With the emergence of new and disruptive technologies, it's no surprise that fintech legal risks abound for this innovative industry. Let's break down these threats...
Fintech Industry Overview
As mentioned, fintech is an industry focused on the application of modern and evolving technology to traditional and financial products and services.
It involves companies that process credit card transactions, facilitate crowdfunding, or transfer money between bank accounts via mobile banking applications. Blockchain technology and digital wallets are also considered fintech.
Fintech does not include 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.
Fintech is incredibly vulnerable to loss and claims due to cybersecurity risks, regulatory non-compliance, operational risks, fraud risks, credit and liquidity risks, reputational risks, and competition and market risks.
These vulnerabilities arise from the digital nature of fintech services, the highly regulated environment, and the competitive landscape of the insurance sector. To mitigate these risks, fintech companies need to invest in robust security measures, ensure regulatory compliance, and implement effective risk management strategies.
Why is Insurance for Fintech
Fintech companies need to protect themselves from other companies in their space. Competition is fierce in this industry, thanks to the combination of new entrants at the bottom and M&A-hungry behemoths at the top. This combo creates a risky environment regarding customer acquisition and retention, as well as the threat of unfair trade practices or IP litigation from competitors. Policies such as directors & officers (D&O), errors & omissions (E&O), and IP insurance, can address many of these concerns.
Fintech firms handle sensitive information. They transfer financial and personal information into cyberspace, which makes the firm vulnerable to cyberattacks. Data leakage happens when any individual copies, sees, steals, or uses proprietary information to access the information of another entity. The company would then have to stop the release of the company’s data in exchange for unauthorized payments. The potential for damage from data breaches in the Fintech sector is exponential in comparison to the typical financial industry.
By nature, fintech companies are heavily reliant on back-end systems and third-party service providers for their frameworks, servers, and data services. Any outages, technology errors, downtimes, or failures can result in significant losses for customers and the company. In many cases, litigation can follow as a result.
Roughly 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 don’t fit flawlessly into pre-existing regulatory regimes, especially with goals of scaling internationally.
The fintech industry is fueled by software and technology, making intellectual property (IP) something to defend. Consider copyrights and trademarks as prime examples of how this industry protects its IP. Fintech companies must also think about contractual measures to ensure their innovation is protected.
Coverage & Policies
These coverages form the foundation of any risk management program for fintech companies:
Fintech companies gather, handle, and store mass amounts of personal data. Cyber insurance protects fintech companies from third-party lawsuits relating to electronic activities (i.e., phishing scams, ransomware, data breaches, etc.). Plus, it offers many recovery benefits, supporting data restoration and reimbursement for income lost and payroll spent. Unfortunately, cyberattacks have increased significantly since the global pandemic, forcing fintech companies to improve cybersecurity measures and practice more due diligence regarding data protection.
Although fintech companies function mainly online, rarely having brick-and-mortar locations aside from headquarters, general liability risks exist. As a result, general liability provides a broad range of protection against some of the most fundamental risks companies face. Many peg this policy as “all-risk” coverage, benefitting fintech companies regardless of physical location. After all, general liability covers personal or property damage and bodily injury occurring on the business premises.
Employers are typically responsible for their medical costs and lost wages when employees sustain work-related injuries. Furthermore, most states require this particular coverage to protect employees. Work-related injuries and illness expenses can occur even in the world of technology. This policy covers these expenses, protecting employees while keeping fintech companies running smoothly.
Any company with employees faces the risks of employment-related allegations, such as discrimination, wrongful termination, breach of contract, etc. Naturally, fintech companies aren’t exempt from these types of lawsuits. The reality is that many fintech employees work remotely, sometimes blurring the lines of liability. Fortunately, employment practices (EPL) liability insurance responds to claims alleging employers have violated their workers’ employment rights.
These policies are essential for or can be tailored to the needs of companies operating in the fintech space:
Shareholders, competitors, investors, etc., can sue a fintech company’s directors and officers, alleging mismanagement or breach of fiduciary duty, to name a couple of reasons. These claims put a leader’s personal assets at stake. Directors and officers (D&O) insurance protects these assets from lawsuits alleging leaders of wrongful acts managing the business. Additionally, investors typically require this coverage before doling out cash or taking a seat on the Board during a funding round.
This blended form was created as one of the most fintech-specific coverages because one “wrongful act” can lead to a claim on both the E&O and D&O sides. For example, if a customer sues for an oversight that caused them a loss (E&O), that same oversight can lead to a regulator potentially bringing the action (D&O). With blended coverage, fintech companies can avoid gaps or gray areas in coverage and the possibility of two insurers pointing fingers and arguing about who should pick up the claim.
People often think of brick-and-mortar operations when on the subject of property protection. Still, although fintech companies sometimes have little real estate, like office spaces in multiple locations, they frequently invest in top-notch equipment to achieve their digital goals. If company property is damaged or ruined in a fire or even a burglary, for example, property insurance responds. This policy reimburses fintech companies for direct property losses, supporting recovery and momentum.
Fintech Insurance Costs
Fintech insurance is a relatively new industry that was nonexistent before the late 1990s, so it has yet to have the history of other sectors. As a result, the cost of insurance for fintech companies varies based on several factors, such as coverage type, risk profile, geography, etc.
Keep in mind that varying levels of coverage and insurance rates exist, depending on your business. But the key cost components include:
- Premiums (regular payments).
- Deductibles (out-of-pocket expenses before coverage).
- Policy fees (issuance, administration, or cancellation charges).
These costs depend on your insurance type, coverage level, and provider. Additionally, coverage levels include basic, standard, and premium. Basic coverage offers minimum protection at a lower cost but may not cover all risks. Standard coverage provides more comprehensive protection with higher premiums. Premium coverage delivers the most extensive protection with tailored benefits, ensuring maximum financial security and peace of mind — but at a higher cost.
Fintech Frequently Asked
Yes, Founder Shield does work with fintech companies. We work with some of the leading US and Canadian financial technology companies to provide tailored insurance solutions that address the unique risks and challenges fintech businesses face. Our team of experienced professionals understands the intricacies of the fintech sector, helping us ensure that your company has the comprehensive protection it needs.
Insurance for a fintech company can be a unique set of coverage based on the risks associated with the industry. Given the digital nature of fintech businesses, it’s important to consider insurance coverages such as:
- Cyber Liability Insurance: With the handling of vast amounts of sensitive customer data, fintech companies are prime targets for cyber threats. Cyber insurance can help protect your company from losses related to data breaches, network damage, and cyber extortion.
- Professional Liability (Errors & Omissions) Insurance: This can protect your company if a client alleges that your services have caused them financial harm due to mistakes or omissions.
- Directors and Officers Insurance (D&O): D&O insurance covers the personal liability of directors and officers for actions related to their corporate roles. It can be very important for fintech startups, especially as they grow and scale.
- Technology Errors and Omissions Insurance: This is a specialized form of coverage designed to cover providers of technology services or products such as software companies, network providers, and digital agencies.
When seeking insurance for your fintech company, it’s important to work with an insurance provider who understands the unique risks and needs of the fintech industry. They can help you navigate the complex insurance landscape and ensure you have the right coverage for your specific business needs.
Fintech companies, while driving the forefront of financial innovation, face a variety of risks that are unique to their industry. Here are some of the major ones:
- Cybersecurity Risk: Fintech companies often handle sensitive data, including personal and financial information of customers. This makes them prime targets for cyber-attacks and data breaches. A breach can result in not only financial loss but also severe damage to the company’s reputation.
- Operational Risk: This encompasses risks related to day-to-day operations, including system failures, process failures, and human error. As many fintech companies rely heavily on complex technology for their operations, a system malfunction or breakdown can have serious consequences.
- Regulatory Risk: The fintech sector is highly regulated and often under increased scrutiny. Regulatory landscapes can vary across different regions and are subject to change, which can make compliance a complex issue. Failure to comply can result in heavy fines and reputational damage.
- Fraud Risk: This can include both external and internal fraudulent activity. With external fraud, this could involve identity theft or payment fraud. Internally, it could involve employees misusing company funds or data.
- Market Risk: As with any business, fintech companies face the risk that market conditions may change, possibly due to economic factors, political instability, or changes in consumer behavior.
- Reputational Risk: Trust is particularly important in the financial industry. Anything that damages a company’s reputation, like a data breach or regulatory violation, can result in lost business.
- Technology Risk: This pertains to the risk of adopting new and emerging technologies that may not perform as expected, or may become obsolete due to rapid technological advancements.
- Competition Risk: The fintech sector is known for its rapid growth and high level of competition. There is a risk that competitors, whether established financial institutions or other fintech startups, may offer superior or cheaper services.
- Liquidity Risk: For many fintech startups, securing consistent and sufficient funding can be a challenge. These companies often operate at a loss in their early stages and are therefore dependent on their ability to raise capital regularly.
Fintech Insurance Quotes
Finding fintech insurance coverage doesn’t have to be painful. We aim to make the purchasing experience as streamlined and intuitive as possible.
Use our custom-built digital platform to get quotes fast. We automate clerical tasks that plague traditional insurance brokerages, giving us more time to be responsive and alert to your company’s needs.
No two organizations are the same. Our team of coverage experts partners with your team to engineer your risk management strategy, together. We take the time to understand the intricacies of your company to get you the best possible coverage.
To do better, you need to know better. With changing political, technological, legal and economic landscapes, staying ahead of the curve is critical.
Our in-house team is tapped into the latest developments of your industry, proactively ensuring you’re covered.
Wil Hamory is a Vice President at Founder Shield. Wil’s aim is to match the pace of business of Founder Shield’s innovative clientele to provide tailored insurance solutions at scale. He has been involved in the mobility industry since its infancy and assisted many of Founder Shield’s On-Demand and FinTech clients meet legal requirements while positioning them to rapidly expand.
Why Choose Founder Shield?
Founder Shield is a leading insurance provider that specializes in offering comprehensive coverage for fintech companies, offering numerous benefits and advantages over traditional insurance providers. Here’s a breakdown of some of the key features and benefits that you’ll enjoy with us:
Founder Shield is focused on protecting rapidly evolving fintech startups. We ensure that our products are tailored to meet the unique needs of fintech businesses.
Founder Shield offers bespoke insurance policies that are designed specifically for each client’s needs, ensuring comprehensive coverage that addresses the unique risks associated with fintech operations.
With Founder Shield’s streamlined quoting process, you can receive a personalized quote for your fintech insurance quickly, allowing you to make informed decisions fast.
Founder Shield’s user-friendly digital platform makes it easy to manage your insurance policies, submit claims, and access important documents whenever you need them.
Founder Shield provides exceptional customer service, with dedicated account managers who are always available to assist you with any questions or concerns you may have about your insurance coverage.
Founder Shield is a preferred choice for fintech businesses because of our specialization in the industry. We offer flexible and customized insurance policies, speedy quoting process, and exceptional customer service with dedicated account managers.
Great service – proactive, responsive, go beyond what I have expected from previous providers. The team do a wonderful job
General Counsel • Urbanstems