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What Barriers to Entry Exist in The Financial Services Sector?

Barriers to entry are factors that make it challenging for new businesses to enter a particular market. Such factors can deliver advantages for existing firms, allowing incumbents to concentrate on R&D and quality product development without undue concern about a multitude of other companies stealing their customers. However, when barriers to entry are too high, they allow monopolies to form that can have negative consequences for customers.


fintech entry barriers payments consultancy

Although all industries possess barriers to entry of some sort, they can prove particularly obstructing in the financial services sector. We’ve listed some of the most common below, as well as how they can be overcome.

Capital requirements

For any company looking to enter a new business sector, making sure they have the capital to do so is normally at the top of the list of challenges. Given the kinds of services they offer, banks and other financial institutions must have significant capital reserves - both to reassure customers and to comply with the strict regulatory stipulations present in some markets. In the European Union, for example, Capital Requirements Regulations mandate institutions set aside enough capital to cover unexpected losses (either in third-party foundations, as in the Netherlands, or dedicated safeguarding accounts). 

However, capital requirement rules are not as much of a hurdle as they once were. The number of regulated fintech firms, both across the European Union and elsewhere is surging. This is partly since fintechs are generally less capital intensive than traditional banks - something that is slowly being reflected by regulations.

Fintechs are showing that the payments and financial services sectors are no longer closed shops.

Access to financing

If new players remain undaunted by the capital requirements needed to enter the financial services market, they will likely need to source funding from somewhere. Fintech investment is certainly growing, giving start-ups more opportunities than ever to take on long-established incumbents. As of January this year, there were 79 unicorn fintech companies around the world, demonstrating that funding can be sourced even for newer financial businesses. 

europes fintech unicorns payments consultancy
Investments in European FinTechs (2013- 2021). Source: Crunchbase news

And while access to capital varies by geography - the US and UK remain the best locations for fintechs to access capital, - investment is pouring in from across the globe. In fact, global fintech investment hit $98 billion for the first six months of 2021 alone.

Regulatory compliance 

Financial services represent one of the most tightly regulated industries for new businesses to attempt to enter. To achieve compliance and start trading, organizations may have to meet a multitude of standards in areas like asset holdings, risk, anti-money laundering, customer due diligence, and much more. As well as the direct challenge of meeting these compliance standards can also be costly. 

To achieve compliance and start trading, organizations may have to meet a multitude of standards

However, the regulatory landscape is constantly changing. Open Banking and PSD2 are increasing competition in the payments space - a trend that may continue when PSD3 arrives. Regtech solutions and license application services can also support fintechs if they are concerned about compliance. At PaymentGenes, for example, we have been able to help our clients Mambu and Enfuce with consulting and service implementation, demonstrating that regulations needn’t prove insurmountable.

Geographical differences

Complicating things is the fact that barriers to entry in the financial services sector will differ from country to country. In particular, these geographical differences can create difficulties for businesses that operate across international borders.

Differences in financial regulators across the globe cost businesses as much as $780 billion a year

It’s also worth remembering that these barriers to entry exist for firms that are looking to enter financial services for the first time as well as those that may already reside within the industry but which are looking to expand into new territory. In either case, however, local partnerships can provide a highly effective way of preparing your business for market differences.

Security concerns

Security challenges in the financial sector are only getting more difficult to address. The COVID-19 pandemic was followed by a 159% rise in banking fraud attacks, and cyber attackers are becoming increasingly adept at circumventing industry safeguards. For new entrants, this represents a daunting prospect. With fintech being the second-most frequently attacked industry by cybercriminals after healthcare, new financial businesses must be prepared to meet the security challenge.

companies compromised by cyber attacks payments consultancy
How many companies are compromised by cyber attacks? Source: Cyberedge group

As with all the aforementioned challenges, however, fintechs are also presented with an opportunity. If they can get their security protocols right, they can quickly gain a reputation for protecting customer data. Having robust defenses will certainly lower their barriers to entry significantly.  

The competition

In the developed world, most people already possess a bank account and access to other financial services, but globally there remains a significant number of underbanked and unbanked individuals. Competition is fierce to acquire these potential customers, but the rewards for the fintechs that manage it are huge. 

Unbanked adults globally payments consultancy
Adults who use formal or semiformal financial services. Source: McKinsey

New businesses must convince underbanked individuals to put their trust in a new fintech start-up rather than an established legacy bank. Evidence suggests this is happening already, however. Over the last decade, the global unbanked population fell by 35%, primarily as a result of fintechs offering mobile money accounts. 

Market complexities

Before rushing into a new market, fintech firms need to assess what problem they are solving, how they will differentiate themselves from incumbents, and ask themselves whether they have carried out sufficient analysis of their new market. If these steps are taken, however, fintechs have the potential to smash the monopoly that legacy banks have held on the financial market for too long.

Entering the financial services sector may have its challenges, but they are worth overcoming. With Open Banking principles and regulations like PSD2 gathering momentum around the world, it is easier to enter the market than ever before and the potential rewards are greater too - both for fintechs and their customers.

At PaymentGenes, we understand the myriad challenges around entering the financial services sector. We assist our clients with finding answers to fundamental questions while planning their entry to new markets.

Our services include market research and key vertical mapping, identifying commercial opportunities and partnerships, and designing your market entry strategy. We can help with vendor selection, staffing requirements, and compliance issues. 

We support our clients on a global scale. So whether you’re looking to take on the banks in your home market or further afield, we can propose a strategy that lets you enter the market with confidence.  

Learn how PaymentGenes Consultancy can assist you in overcoming the entry barriers!

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