Founder Shield 101: Insurance for Fintech Companies.
As with any disruptive industry, there are several inherent risks that fintech startups face. Here’s a review of those risks and how to mitigate them with insurance for fintech companies.
1. Financial Loss
This risk should be abundantly evident to anyone operating in this space. When you create a product that helps people make, manage, spend, or send money, there’s always a risk that a user suffers a financial loss when things go awry (technically or operationally). The allegations might not be warranted and the error might not even be your fault, but you’re still going to have to pay the legal fees to deal with it.
Errors and Omissions Insurance (“E&O”) protects the company from claims and losses related to a “glitch” in the companies product or service. This glitch could be an actual technical glitch (a bug in the platform) or a glitch in the companies operations such as making poor investment advice or not living up to contractual obligations.
E&O is extremely important for fintech companies. Most fintech products aim to create a financial gain for users, so the threat of a claim for monetary damages is very real.
2. Data Breach
Whether originating loans like Lending Club or processing payments like Stripe, chances are your fintech startups captures a ton of data. Most of this data is sensitive and confidential, or “personally identifiable information” (“PII”): social security numbers, credit card numbers, bank routing and account numbers, and more. Believe it or not, a simple name and email address counts as PII in some states.
Cyber liability insurance protects companies in data breach situations. The right policy will pay for much more than the legal fees from resulting lawsuits. Forensic analysis, PCI fines, data restoration, regulatory proceedings, business interruption can all be covered as well. For a fintech company facing a data breach, this could be a huge lifeline.
3. Regulatory & Shareholder Actions
In contrast to their counterparts in the venture-backed SaaS sector, fintech startups face a substantial regulatory risk factor. The landscape is rife with a myriad of securities and consumer protection regulations, vigilantly enforced by entities such as FINRA and the SEC, among others. As fintech enterprises secure increasingly substantial rounds of institutional funding, they also find themselves grappling with progressively more burdensome shareholder obligations. This underscores the growing importance of insurance for SaaS companies operating in the fintech space.
Directors and Officers (“D&O”) insurance aims to protect the personal assets of directors and officers as they perform the duties of their managerial roles. The claims can come in 3 flavors: non-indemnifiable claims naming directors/officers, indemnifiable claims naming directors/officers, and regulatory agencies aimed directly at directors/officers. All 3 of these situations are covered by a good D&O insurance policy. In a heavily regulated area such as the fintech space, a solid D&O policy is imperative.
While there are other insurance products that can serve the space as well, these 3 policies are a great backbone on which fintech startups can mitigate a ton of operational risk. Reach out to us to talk in more detail about insurance for fintech companies or get started with quoting coverage for your fintech company here.