Create an Article›User Guide›

Michael Zetser Discusses the Unique Risks of Investing in Fintech Startups

Sep 17, 2023

iCrowdMarketing powered by iCrowdNewswire

As someone with experience in the fintech sector, Michael Zetser believes that anyone who wants to invest in this space should first understand the reasons for its growth and the potential risks involved. In recent years, there has been a significant expansion in financial technology, both in terms of its capabilities and adoption. These days, an increasing number of businesses are investing in fintech for providing customers with a better overall experience.

While fintech has been expanding rapidly, it is essential to understand its role and future, along with the risks, before jumping on the investment bandwagon.

Banks versus fintech

Traditional banks and fintech companies have different business structures. The former are focused on direct customer services, while the latter use advanced technologies, such as artificial intelligence (AI) and machine learning (ML) for streamlining their services.

Furthermore, banks are subject to heavy regulation, which means they need to be properly licensed and comply with a strict set of guidelines. The same does not apply to fintech services, due to which they have greater freedom in establishing their rules and regulations. However, this also means that investing in fintech companies is riskier than traditional banks.

Future of fintech

The fintech revolution has just begun and there are plenty more innovations expected in the future. For instance, blockchain technology is gaining traction rapidly, even though it is a high-risk investment. Fintech professional Michael Zetser says that as innovations continue to happen in the fintech sector, new and strong regulations will be introduced for this sector. These will undoubtedly change the entire industry’s landscape and fintech providers would have to update their products and services in order to comply with the new rules.

The risks

At first glance, investing in fintech apps, products and services seems like an ideal opportunity because of considerable consumer demand. But, there are some unique risks that also come with this investment. Some of the notable ones are highlighted as follows.

  • Transactional speeds

The high speed of transactional services is one of the primary benefits that fintech products and services can offer. Technology companies are required to deliver efficient and fast financial products and services and companies that use these technologies also have to adapt. Fintech can only be successful if companies are committed to investing in new technology for efficiently operating their fintech products and services.

  • Algorithmic decision-making

Micahel Zetser points out that machine learning and automation are a key element of fintech products, as they use specific algorithms for making important business decisions. For instance, these technologies can be used by businesses for determining the eligibility criteria for some services, but the problem with this automation is that it can result in discriminatory, or even unfair practices.

Frequent audits need to be conducted for assessing the algorithms to ensure there will not be any bias and smart and well-informed decisions can be made.

  • Technology failures

The reputation of a fintech company can be destroyed completely due to repeated technology failures and there is also a damaging impact on the reputation of the company that is utilizing the said company’s solutions. In fact, even customers will suffer because they might not be able to access vital services due to technology failure. Considering that economies are running 24/7 these days, it is essential to ensure continuous access to services.

  • Regulatory practices

In a number of instances, the regulatory oversight of fintech companies is quite different from that of traditional investment banks. While fintech companies are able to offer faster services due to this lack of regulatory oversight, which is undoubtedly beneficial for investors, it also increases the risk of fraud. Moreover, experts like Michael Zetser have highlighted that fintech regulation will soon come into effect and when that happens, it can have a significant impact on the services provided by fintech companies.

  • Cross-border transactions

Companies depending on cross-border transactions need to be very cautious when they leverage fintech technology. Just because a technology works well in one country is no guarantee that it will work the same in another. This is because not every country has the same systems in place and the safeguards applicable might also differ. It could mean greater security issues and also make it difficult to track transactions.

  • Misconduct and fraud

Fintech products and services come with the risk of fraud and misconduct, such as money laundering. Implementing safeguards is a must for keeping the company safe. For instance, fintech organizations should come up with a list of potential threats and then develop a plan to minimize them for preventing fraud and misconduct that could damage their reputation.

Understanding the unique risks associated with financial technology can help investors in making better decisions when it comes to their investment. You can choose a fintech startup for investment, which is familiar with the risks and has taken steps to mitigate them.

Tags: Uncategorized