Risk Management for Fintech Startups: 6 Areas to Prioritize

Fintech culture, and startup culture in general, often revolves around the concepts of innovation and disruption as a means for creating change in the financial industry. While these ideals are not inherently negative, they represent only one aspect of a successful business.

On the other hand, the less glamorous but equally important side of the equation is risk management. This is particularly true for fintechs, which must adhere to various regulations and compliance standards in order to manage their risks effectively. Given that financial services comprise a significant portion of global GDP and are vital to a thriving economy, regulators closely scrutinize the risk management practices of these companies.

There are six key areas of risk management that all founders should prioritize, including:

1. General Risk Management
2. Business Continuity Planning
3. Business Resilience
4. Institutional Knowledge
5. Consistent Testing
6. Third-Party Risk Management

Below, we’ll take a deep-dive into these key areas and provide some important insights for founders. 

1. Manage Risk, in General

General risk management should be a top priority for founders, as it is crucial to the success of a fintech company. In order to thrive, it is imperative to understand, monitor, and mitigate risks. These risks may include, but are not limited to:

• Regulatory Risk
• Compliance Risk
• Application Security Risk
• Data Security Risk
• Operational Risk

The specific bouquet of risks your company will need to manage will depend on your particular corner of the fintech world. For example, lending platforms and investment platforms will have their unique regulatory requirements. Regardless, founders should understand the various risks their businesses face and monitor them all. 

In the early stages of launching a lending or credit startup, we advise founders to not allocate too much time and resources towards compliance. This recommendation is based on prioritization, as focusing on compliance in the early stages may impede innovation and iteration. Instead, it is more crucial to establish a solid foundation for the business. As the company grows and secures Series A/B funding, compliance can then be prioritized at a higher level.

2. Plan for Business Continuity

Business disruptions can stem from a wide range of factors and have severe long-term consequences for a company. According to a 2018 FEMA report, 40% of businesses fail to reopen after a disaster, while 25% collapse within a year. More recently, the COVID-19 pandemic resulted in over 41% of businesses temporarily or permanently closing.

Although it is impossible to predict every potential disruption, proper planning can mitigate many types of business outages. A “business continuity plan” is an invaluable tool for founders, regardless of the industry. However, fintech founders should consider several factors unique to their industry when developing such a plan. Key items to include in a fintech business continuity plan may involve:

• How data will continue to be backed up and recovered
• How your team will access to critical business infrastructure
• How your team will perform financial and operational assessments
• How customers and customer-facing teams will communicate
• How management and their team members will communicate
• How regulatory reporting will be maintained
• How communications with regulators will be maintained

To evaluate your company’s readiness for business continuity, you can visit ready.gov and gain insight into performing a business impact analysis (BIA). By conducting a BIA in-house with the guidance of your managers, teams can delve into their programs to identify shortcomings and devise plans to address them. This approach can help identify gaps in the organization and allow for the creation of effective solutions to bridge them.

3. Build Business Resiliency

Business resilience refers to an organization’s capacity to adapt quickly to disruptions while continuing to operate effectively, protecting its people, assets, and brand equity.

In contrast to a business continuity plan, which outlines how a company responds to disasters resulting in outages, business resilience planning involves developing strategies to prevent costly downtime, address vulnerabilities, and maintain operations following unexpected breaches.

When a disaster does occur, the company must be able to restore lost data, transactions, systems, tools, and other elements. To address data loss, the company must work closely with its partners to recover any data it is responsible for managing.

Cloud-based environments can significantly strengthen a company’s business resiliency. Top-tier cloud-based systems often include the following characteristics:

• Redundant environments based on multiple data centers, 
• High-availability modes with active/active service deployments. 

Some cloud service providers worth exploring include Amazon Web Services (AWS), Google Cloud Platform (GCP), and Microsoft Azure.

Although significant interruptions may be unavoidable, their impact can be mitigated by ensuring that your teams and organization are operating efficiently and adequately prepared in the event of a system outage that may necessitate a rapid failover.

4. Create Institutional Knowledge

To ensure long-term success, fintech founders must establish and document workflows and processes that underpin the business. This involves creating “institutional knowledge,” which includes formalized and comprehensive policies, procedures, and processes.

Institutional knowledge can take one of two forms:

• Explicit or tangible knowledge – This includes documents, records, and reports that can be stored and passed between people.

• Implicit or intangible knowledge – This includes personal stories, skills, and intuition-based learnings that are more difficult to communicate. This type of knowledge can often be transferred through training and mentorships.

Creating and maintaining institutional knowledge will reinforce the longevity of your organization. As members leave, move on, or retire, the knowledge that supported them in their roles remains after they’ve gone. 

There are many ways to collect, organize, and store institutional knowledge. Some companies create Google Docs to record workflows, processes, and even their business continuity plans. Before we sold Stilt, we used Confluence and at The B2B Sherpa we use Notion. Whichever solution you choose will depend on the size and unique needs of your company.  

5. Test Extensively (Before Launch…)

Thorough testing is a fundamental requirement when getting ready to launch your fintech product, whether it be for credit, lending, or other purposes. It is critical to bear in mind that software and applications are developed by humans, and human errors can result in defects or product failure.

During the product development cycle, rigorous testing and the associated documentation (institutional knowledge) are essential for several reasons:

• To identify defects
• To reduce flaws in the component or system
• Increase the overall quality of the system

Furthermore, in the fintech industry, testing is frequently a mandatory legal and compliance requirement. Neglecting to test your product not only risks a poorly received launch but can also result in costly fines and other penalties.

Moreover, the responsibility to test continues even as you add features or introduce new products. It is critical to thoroughly test everything to ensure that the product operates smoothly and satisfies all legal and compliance obligations.

6. Manage Third-Party Risk

Third-party risk management (TPRM) is a risk management approach that concentrates on recognizing and decreasing risks related to the utilization of third-party entities, such as:

• Partners
• Vendors
• Suppliers
• Contractors
• Service providers

With the advancement of technology and the increased adoption of outside services by organizations, third-party risk management (TPRM) and oversight have become crucial areas of focus for companies of all sizes.

Nowadays, launching a fintech product that does not collaborate with any third-party service or provider is almost impossible. Therefore, TPRM aims to evaluate and appraise the risks associated with your company’s partners. Third-party risk varies across a spectrum, ranging from highly manageable risks to startups with innovative new products and limited resources to address product malfunctions.

In addition to assessing the performance of partners, founders must also understand:

• the history of services and any prior issues 
• all aspects of how the services are performed
• how data is created, stored, and transferred throughout the lifecycle 
• how data is administered, monitored, restricted, and terminated

Developing strong relationships with your third-party partners is crucial to fully comprehend the services they provide. Regular and constructive communication with each partner’s main point of contact can help foster positive relationships and reduce risk during times of crisis.

Final Thoughts

Launching and maintaining a successful fintech company requires a comprehensive understanding of the various risks and challenges unique to the industry. Founders must prioritize general risk management, create robust business continuity plans, and ensure their organization’s resiliency in the face of disruptions. Institutional knowledge plays a vital role in promoting longevity, while thorough testing and third-party risk management remain critical components of a fintech startup’s success.

Ultimately, a successful fintech company will adapt and evolve alongside an ever-changing landscape, always striving for continuous improvement. As you embark on your fintech journey, remember that preparedness, diligence, and adaptability will serve as your most valuable assets. By embracing the principles outlined in this blog, you will set your fintech startup on the path to long-lasting success and a secure position within the ever-growing world of financial technology.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

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