The Global VC

Fintech Investment is Exploding — 5 Ways Governments & Ecosystem Builders Can Help

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with Sheel Mohnot

Investment in fintech companies is up 8X in the past 5 years, with over 200 financings for a combined $4.9 billion in 1Q2016 alone.  

“Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.”

Jamie Dimon, Chairman and CEO of JPMorgan Chase, pointed out: “Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. They are very good at reducing the ‘pain points’.”

Quarterly financing to VC-backed fintech companies has been growing immensely:

Financing Trends

But investment is not flowing freely everywhere.  

For example, in 1Q2016, Chinese fintech companies received $2.4 billion in funding (albeit primarily from two mega-deals), while the rest of Asia received only $0.2 billion.  

Meanwhile in Europe, deal count increased but the amount of capital invested did not.  Even when the investment flows, the performance often does not.



After investing in more than 130 fintech startups in 15 countries and providing ecosystem development advisory in markets around the world, we’ve identified three core challenges that most ecosystems face with fintech.

Fintech’s 3 Ecosystem Challenges

1. Regulatory regimes are often ill-suited for fintech.  

Regulations in the finance sector are often unclear or highly complex, and regulatory processes and agencies may be slow.

For example, in the U.S., there are 48 different rules (state by state) around what constitutes a money transmitter business. Many states require a surety bond that varies by state and can cost over $1 million. This alone prevents many fintech companies from getting off the ground.

2. Traditional financial institutions may hold down fintech startups, intentionally or unintentionally.  

Not long ago in the U.S., many banks did not even entertain meetings with or extend invitations to fintech startup founders.

When some banks did begin engaging with fintech startups, it was with the idea of gaining an edge over competing banks by co-opting and closing off the startup — which could in turn prevent the startup from achieving its potential.

An analogous hypothetical would be forcing Visa to be exclusive to certain issuers and merchants, rather than allowing ubiquity.

3. Customer preferences may not be ready for certain fintech solutions.  

Customer acquisition is very difficult in fintech.

It’s relatively easy to build a big invite list, but it’s very hard to get people to actually change financial institutions. We (the post authors) personally still bank with the banks where we got our first accounts more than a decade ago. Insurance, Loans, and Mortgage are the 3 most expensive word groupings to acquire users for on Google.  

Banks in the US spend over $500 to acquire a single user, and over time many startups will get there as well. Unlike some other industries with a higher viral coefficient, in fintech you often spend more to acquire the millionth user than you did to acquire the thousandth.

Banks in the US spend over $500 to acquire a single user, and over time many startups will get there as well


These challenges can’t be fixed overnight, but that doesn’t mean there’s nothing that can be done.

5 Ways Goverments Can Help


1. Create a “regulatory sandbox” that provides startups the opportunity to test new ideas without immediate threat of regulation.  

Regulating early-stage startups — before they have found product-market fit and achieved any meaningful scale — seems generally unnecessary from either a systemic risk control or consumer protection perspective while stifling innovation before it starts. Exempting startups from certain regulations in the early-stage can enable innovation and experimentation.  

The UK’s Financial Conduct Authority (FCA) has done this already, and the Australian Securities & Investments Commission (ASIC) is looking at doing something similar.

2. Offer fast and transparent regulatory review of potential new fintech products or services.  

Once startups emerge from the earliest stages they ought to be compliant.

Reducing the regulatory review process from years to months or from months to weeks would substantially reduce legal expenses and could even mean the difference between life and death for a startup.

3. Create a support system or kit to help fintech startups meet regulatory requirements

Even founding teams with finance and legal experience can find industry regulations to be a challenging maze. Developing and sharing resources could reduce friction in the industry and ensure early-stage compliance.  

Accelerators specializing in fintech are one effective way. For example, startups in 500’s fintech accelerator track get a nontrivial amount of support to sort out regulatory compliance. In the UK, the FCA established an innovation hub with staff available to guide any startup through financial regulation.

4. Roll out consumer awareness initiatives to increase demand.

PSA campaigns to improve financial literacy can help clarify the potential value of switching to new fintech products & services.  

Campaigns to raise basic awareness of existing protections can help overcome risk-related hurdles to adoption. The effectiveness of startups running such campaigns is likely low, whereas the cost can be quite high. This is a clear market failure that governments can rectify.

5. Encourage traditional financial institutions to invest in or partner with fintech startups — preferably non-exclusively.  

Some banks and some fintech startups have already indeed realized that partnering can be better than competing, so we’re pleased to see that this is happening on an ad hoc basis.  

It would be even better though to establish formal processes and even alliances.  JPMorgan is moving in this direction with their upcoming announcement of a startup residency program.


Ultimately, the selection of ideas and details of implementation depend on specific market context. Moreover, the efforts need to be part of a broader ecosystem of investment and other support.

If you’re interested to learn more or do more, please contact us:

– For fintech investment, Sheel at

– For ecosystem development and corporate innovation advisory, 500 managing partner Bedy Yang at


About the authors:

Sheel is a partner with 500 Startups and head of the recently-announced 500 FinTech fund.  His prior startup experience includes 2 successful fintech exits, a payments company and a high-stakes auction company.  He also created and hosts a podcast called The Pitch, which has >10,000 listeners.

Eddie is a venture partner with 500 Startups.  He is a head of the recently-announced 500 Startups Vietnam fund and is supporting development of 500’s corporate innovation and ecosystem development advisory offerings.  He has invested in fintech startups and provided advice on promoting fintech investment in Vietnam.

500 Global Team

500 Global Team