FinTech

Why chasing fintech licenses could lead to early downfall of your startup

In my extensive experience as a startup attorney, I have provided counsel to more than 300 startups, assisting them throughout their journey from establishment to fundraising and expansion. I am well-versed in the challenges that startups encounter, particularly in relation to securing funding, managing investors, and navigating regulatory frameworks. Notably, many potential issues can be preempted during the early stages of a startup.

Understanding the market must be your first step

Having discussed the challenges of fundraising and the common mistakes made with cofounders, it is essential to delve into the intricacies of regulations and licenses. Market understanding should be the initial step in this process. Obtaining fintech licenses for early-stage startups can be a formidable undertaking, yet it is imperative for the success of any startup operating in the financial services industry.

Primarily, founders of fintech startups must comprehend the data pertaining to the financial services industry and the market. In Nigeria, there exists a notable issue of financial exclusion, with over 54% of bankable adults remaining outside the financial system. This presents a substantial market opportunity for fintech solutions aiming to bridge this gap. This is just one instance, and a closer examination of the data will reveal further opportunities.

When contemplating the establishment of a payments company or any fintech solution, it is crucial to look beyond conventional aspects such as payment gateways, super agents, and payment terminal operators. While these licenses are pivotal, they often entail significant fees that could be prohibitive for a fledgling startup.

The regulatory landscape in Africa, particularly in Nigeria, can be fragmented and challenging. Nevertheless, this also creates opportunities for startups capable of effectively navigating these complexities. Understanding local and regional regulations and devising strategies to comply with them while offering innovative solutions can differentiate your startup.

So, what does the current licensing framework for fintechs entail?

Adopting an astute approach to fintech licensing is paramount. One of the initial steps is to establish partnerships rather than immediately pursuing a license. Established entities already possess these licenses and the requisite infrastructure. By collaborating with these entities, you can introduce your innovative solutions to the market without the initial overhead of obtaining a license.

For instance, engaging with a bank or a licensed payment service provider (PSSP), negotiating a partnership, and utilizing their license for operation can mitigate costs and expedite your credibility and expansion.

The crux of these partnerships lies in offering value that the larger entity presently lacks. For instance, if your solution streamlines payment processes or enhances customer experience in a manner not currently addressed by the larger entity’s systems, you have a compelling case for collaboration.

It is crucial to remember that end users are more concerned with the speed, efficiency, and accessibility of your service than the entity holding the license.

Before pursuing a license, it is imperative to address certain considerations during the partnership phase; most notably, the ownership and protection of Intellectual Property (IP). Many founders overlook the importance of safeguarding their IP, which can lead to complications in the future.

Apart from registration in the primary market, it is essential to also consider registration in all jurisdictions slated for expansion, as intellectual property rights are not universally applicable.

Before disclosing any detailed information to potential partners or investors, it is integral to ensure that your brand, app, and proprietary technology are adequately safeguarded through patents, trademarks, copyrights, and appropriate contracts. Furthermore, a Non-Disclosure Agreement (NDA) is indispensable.

Upon establishing a partnership and witnessing your product gain traction, you can contemplate obtaining licenses. This decision should be driven by the necessity to expand, broaden your reach, or optimize profits. Acquiring a license at this stage is sound practice, as you possess a proven business model and a robust customer base. 

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