding market cools. Second, we're seeing banks, once flummoxed, finally starting to get the hang of digital innovation.

To survive the down market will require upstarts to take a long, hard look at their business models and make key investments in these three areas: regulatory compliance, bank partnerships and excellent customer experiences.

A Compliance Program Is Not Optional

Failing to invest in compliance is one of the single biggest mistakes fintech upstarts make. Many upstarts view compliance as an expensive waste of time and resources — or, they don't look at it at all. It goes against their very nature as market disruptors.

But when it comes to competing in a highly regulated market like financial services, the traditional Silicon Valley model breaks down. In fintech, compliance is table stakes for those serious about transforming the future of banking.

As we've seen time and time again, ignoring compliance is a losing strategy. It slows business to a crawl when regulators come calling (and trust me, they will). Further, the more successful your business, the faster regulators appear. Right or wrong, this happens for many reasons. A common reason of late is because a company is perceived to have unfair or deceptive business practices, for instance.

In a down market, higher compliance costs can be deadly. But they are also avoidable. Customer-driven companies always start by documenting customer interactions. Businesses with a focus on compliance must instill a culture of looking out for customers, which in turn creates trust and helps companies build their brand into a lasting asset.

Partnering with Banks Is a No-Brainer

By and large, it seems fintech companies have accepted the reality that banks aren't going anywhere anytime soon. The lofty proclamations about the demise of traditional banks have quieted and talk of partnerships has become de rigueur in fintech boardrooms.

You don't need a massive sales team or multimillion-dollar marketing budget to partner with banks, but it does take patience and requires listening to what the bank actually wants and needs. Above all, partnerships depend on trust.

My dad and grandad taught me that your word is what matters most in business. When communicating with employees, customers, vendors and partners, what you say — and how you say it — is the basis for building trust. In turn, that trust is the basis for building relationships.

Dealing with money and being in direct contact with a partner's customer base requires the highest level of trust. This makes fintech especially reliant on trust and strong listening skills. It's also why bank partners take extra time to make sure they can trust you before finalizing any arrangement.

To bring a partnership to market rapidly, fintech companies need to build trust while building products at the same time. It's about parallel processing, and each step of the product development lifecycle can serve as an opportunity to build goodwill and confidence, so long as you view it that way.

It's About the Customer, Stupid

While innovations in technology have propelled fintech thus far, competing on technology alone won't cut it in a down market. As any old hand will tell you, it's all about investing in customer relationships. Today, of course, this means investing in the customer experience.

Redefining the relationship banks have with their customers is the greatest opportunity for every innovator in this space.

Starting with the arrival of the ATM in the 1960s, technology has been driving a wedge between banks and their customers for decades. As a result, banks are no longer the center of every business and consumer's financial universe. Today, banks tend to look more like cash depositories than the financial advisors they once were. This represents a major opportunity for both fintech companies and banks.

Faster payments, hyperintelligent advising, cheaper loans — these are all important innovations of the recent fintech boom. But there's only so much speed, intelligence and savings that can be achieved over a given period of time. Customer happiness, on the other hand, has no ceiling.

Optimizing for experience, not just efficiency, is the winning strategy in fintech. In the end, banking is a relationship business. No one should forget that and everyone should take advantage of the technology available today to enhance those relationships.

René Lacerte is the chief executive and founder of Bill.com, which he launched in 2006. He can be reached on Twitter at @rlacerte.