Tech Startups in Commercial Banking and Insurance, Part 1: Problems and Challenges


The evolution of technology has reshaped many aspects of both the financial services and the insurance industries, and there is no indication that this growth will slow down any time soon. Whether a startup calls itself a “fintech” or an “insuretech” firm, its market is evolving. Recent events have shown that the “disruptors” can also be the “disrupted” through broad market forces and challenges. Much of our fintech vendor coverage on the Commercial Banking & Payments practice is from the perspective of banks and practitioners, but recent events made me wonder how fintech startups view some of the broader market forces shaping their industries.

Aite-Novarica Group advisors Stephanie Dalwin and Gilles Ubaghs have no shortage of experience working with technology startups in their respective verticals. To get a better understanding, I asked them about market transformations in their areas of coverage. Part one of this three-part series considers some of the problems and challenges technology startups in commercial banking and insurance are experiencing and suggests various strategies they might consider employing to succeed in an increasingly difficult environment.

What specifically do we mean when talking about “fintechs” in your area of coverage?

Stephanie Dalwin: On my side of the fence, I’m referencing insuretech, i.e., any companies bringing new technologies or business models to the insurance industry. Some consider insuretech to be a subset of fintech, and there certainly is a lot of overlap in these two spaces. Yet insuretech is really a stand-alone coverage area, given the unique complexity and requirements of insurance.

I also want to note that, as my colleague Jeff Goldberg points out, “insuretech” is not synonymous with “disruption.” Many thought leaders position insuretech as antagonistic or disruptive to the industry. However, startups bring technical expertise that insurers might not have access to in house. Even startups entering the industry as competitors (e.g., startup carriers) may actually end up being partners or acquisition targets for established insurers.

Gilles Ubaghs: Ask even the biggest multi-billion-dollar financial services vendor if they’re a fintech firm and all of them will say absolutely. Yet when most banks or institutions talk about fintech organizations, they mean something quite specific that’s characterized more by a style than any specific size or company age.

Most of the market thinks of fintech companies as being young, innovative, and disruptive—digitally forward with an eye to improving (and often disintermediating) existing processes, capabilities, and status quo players. We actually don’t limit usage of the term “fintech” to just startups, as there are quite a few midsize, long-established vendors out there doing bleeding-edge work that has real potential to shake up commercial banking and financial services.

By its disruptive nature, the fintech category tends to preclude large incumbents in the market. I think a key aspect of what constitutes fintech is what are these alternatives to legacy processes and who are these providers. Fintech is like art—it’s hard to pin down one definition, but most people recognize it when they see it.

How have market dynamics changed for tech vendors over the past year?            

SD: Insuretech unfortunately has not been spared from economic uncertainty. We’ve seen a lot of layoffs. We saw a dip in investments at the end of 2022; it remains to be seen what 2023 has in store. Public exits have had disappointing results. The pressure to attract tech talent may ironically be alleviated by some of the tech layoffs; a large pool of talent is looking for a place to land, and it’s a ripe time to be part of innovation in insurance.

There have also been bright spots: We’ve seen a maturing market with larger startup players acquiring others. We’ve also seen greater involvement of insurers, whether through venture investing, participating in accelerators, or acquiring solutions of their own.

GU: The fintech market, like the broader tech market, is undoubtedly going through a rough patch. But many of these challenges are driven more by the supply side than the demand side. The market has been booming since the Great Recession and an ultra-low interest rate environment became the norm, and the past year has seemingly been bad headline after bad headline—from the crypto crash to Silicon Valley Bank (SVB) to large-scale layoffs at some of the biggest names in fintech.

While the funding environment is tight at the moment, the biggest shift now is more about attitude. Visionary tech gurus are out, and fiduciary due diligence is very much in, so we are seeing increased focus on good governance, revenue income, and the bottom line. The irony is that banks have never been so open to fintech partnerships. The frameworks are finally becoming more widespread, and the need for new capabilities hasn’t changed. Those fintech companies (and their partners) who can weather the storm will do very well longer term.

What are some common obstacles that startups face in breaking into financial services? 

SD: Simply put: Insurance is complicated. Startups entering the space face a uniquely difficult challenge. There are 55 regulatory jurisdictions, and legacy back-end systems and processes are pervasive. And, of course, insurance has a language of its own; anyone new to the industry has surely had to get up to speed on terms like “reinsurance” and “subrogation.”

The industry also poses a difficult cultural obstacle for new entrants. Insurance by its nature is the business of risk avoidance. Unfortunately, anything “new” may be seen as a risk, including startups and, more generally, innovation. Many insurers have embraced insuretech, but startups still need to prepare to demonstrate their understanding of the industry, the value of their solution, and their ability to weather a potentially lengthy onboarding process.

GU: Everything Stephanie says above is bang on when thinking about breaking into financial services. “Move fast and break things” just doesn’t work in such a heavily regulated environment, and with good reason (cough, FTX, cough). For fintech companies looking to partner with banks, compliance, security, regulatory oversight, data sharing, and privacy are all top of mind for financial institutions and not going away anytime soon. A lot of fintech firms are now full of ex-bankers who know the market well, which helps enormously—and fintech companies that can get in front of the dry technical and regulatory hurdles have a big advantage.

I’d also add integrating into legacy bank platforms and processes. This can be a real hurdle for a lot of financial institutions working with creaky infrastructure. For those going directly to end users, including the small and midsize business space, the biggest challenge aside from sheer visibility is very much the trust factor in gaining at least the appearance of being a stable and secure financial services partner. In a post-FTX and post-SVB world, that will likely become harder. I suspect we’ll see a lot more up-front discussion of partners, regulatory protections, and security consideration in marketing messages.

What challenges do startups face in boosting their industry presence and getting their marketing message in front of a wider audience?  

SD: Insurer CIOs and heads of business units are regularly flooded with sales messages. The big challenge is breaking through the noise without sounding “salesy” (in fairness, this is probably true in any industry). Industry tech conferences are a great way to get in front of insurers. Thought leadership can demonstrate a solution provider’s understanding of and value to the industry.

Another challenge is simply understanding the industry and its players. Many startups are industry outsiders (increasingly, more insurance veterans are founding startups, though gaining traction is a perennial issue). Accelerators and incubators are increasingly partnering with insurers to help guide startups and expose them to a wide swath of the industry. Insurers can also help startups navigate their own organizations via a dedicated innovation champion or team.

GU: The volume of noise in the fintech market is difficult to keep up with for specialists focusing on this space, let alone for decision-makers within financial institutions who have day-to-day operational issues to contend with. A critical starting point is just repetition and visibility: Attend the banking conferences, produce webinars, give interviews, and try to get forward in the trade press. Financial institutions in particular are increasingly keen to work with fintech firms, but no one wants to be first. If you want to gain financial institutions’ attention, tell them who else you are working with. Show people the use cases and the case studies whenever you can. Work with the core and digital banking providers to get involved in their fintech marketplaces. Paths to partnership are growing, and fintechs should pursue all of them. A lot of fintech organizations tend to be focused on the more glamorous tech side of the startup world, when they really need to focus more on the everyday banking world.

What Comes Next?

It remains to be seen what 2023 has in store for fintech and insuretech startups, but this year will certainly present new challenges: potential economic crises, a challenging job market, and funding uncertainty, to name a few. Even so, the importance of startups remains clear: They bring vital new technologies and capabilities that are not always available in-house for financial institutions. Our next blog post in this series will discuss ways in which startups can contend with the ever-changing market dynamics on the horizon while demonstrating value to banks and insurers.

In the meantime, be sure to check out some of our recent research in these spaces to get a sense of trends and the current landscapes. Our latest Commercial Banking Fintech Spotlight highlights data and analytics startups bringing new capabilities to the space. Our recent report Insuretech for Insurers: A Guide to 300 Startups provides an overview of market dynamics and insuretech solution providers in North America.

As I mentioned above, our team has a wide breadth of experience working with fintech and insuretech startups. Feel free to reach out to Gilles at [email protected] or myself at [email protected] for any questions about our work with commercial banking fintech companies. Stephanie can be reached at [email protected] if you’re interested in learning more about how we help startup insurance carriers and vendors.