Fintech market: a funding crunch, AI and soaring future growth

The fintech insurance market is growing. Martin McCarron, director of Financial Institutions and Management Liability at Markel International explains how underwriters are managing its evolving exposures.

Fintech is a flourishing sector that has come a long way from its disrupter beginnings—think PayPal—in the 1990s. Activity increased after the Global Financial Crisis and now optimistic CEOs in the sector suggest it could grow to six times its current size by 2030.

The support of insurance will be crucial if it is to reach this potential, says Martin McCarron, director of Financial Institutions and Management Liability at Markel International.

Following the 2008 Financial Crisis, people wanted alternatives to the banks, he says. “That’s where fintech came into its own, offering efficiencies, improved pricing, and availability to customers.

“What we have now is a global disrupter that plays a very important part in the financial services industry, with more expansion to come.”

Such potential does not come without an economic reality check, however. Current growth hurdles include recessionary impacts, high inflation and rising interest rates, which for fintechs manifest as a hit on available funding.

The funding crunch

Entrepreneurs need a lot of money to develop and establish an idea. They may generate revenue, but some will remain unprofitable for a number of years, McCarron says.

“Having funding in place is absolutely essential to getting to the point where an operation turns a profit. The difficulty at the moment is a funding crunch that is happening across all sectors.

“Fintech has a particular need for this funding because when it starts to dry up it creates problems.”

Figures from Innovate Finance, the independent industry body for UK fintech, show this is already happening. It estimates that global venture capital investment in fintech dropped to $92 billion in 2022 from $130 billion in 2021. In the UK, the second largest fintech market after the US in terms of investment, funding was £12.5 billion ($16.2 billion) in 2022 down from £13.5 billion in 2021.

“It’s a pretty safe bet that the trend in reduced funding is going to continue into 2024, which means there are going to be issues of raising the capital to carry on the business the way the fintech company wants to,” McCarron says.

This investor pressure will restrict the fintechs’ ability to innovate and push the broad range of services and products.

Reduced funding means more financial insecurity. This will drive mergers and acquisitions across fintech, with some of the stronger, more established, players acquiring smaller fintechs, he says. Traditional financial institutions may also acquire smaller fintechs to access innovative technology.

Reduced funding also raises the potential for more insolvencies, which is a concern for insurers.

With such a range of challenges, McCarron says insurers need to make sure that they fully understand the funding plan a fintech has in place.

“We would look at the controls and procedures, and personnel. If there is going to be a reduction in staff within a fintech, we need to make sure that the key functions those staff work on are going to be maintained.”

Regulators will be keen on that given the risk of issues such as money-laundering, he explains.

Deeper understanding

To manage these emerging exposures underwriters are evolving their approach too.

McCarron says the key thing for underwriters is to get a real understanding that goes beyond top level insight.

“When we’re looking at a specific fintech account, we need to understand exactly how that company is dealing with the funding crisis, product innovation, staffing and potential criminal activity. We need to make sure we are comfortable with that from an underwriting point of view and be able to establish the risk there.

“We need to understand the fintech funding agreements that are in place, not just now, but in the next 12 to 24 months. This is vital for us from the insolvency point of view,” he explains.

The potential of systemic event risks has moved up the agenda in recent years. Within the fintech industry, there are key service providers that work with a number of fintechs which, if attacked, could cause a systemic event, he explains.

“We need to look at our portfolio of risks, understand where those potential systemic issues are, and address and manage them. We need to know what potential aggregation might occur. If a particular key service provider were hacked and the service went down, what would the knock-on effects be?”

Growth trends

Looking ahead at emerging risks in the next 12 months, McCarron says he’ll be monitoring insolvency, the funding crunch, and criminal activity.

But, he says, among fintech CEOs there is longer-term optimism that once we get through this stage the growth potential is huge.

“These CEOs are predicting fintech will be six times what it is now by 2030,” he says.

Positive trends and developments such as the expansion of embedded finance support this view—for example, the buy-now-pay-later shopping service Klarna. The potential of such services to expand fintech distribution is “absolutely huge,” he says.

Another boost is expected to come from artificial intelligence (AI). “We’ve already seen robo advice—digital investment platforms—in the fintech space, but you can see that there is potential beyond that.

“Think about all the financial transactions you’re doing on a regular basis—AI could take a lot of that responsibility away from you,” he adds.

McCarron does not skirt over the risks that come with AI, particularly around social engineering or phishing attacks. “AI could play a significant role in expanding that as a risk and a threat,” he says.

But generally speaking, the fintech industry is constantly evolving and innovating, to improve, to bring more efficiencies, more services, and lower prices across the financial industry.

“As we’ve already seen, this is going to continue. It will drag the rest of the traditional financial services industry along with it. Fintech will always be at the forefront in developing a lot of these ideas and improving the industry.”

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