FinTech – Top 5 Insurance Risks
17 November 2020
Unlike the vast majority of business sectors in the wake of the Covid-19 pandemic, the online industry is booming, attracting billions in global investment. The UK FinTech sector attracted record investment of $4.9 billion in 2019, making us the second biggest FinTech market in the world when it comes to VC investment, surpassed only by the US.
These tech-led financial services firms 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.
Having worked with start-ups and growing tech businesses, we understand they have a unique set of risks unlike those usually faced by traditional firms. We work closely with CFC, one of the most ambitious and forward-thinking online insurance businesses of the dotcom boom, and can share with you the top five insurance challenges for FinTech businesses:
- Professional liability – 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.
- Regulatory environment – 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.
- Cyber event – 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 all businesses, but especially those in the FinTech sector.
- Technology failure – 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 organisations 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.
If you need advice or a review of your current insurance programme, contact Charlotte Perkins.