What are the key reasons payments startups fail?

In Startup, Tech
Nairobi, East Africa's finance hub

The inability to scale is the biggest reason payments startups fail, a key challenge that was cited by the Global Payments Innovation Jury. Innovation is a risky activity and failure is an inevitable part of the process.

Although failed companies usually point to funding shortages and/or regulatory change, the Jury concludes that there are two standout reasons for failure. The Jury believes the inability to scale is the biggest reason payments startups fail, a key challenge that was also cited by the 2015 Jury

Generally, this takes the form of a business that works well with a limited group of customers but cannot easily be expanded to a broader customer group, or a business that works well in one geography but cannot be expanded to other markets without being totally rebuilt.

Difficulties in scaling IT systems have become much less important as cloud services have  proliferated, thereby often exposing more fundamental flaws in the business model. The second standout reason, as seen by the Jury, is that many new businesses do not offer any significant advantages over existing solutions. Many jurors commented that frequently they see B2C payments solutions that are ‘solutions in search of problems’.

Some early adopter customers may like a new solution but the broader market frequently has no real desire to change from established payment solutions.

  • The biggest reason for startup failure is a lack of brand recognition and trusted access to the market, so support for a start up from an existing
    infrastructure is very helpful.”
  • “It is almost always harder and more expensive to acquire customers than anticipated at the outset and so the unit economics
    are extremely challenging.
  • Often a company is successful on a small or one market scale, however once it crosses borders – especially if it is a face to face solution – the complexities and regulations restrict its ability to expand.
  • As an independent B2B provider, we struggled to convince large companies to deal with us because we didn’t have a great balance sheet. Until we got through that, an early exit seemed the only way out.
  • “It’s not so much that there no advantage over existing solutions, but rather that the advantages may not be
    valued by customers. Simply saying that you provide better security or are a little more convenient is not enough.”

What is the most likely future of  successful payments startups?

Most startups must have a plan to create liquidity for investors, especially as operating as a private company longterm is rare and exit to the public market by IPO continues to be mainly reserved for larger companies like Nets, Square and  orldPay.

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The Jury sees acquisition by established payments players – large payments companies and major card companies, such as ACI, American Express, FIS and Visa – as the best exit option.

These companies are under pressure from their customers to deliver innovative solutions so they need to actively pursue innovation agendas As large organisations they can tend to find internal innovation difficult, so ‘buying-in’ innovation from the outside makes good sense.

The acquisitions by ACI of Pay.On and by First Data of Clover are clear examples of the trendto ‘buy-in’. An exit to a large established player also addresses several issues for startups. Irrespective of how good the startup’s technology is, it can be difficult to convince potential customers that it is a viable business partner.

Established players are often already integrated with payment infrastructures and have a good understanding of regulatory requirements around the world.
The ability to benefit from an already existing sales and marketing organisation to address a substantial customer base can turbo- charge the growth of a fintech.

The next most likely exit option was acquisition by a technology giant, such as Amazon, Facebook or Google, all of which are building capabilities in the payments market.

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The 2015 Jury rated these technology giants as the top exit prospects, so perhaps the lower rating in 2017 reflects the greater competition for fintech companies by the established payments players and somewhat of a cooling towards payments by the tech giants as they find the payments market not as easy to dominate as they first thought.

Finally, as was the case in 2015, the Jury believes that acquisition by banks is the least likely end-game for successful payments startups. For most industry innovators, exit via bank acquisition is not normally the preferred option because of the risk that the bank culture will kill the innovative
approach that made the startup attractive in the first place.

However, some notable deals, such as the acquisition of Simple by BBVA and of  Fidor by BPCE, show that at times this is an attractive exit option.


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