Overview of the Fintech industry

Financial Technology (Fintech) is an industry focused on the application of modern and evolving technology to traditional financial services. If your company process credit card transactions, enables crowdfunding or transferred funds to another bank account through a mobile banking app, you can be considered as a Fintech company. Or maybe you’re even involved in blockchain and digital wallets, some of the most exciting Fintech exciting advances in decade. Front-end or back-end, it doesn’t matter. The goal of Fintech is to move the entire industry forward.

What are we not talking about? Banks, investment vehicles like private equity or hedge funds, insurance companies or securities broker-dealers. While some within these spaces exhibit every quality of a “Fintech” company, these are all considered “financial institutions” in the insurance world and, as such, present unique coverage concerns.

Biggest players in Fintech as of 2017 (Forbes)

Stripe with a valuation of $9.2 billion
Credit Karma with a valuation of $3.5 billion
Apttus with a valuation of $1.9 billion
AvidXchange with a valuation of $1.4 billion

Some of the biggest risks Fintech companies face

Data Breaches

When sensitive information is data is copied, transmitted, viewed, stolen or used by an individual unauthorized to do so. The Equifax Breach in 2017 that leaked 145.5m customers accounts (including social security numbers) was due to a server security patch that was not implemented.

System Failures

By nature Fintech companies are heavily reliant on back end systems and third party services providers for their frameworks, servers and data services. Any outages, downtimes or failures can result in significant losses for customers and the company. In many cases litigation can follow as a result.

Regulatory Non-Compliance

43% of Fintech sector leaders think that regulations have the potential to slow the growth of the industry. Navigating the complexity of regulatory requirements is a major risk for any Fintech company. Often operations do not fit easily into preexisting regulatory regimes, especially if you want to scale internationally.

Why is Insurance for Fintech Organizations Important?

Fintech companies are often required to protect themselves from other companies in their space. Competition is fierce in this industry, thanks in no small part to the combination of a crowd of new entrants at the bottom and a stable of defensive, M&A-hungry behemoths at the top. This creates a risky environment both in terms of customer acquisition/retention as well as the threat of unfair trade practice or IP litigation from competitors. Policies such as directors & officers, errors & omissions, and IP insurance can address many of these concerns.

Since the main function of these companies is to provide a professional service, few policies are more important than professional liability (errors & omissions) insurance. If a customer or affiliate claims they lost money as a result of your mistake, a lawsuit can soon follow. We’re all human and errors happen, but with Fintech, those errors can be both costly and easily traceable. An E&O policy is a common-sense protective measure to help these companies manage risk.

Cyber Security

One of the most critical threats is the industry’s exposure to hacks, data breaches and other cyber attacks. The data Fintech companies handle is highly sensitive, meaning the potential damage caused by a data breach is substantially higher than in other industries. One small leak and it can wreak havoc on a balance sheet. (Remember that Equifax data breach?)

Experian estimates that a stolen social security number — one of our most closely guarded forms of personally identifiable information — goes for about $1 on the dark web. Credit card info (especially when it includes the CVV and other related data) and payment processing login info can go for as much as $200 per record.

Outlier Fintech Risks

There are the outlier challenges for Fintech companies that most industries never have to deal with. Allegations that Paypal, Stripe and Square discriminated against gun store owners would fit in this category. As would FTC actions against payment processors who allegedly turned a blind eye to ongoing frauds. When you’re dealing with money, there’s no shortage of things that could potentially go wrong.

Standard Business Risks

There are the risks every company has to deal with. Most states require employers to purchase workers compensation insurance for their employees. And speaking of employees, the company can be sued by its workers for employment practices violations. Stakeholders in the company can file suits against management if they feel they haven’t upheld their fiduciary duty. Competitors can take you to court with allegations of unfair trade practices, intellectual property infringement or defamation.

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