Enhancing resilience: overcoming the challenges facing the future of fintechs
In a world where innovation, finance and technology intersect, the fintech industry is continuing to see strong growth. However, beneath the surface lie several challenges that could impact this growth trajectory, says Markel International’s Nick Rugg.
Over the past decade, the fintech industry has been pioneering solutions that are changing how we manage money, transact and invest. This fintech revolution is reshaping modern economics, with revenues projected to grow sixfold from $245bn to$1.5trn by 2030. However, amid this continued wave of innovation, these firms face complex and evolving threats to their sustained success.
1. Safeguarding against cybersecurity threats
According to multiple reports, the recent Microsoft-linked CrowdStrike IT outage is believed to have caused $5.4bn of losses for large enterprises – highlighting the critical need for robust cyber insurance. Furthermore, ransomware poses a significant threat to day-to-day cybersecurity, with fintech companies frequently targeted and millions paid in ransom to malicious threat actors who have stolen their confidential data. Malware is the most common type of cyber attack in the financial sector, affecting 40 percent of companies worldwide and accounting for 73 percent of successful cyber attacks across all industries.
For many fintech companies, the handling of sensitive financial data and transactions makes them prime targets for cyber criminals. The importance of cybersecurity cannot be overstated – fintechs require vital protection through specifically tailored insurance policies, proactive risk assessments and incident response planning to mitigate financial and reputational fallout when a cyber breach occurs.
2. Navigating regulatory complexity
Beyond the threat of customer litigation from data breaches, fintechs must also navigate a complex web of regulations. For example, the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA) in the US impose stringent requirements on data protection and privacy. GDPR enforces rigorous data handling and breach notification procedures, while the CCPA grants California residents extensive rights over their personal data.
The landscape is both varied and stringent – compliance requirements can differ significantly across jurisdictions. This poses a considerable challenge for firms aiming to scale their operations globally. From an underwriting perspective, these regulations complicate risk assessment by requiring in-depth knowledge of regional compliance standards and associated liabilities. For policyholders, ensuring alignment with these complex and often overlapping requirements is crucial, as non-compliance can result in hefty fines, reputational damage and business interruptions. Navigating these regulatory mazes demands specialised expertise and often bespoke insurance solutions tailored to the multifaceted nature of global regulations.
3. Strengthening operational resilience and building investor confidence
As fintech companies scale and diversify their offerings, operational risks multiply. From technology failures to operational disruptions and supply chain vulnerabilities, these risks can threaten business continuity and erode investor confidence.
The cause of the recent global IT outage demonstrated the crucial need for robust risk management practices. Effective risk management goes beyond mitigating potential liabilities; it builds trust and confidence among customers and investors. By collaborating with reputable partners and demonstrating robust risk management practices, fintech firms signal their commitment to responsible governance and proactive risk mitigation. This, in turn, enhances investor confidence, strengthens relationships with stakeholders and paves the way for sustainable growth and market leadership.
4. The need for tailored risk management and specialised expertise
The transformative potential of fintech lies in its ability to innovate and disrupt traditional financial services. However, realising this potential requires a steadfast commitment to managing risks effectively. Insurers play a crucial role by offering comprehensive solutions that safeguard businesses against malicious and non-malicious cyber threats, ensure regulatory compliance, strengthen operational resilience and enhance overall business sustainability for their policyholders.
Tailored solutions, offering comprehensive but flexible insurance coverage that provides protection for a fintech company’s financial and technology liability, the liabilities of its directors and officers, as well as crime and cyber exposures, are designed to align with a fintech firm’s specific business models and growth strategies. Insurers can also bring specialised expertise, from risk management professionals and legal and tax advisors to data analytics tools, empowering fintech firms to stay ahead of emerging risks and navigate complex landscapes.
In today’s rapidly evolving fintech environment, insurers must provide more than just robust insurance policies; they need to act as trusted risk management partners. This involves offering proactive support in identifying and mitigating potential risks before they escalate. By leveraging their expertise to deliver tailored risk assessments, insights into emerging threats and best practices for risk management, insurers help fintech firms build a culture of preparedness and resilience. This collaborative approach not only mitigates potential liabilities but also enhances the fintech’s overall security posture and operational stability, ultimately supporting long-term success and growth in a competitive market.
By transferring financial risks to insurers, fintech companies can focus on innovating and delivering their products in a dynamic marketplace, positioning themselves for sustained success in the thriving fintech sector.
Nick Rugg is head of fintech and investment management insurance at Markel International