An Intro to Supply Chain Challenges for Fintech
A supply chain is the process that transforms a raw material into a finished product, which is later delivered to the consumer. Supply chain, in the context of fintech companies, involves the seamless flow of digital services, data, and transactions to support their service-based business. Fintechs encounter a range of supply chain challenges that impact their business operations, such as talent gaps, issues with partners/vendors, data security, regulatory compliance, and many more. Tackling these supply chain challenges is crucial for Fintech companies as it often separates a successful business from an unsuccessful one.
Fintech Supply Chain Challenges from a Global Perspective
Fintech is considered one of the most important industries for the world economy, considering its potential to revolutionize the entire Finance industry. Financial technology (FinTech) is at the forefront, offering innovative solutions to streamline operations, improve transparency, and unlock new financing options. BCG predicts a significant surge in fintech revenues over the next decade, with annual growth expected to exceed six times the current levels. By 2030, these revenues are projected to reach $1.5 trillion, accounting for approximately 7% of the global banking and insurance revenue pools. By 2030, it is projected that fintechs in banking, including those offering lending, deposits, payments, trading, and investment services, will make up approximately 13% of the banking revenue pool.
Starting and running a fintech business at a global level is not easy. Businesses have to deal with a lot of issues, such as privacy, customer experience, and regulatory hurdles. Let's look at some numbers to help us understand the supply chain problems that fintech businesses have to deal with.
Challenge 1: Data Security Issues
The interconnected nature of supply chains creates a larger attack surface for cybercriminals. As fintech companies are interconnected with various partners using APIs, a data breach at a single supplier can expose sensitive customer information. According to IBM, the average cost of a data breach globally in 2023 was $4.35 million, highlighting the financial consequences of such vulnerabilities. As per another research from InterSystems, 81% of fintechs globally consider data their biggest technical challenge, with concerns around data security, leveraging data for AI, and integrating customer data.
Compliance issues: Fintech companies are subject to strict data security regulations. A breach can result in hefty fines and reputational damage.
Loss of customer trust: Data breaches can erode customer trust in a fintech company's ability to safeguard financial information.
Solution: Fintech companies can use enhanced security measures such as Two-factor authorization, Biometric authentication, Real-time alerts and notifications and Behavior analysis to ensure better protection of their consumer’s data.
Challenge 2: Regulatory Compliance
Finance is a highly regulated sector, burdened with government regulations and bureaucratic processes. Companies have to comply with various laws, including the GDPR, GLBA, the Wiretap Act, and the Money Laundering Control Act. Global banks and large brokers with upwards of 20,000+ employees end up spending a staggering $200 million+ in compliance every year, which is a significant cost for these regulations.
Not meeting regulatory requirements can lead to expensive fines and legal disputes. Fintech companies often face disruptions in their operations, when the government requires them to temporarily suspend business activities until regulatory matters are resolved. Altogether, companies shell out nearly $15 million dealing with the repercussions of non-compliance.
Solution: Operating in multiple economies requires Fintech companies to carefully navigate and comply with various regulations to avoid penalties and maintain smooth operations. Fintech companies can hire a legal consultant or company to handle their work, allowing them to concentrate on their core business operations. They may also employ an in-house legal team, dedicated to handling legal and compliance matters.
Challenge 3: Supplier Partnership Risks
Numerous partners collaborate with fintech firms, including payment processors, banks, other financial institutions, and point-of-sale (POS) vendors. Effectively managing these relationships can present difficulties, particularly in terms of communication, integration, and risk mitigation.
Many times fintechs enter into partnerships without doing their due diligence, which later impacts their business. One of the best examples of a failed partnership is the recent partnership between Apple and Goldman Sachs. Apple and Goldman Sachs announced their partnership in 2019. The relationship revolved around the Apple Card, a credit card provided by Goldman Sachs that works with Apple Pay. Now, Goldman Sachs is looking to end their partnership as it has resulted in billions of dollars of losses.
Solution: Companies need to think twice and do their due diligence before entering into any partnership. Additionally, they must conduct routine checks to ensure that the relationship with their partner remains intact.
Challenge 4: Talent Gap
Attracting and retaining employees with the right level of skill sets continues to be a persistent issue for Fintech companies. The Korn Ferry Institute predicts a tech industry talent shortage of 4.3 million workers by 2030, with fintech being the most affected sector. 67% of the UK’s fastest-growing fintechs consider top talent to be a high priority.
Fintech companies mostly rely on technology and innovation that require highly skilled employees who are well-equipped in technical skills while having a blend of financial knowledge and soft skills like problem-solving and communication.
Solution: Fintech companies can address the talent gap by providing additional training and development for their current employees. In addition, organisations need to consider providing competitive salaries and benefits packages to attract and retain highly skilled professionals in a competitive job market.
Challenge 5: Scalability
Scaling a fintech business is extremely difficult as often companies have to risk their current business to make room for new ones. To accommodate the influx of new consumers or products, they would require more advanced systems capable of processing large volumes of data and information. It can be challenging to maintain a positive and seamless consumer experience across all points of contact as the number of users increases. Fintech companies need to invest in robust customer support systems and maintain clear communication channels that allow them to scale their operations easily.
Solution: Fintech companies should make a clear plan for how they will grow their businesses and the tools they will need to make sure the process goes smoothly. Knowing exactly what they need will help them plan well and make it easier for the business to grow.
Fintech Supply Chain Challenges in Saudi Arabia
While fintech is booming in Saudi Arabia and a crucial part of the government’s Vision 2030, there are various hurdles in the growth path of this industry. Some of the most prevalent supply chain challenges that fintech companies in Saudi Arabia are outlined below:
Trust
Fintech companies are still new to the financing game in Saudi Arabia, and customers are yet to develop a high level of these companies. Banks enjoy a high trust due to their long-standing customer relationships. In Saudi Arabia, banks form majority of the lending provided to SMBs, extending around 94% of the overall credit facilities. For many Saudis, religious principles are important. Traditional banks offer Sharia-compliant financial products that some fintech companies might not have yet.
Solution: Saudi Fintech companies need to create a user-friendly experience (UX and UI) for their consumers that makes consumers want more. Also, they can partner with trusted banks or financial institutions to leverage their existing reputation and provide a sense of security to consumers. Offering Sharia-compliant products is another way of winning the trust of consumers.
Regulatory Hurdles
The Saudi Arabia Central Bank (SAMA) and Capital Market Authority (CMA), which are at the forefront of regulating financial services in the Kingdom, supervise the Fintech market. Fintech companies in Saudi Arabia are heavily regulated by these supervisory bodies with various rules and regulations to protect the interests of the citizens of Saudi Arabia. Fintech companies need to implement and maintain effective Anti-Money Laundering/ Counter-Terrorist Financing programs as per the guidelines set by the Saudi Arabian Financial Intelligence Unit (SAFIU). The country also has strict data privacy laws wherein Fintech companies need to ensure robust data security measures and comply with data localization requirements.
Solution: Saudi Fintech companies need to closely monitor the regulatory updates and developments issued by SAMA, CMA, and SAFIU. The information can be obtained through official websites, industry publications, or legal counsel specializing in fintech regulations. They can also consult with legal experts experienced in fintech regulations as it will help them better navigate complex legal and regulatory issues.
Talent Gap
While the talent gap is a challenge for fintech at a global level, it is more relevant for fintech companies operating in Saudi Arabia. The talent pool in the country is limited, with the Saudi education system still evolving to meet the specific skillset demands of the fintech industry. Established financial institutions and tech companies also compete for skilled professionals, driving up salaries and making it harder for fintech startups to attract top talent. Visa and work permit regulations in Saudi Arabia are known for their strictness, posing challenges for Saudi fintech companies in their efforts to hire skilled professionals from overseas.
Solution: Fintech companies in Saudi Arabia can offer remote work opportunities to expand their talent pool beyond geographical limitations and attract skilled professionals across the globe. They can also invest in upskilling and reskilling their current employees which allows them to solve the talent gap issue with the least possible investment. Another option can be to partner with universities to develop a targeted curriculum focused on fintech skills and offer internship opportunities for students.
Conclusion
The Supply Chain challenges for fintech companies are extensive with data security issues and regulatory compliance leading the charge. Whenever fintech companies are planning to introduce a new product or expand their operations, they need to consider each and every challenge presented in this article carefully before deciding to action upon it. There are a lot of options out there, and as Fintech companies in Saudi Arabia are primarily new, they can look towards partnering with relevant organizations or outsource the work to skilled professionals so that they can focus on their core business operations.
About Finmal Fintech Fund
Several high-profile investment funds have already stepped up to address the funding gaps in the fintech sector, including Sanabil Investments and Shorooq Partners. Fintech funds launched by Tanmeya Capital also offer exposure to the growing Saudi Arabian fintech sector. Tanmeya is focused on bridging the financing gap in Saudi Arabia’s SME sector along with the support of several government initiatives. In the Vision 2030 scenario, the credit gap in the SME sector will improve dramatically from a shortfall of SAR 372 billion in 2020 to just SAR 94 billion by 2030. To offer investors attractive risk-adjusted returns through exposure to financing solutions for eligible SMEs, Tanmeya has launched the Finmal platform with a rigorous credit scoring of SMEs to evaluate the financing eligibility of SMEs. Leveraging its robust data analytics platform, the Finmal platform is designed to reduce credit repayment risk while partnering with strategic financial partners for disbursing secured loans. Finmal’s edge is its access to a massive pool of robust SME data. Funds will be deployed for various means, including supply chain financing, POS financing, and consumer financing that help SMEs to overcome their operational financial challenges and scale beyond.
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