Fintech: emerging risks in a $4tr growth market

“The US fintech market is estimated at $4 trillion and that figure will just keep growing. It is here to stay—it’s not the fad that folks perhaps thought it was.” This was the view of Deb Chamian (pictured), director, Commercial Financial Institutions at Markel Specialty, as she spoke to Intelligent Insurer about growth in the fintech sector and how insurers can manage its emerging risks.

In recent years, the significance of fintech—technology in the financial sector—has grown, ushering in an increased recognition of the market’s emerging risks. From financial and system failures to losing customers as a result of poor service, the challenges for insurers covering fintech are myriad.

It is fintech’s ability to access data to support informed decision-making that has helped it make inroads into the asset management sector. Fintech’s use of technology to modify, enhance and automate financial services for businesses and consumers has been a game-changer.

One example of this is where fintech portfolio managers use optimisation models, based on artificial intelligence (AI), to build portfolios, says Chamian.

“The models consider various external factors such as risk tolerance, return objectives, and market conditions to generate portfolio allocations for their clients,” she explains.

Another example is the rise of fintech lending firms. These firms use data, which can include the timeliness and regularity of rent or utility payments, to determine a borrower’s credit-worthiness.

“The benefit here is that lenders can reach credit decisions more quickly than traditional banks, making the service more convenient for borrowers,” Chamian says.

“In addition to advisors and lenders, mobile banking, peer-to-peer payment services, automated portfolio managers and trading platforms are starting up everywhere.”

Startups as standard

As the sector grows, Markel is seeing a number of emerging risks affecting the middle-market fintech space.

Financial failure is a potentially ruinous example, according to Chamian, as many fintech firms are startups.

“If the business is not managed correctly, and does not grow as per the business plan it could fail. Then it would be subject to litigation from investors and clients.”

Another weighty risk for primarily tech-dependent firms is the potential for system failure.

“Unlike a traditional bricks and mortar entity where you walk in, meet someone and have your problem fixed, fintechs are technology companies, so there may not be as many workaround options if there’s a problem,” Chamian notes. “A system failure, without a good backup plan, could be an issue.”

Poor service is another risk with serious consequences. Customers that use fintech are looking for fast, accurate service and if that doesn’t occur they’ll move on, taking revenue with them, she says.

“Startups can sometimes be under a lot of pressure to grow profitably very quickly. And the business plan may focus on certain products rather than others, which could lead to customer dissatisfaction,” she adds.

On top of this, Chamian says, there could be compliance challenges if the customer base grows too quickly, because trying to scale the compliance function can be complex.

In addition, you can’t talk about tech company risk without acknowledging the threats from bad actors, including those using AI.

“Even without AI, there will always be people looking to steal,” she says. “We have seen an example of an employee who was stealing small amounts of money from their company. They left the firm and left the country, but because the firm did not change the passwords, they continued to steal. The due diligence process around these technology companies is huge.”

Cover for fintech risk

Because so many fintech firms are startups, they have real exposure to financial failure. To protect against the fallout from this, officers of the company will need to be protected from claims that they have mismanaged the firm, Chamian says. Directors and officers liability cover is the go-to here.

If the company experienced a system failure, resulting in poor service or financial loss, that would result in a potential errors and omissions (E&O) claim, so E&O cover is important to protect the financial and technical exposure of these entities, she explains.

E&O comes in useful with the issue of theft as well, which is a common risk for fintech firms handling payments, invoices and redemption requests.

At Markel, Chamian says, financial institution cover is geared to solving the insurance needs of this market.

“We have a financial services protection policy that has all the coverages mentioned on one policy form. We tailor the definition of professional services to meet the unique needs of the insured. We have the freeform ability to cover services that may not be part of our base form definition.”

These coverages are packaged on one policy form to avoid any gaps.

Markel is well-versed in the registered investment advisor (RIA) space and provides professional liability insurance to 5,000 RIAs.

“Many RIAs have a digital component to their operation, which is closely related to a fintech firm,” Chamian explains. “We had an investment advisor client who had a robo affiliate entity—we were able to meet the coverage needs for that technology exposure on one form.”

The vibrant fintech sector is now a big part of the financial services marketplace. It is still growing but with that comes more emerging risk. Fortunately, says Chamian, a holistic and tailored insurance approach can help the sector maintain its upward growth trajectory.