Top 5 risks for FinTech businesses
The FinTech industry is booming, disrupting the financial sector and attracting billions in investment globally, but these businesses also have a unique combination of risks that don’t fit the typical financial institution.
The FinTech industry is booming, disrupting the financial sector and attracting billions in investment globally. Over €2.7 billion was invested in European fintech in the first quarter of 2018 and in the same year US FinTechs raised $12.4 billion in funding. The UK also has over 1,600 FinTech firms which is estimated to have more than doubled by 2030.
These technology-led, financial services firms are increasing transparency and efficiency, reducing costs of services as well as providing the most vulnerable access to financial products. They provide consumers and businesses with innovative tools and products through which to manage and control their money, whether it be app-based banking, online lending, investment platforms, trading platforms or AI-led wealth management.
FinTech businesses have a unique combination of exposures that are not contemplated by traditional financial institutions products. We’ve rounded up the top five facing FinTech businesses today:
Negligent advice and failings in client services are common risks for any company providing financial services, especially FinTechs who offer new financial products through new distribution models. FinTechs can also have a reliance on third-party contractors, adding an extra liability risk due to third-party negligence.
New technology, new products and new distribution brings a wealth of opportunities, but also new regulatory exposures. FinTech companies will need to ensure they keep on top of the implementation of suitable and satisfactory risk management systems. As the FinTech market evolves, so will the regulatory environment, and a major risk for FinTechs will be keeping pace with the regulators’ latest updates. FinTechs will also have to consider differing regulations in multiple territories should they operate internationally.
Theft of funds
The majority of FinTechs deal with a high frequency of funds movement. High volumes of payments, transactions and customer accounts, as well as the fast growth and implementation of new technology, leaves them vulnerable to theft. These thefts could be by an employee or external party.
Given the nature of their operations, FinTech companies are prime targets for cyber criminals. Network security, data breaches or even a denial-of-service attack - as well as damage and rectification costs following these incidents - should be a major concern for FinTech companies.
Innovative technology is essential for FinTech companies - it is how they have disrupted traditional financial services - but this heavy reliance on technology infrastructure means firms can be vulnerable. Technology failure can mean customers are unable to access services resulting in lost income or lost customers.
Like many emerging businesses at the intersection of technology and industry, FinTechs aren’t likely to find all of their exposures covered in a single policy. Traditional financial institutions policies don’t cover liability arising from the failure of technology, sub-contractor liability or IP infringement, while technology policies aren’t likely to cover exposures from the provision of financial services products or advice and are unlikely to offer the D&O cover that most financial organizations would expect.
FinTech businesses will need a dedicated policy to manage their evolving risks. A FinTech policy should offer coverage for both liability arising from financial services and technology services, as well as management liability, theft of funds and cyber coverage.
Coverage can be found spread across multiple policies but a single, comprehensive policy is more cost efficient and will prevent gaps in coverage and complications in the event of a claim.
For more information about fintech insurance check out our financial institutions product page or get in touch!