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.

Protect Yourself and Your Organization

What Insurance do Fintech companies need?

Cyber Insurance

What it covers:
This protects your organization from lawsuits, fines and penalties arising out of a hacking attack or data breach. It can also reimburse the company for its direct expenses such as breach notification costs, credit monitoring, data restoration and forensic analysis.

Why you need it?:
If you collect any sort of personal or organizational information, have a “login” feature on your site, integrate with another organization’s systems in any way, have employees who could fall for a phishing scam, generate online content such as blog posts or even simply rely heavily on email communications, you need cyber liability insurance. Fintech companies who regularly process transactions are highly visible targets for hackers and, as such, should be protected.

Intellectual Property Insurance

What it covers:
Protects the company and its intellectual property. Policies can work two ways: 1. Defense policies provide legal defense costs if you are sued for an IP infringement 2. Abatement policies help cover the cost of enforcing your own IP rights

Why you need it?:
IP litigation is common and expensive. Companies in innovative, disruptive and/or competitive spaces may face suits from both competitors and patent trolls. For the latter, just having this policy in-force can act as a deterrent. In the case of competitors who may have a more valid claim, the policy provides much needed capital so that the company’s balance sheet doesn’t have to take the hit. (Not to mention the benefit of partnering with an experienced claims team who can guide you through the process).

Directors & Officers Insurance

What it covers:
Protects the company and key individuals from liability related to the management of the organization. Companies that indemnify their executives against certain covered claims can turn to their D&O policy for reimbursement. In addition, if the organization itself is named in a suit, the policy would defend the entity.

Why you need it?:
Ensures the company and its leadership is protected from legal liability related to allegations of breach of fiduciary duty and other management-related claims. It provides the capital required to absorb certain legal costs without mortgaging the future of the entire organization.

Professional Liability Insurance (E&O)

What it covers:
Also referred to as “Errors & Omissions ” or “malpractice” insurance. It covers the Fintech companies if an act, error, or omission committed in the course of the company’s performance of professional services is alleged to have caused a financial loss for a third party.

Why you need it?:
Complex litigation expensive and there’s a lot that can go wrong for financial technology companies in particular. The policy responds to the threat of professional service disputes by paying legal fees and judgments or settlements that result from a lawsuit for an alleged failure in the provision of professional services.

Workers Compensation & Employers Liability

What it covers:
Provides a legally required coverage protecting employees if they are physically injured or get sick while on the job. Legal requirements vary state-by-state so be sure to research the laws in each state where you have employees located.

Why you need it?:
Fines could be imposed on any company that doesn’t comply with their state’s workers comp laws. Employers liability coverage also provides valuable legal defense costs if a lawsuit develops in connection with the injury or illness outside of what standard Workers Compensation covers.

Property Insurance

What it covers:
Building coverage protects properties that are owned, while business personal property coverage reimburses for covered damage to the contents of a building. Lost income and extra expenses caused by a covered loss can also be addressed by business interruption coverage.

Why you need it?:
Any company with a physical presence runs the risk of their physical property being damaged or destroyed. If you hold large amounts of inventory or own equipment you’ll often have a lot at stake. On top of that, renting temporary office space after a fire is a surprise cost that no business needs to be caught off guard by.

Employment Practices Liability Insurance

What it covers:
Protects the organization and its management by paying the costs of defending against certain suits from employees or investigations from government agencies. Common claims include allegations of harassment, discrimination, retaliation, and wrongful termination.

Why you need it?:
If you or the organization itself is named in such a claim, the coverage would defend you and pay the judgment or settlement against you. Keep in mind how easy it is for an employee to start an action that requires a legal defense.

General Liability Insurance

What it covers:
Covers the organization from some of the fundamental risks that come with running an Ecommerce organization, such as ‘slip and fall’ claims, damage to a third party’s property, products liability claims, damage to rented space, and personal or advertising injury claims.

Why you need it?:
It forms the foundation of any risk management program. On top of protecting the company from legal liability caused by bodily injury or property damage, this coverage is usually required in contracts like office leases and vendor agreements.

Crime Insurance

What it covers:
Protects the company from loss caused by certain illegal activities. Unlike many other commercial insurance policies, it has nothing to do with defending against lawsuits from third parties. This policy instead reimburses the company itself for losses of money, securities or other tangible property that it directly experiences.

Why you need it?:
Most businesses are exposed to the risk of criminal activity. This insurance protects your company from crimes committed within the company itself as well crimes committed by people or other factors outside of your company. Common claims include:

  • Employees stealing money from the company or clients.
  • Inadvertently accepting stolen credit cards, counterfeit credit card numbers or payments from unauthorized users
  • Non-employees stealing from the company’s office or from the premises of the company’s bank.
  • Robbery of valuables while in transit under the care of a messenger or armored car.
  • Computer and wire transfer fraud.

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