How has growth created risks for fintechs in 2022?

2021 was a transformative year for fintech. What felt like a corner of the technology industry a decade ago is now the largest funded category globally. The fintech industry received over $130b in capital representing 20% of all capital invested in 2021. And exits too were on the rise with a 3x increase in the number of companies going public vs 2020.

But with great growth comes greater risk, and some fintech companies have begun to feel vulnerable to its effects. But how exactly has this boom impacted these businesses? And what can be done about it?

Playing catchup

While the spectacularly swift rate of expansion in this industry is encouraging, it means fintech companies can struggle to standardise compliance processes, and quickly move beyond their operational capabilities.

Furthermore, fintech regulations are constantly evolving as authorities try to keep pace with technological advances, making it challenging for businesses to stay on top of these ever-changing requirements. This is further compounded in the case that fintechs expand internationally and need to consider additional jurisdictional regulations.

How is this affecting fintech risks?

"Digital finance has unlocked new synergies between financial and non-financial activities that potentially introduce systemic risk into the market for financial services," a joint report from the EU's banking, insurance and markets watchdogs said.

For instance, cloud computing, or banks and other financial firms using outsourced providers for services, is booming, the report said.

It is sometimes unclear how to categorise some digital financial services under existing rules, creating uncertainty over data privacy, anti-money laundering safeguards and how much capital they should be holding, the report said.

Is regulation the biggest risk to fintech?

Failure to adhere to regulations can have serious consequences. The financial burden could be significant, as shown by the German challenger bank N26. A €4.25 million fine was ordered by Germany’s market regulator regarding deficiencies in its reporting of suspicious activities “in the area of anti-money laundering.”

The solutions

There are a few things that fintech businesses can do to it continues to stay on top of the regulatory requirements and avoids the potentially ruinous financial cost of noncompliance.

Set up a comprehensive governance, risk and control framework

Fintechs can protect themselves from the business risks stated above through a well structured governance, risk and control framework, which makes sure that appropriate insurance is in place to cover any losses.

Risk management needs to be a priority of any business and should be embedded within the overall strategy. This can include defined committees with clear mandates and responsibilities, with progress reporting to the board.

Actively engage with regulators

Regulators face a continual learning curve as they work to keep pace with developing technology — just like banks, fintechs must keep updating themselves on risk management and compliance-related rules and regulations as they evolve.

Partner with an insurance broker who understands your risks and fintech regulations

As a fintech company becomes more established, it’s important to partner with an insurance broker that has the knowledge and expertise to service your evolving demands and needs. With a long-term view, a good fintech broker will ensure an appropriate insurer will be able to service the business activities of the roadmap.

One step ahead

While the UK fintech market is famed for providing market-leading balance when it comes to regulation and innovation, fintechs must focus on the unique exposures facing their industry as well as their individual business’ risk management capabilities to stay on the good side of the regulator.

For the large part, the above risks can be avoided. It’s therefore important for fintechs to take action and protect themselves through an insurance solution that is tailored to meet their demands and needs.

To find out more about your options or speak directly to a broker, have a look at Superscript’s specialised fintech insurance offering.

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