There are many similarities between ‘fintechs’ and ‘techfins’, each of which use technology to deliver financial solutions. But for outsiders to the sector, it can often be difficult to tell them apart.
When it comes to insurance, techfins have a relatively smaller risk exposure compared to their fintech cousins. As a result, they may find themselves in receipt of excessive premiums, or even a refusal of cover, where insurers aren’t properly informed. Amid these challenges, techfins that that can effectively and accurately articulate their risk exposures will give themselves the best platform for success.
The difference between fintechs vs techfins
Despite certain similarities, there are significant differences between fintechs and techfins, which have tangible implication for each set of firms’ risk exposures:
Fintechs (short for Financial Technology) refers to companies that use technology to create innovative financial products and services or to enhance the delivery of traditional financial services. This includes things like mobile banking apps, digital wallets, robo-advisors, and peer-to-peer lending platforms. FinTech companies are typically viewed as start-ups or early-stage companies that are disrupting the traditional financial industry. However, as many of these companies have grown to become large-scale organisations, the group now includes firms such as Wise plc., Starling Bank, Revolut, Monzo, Pension Bee, and more.
Techfins, on the other hand, were originally referred to technology companies that had expanded into the financial industry, offering financial products and services as an extension of their existing technology platforms. Examples of such companies included Amazon, Google, and Apple, which have all launched financial products like digital wallets and credit cards. Since then, the definition of a techfin has expanded to include technology companies that build specific software for the financial services industry. These include firms that provide services such as payment platform creators, digital asset vault builders, information platforms, or any other technology for the primary use of financial institutions.
In summary, fintech companies are financial services providers that use technology to create innovative products, while techfin companies are technology companies that have expanded into financial services.
Although this distinction is useful, it remains the case that insurers will treat firms on a case-by-case basis. For instance, where firms are building technological infrastructure or application programming interfaces (APIs) that allow the efficiency of existing payment to infrastructure (e.g. bank to bank/merchant to bank), precisely how that infrastructure or interface is built will determine whether the firm should be viewed as a financial institution in its own right, or simply providing the infrastructure.
Risk implications for techfins
Despite their differences, the proximity between many techfins and fintechs is a cause for concern among insurers. This is particularly true where the techfin provides services related to payment processing to other firms within the financial services sector, such as banks, as this makes the techfin an attractive target for fraudsters.
However, unlike financial institutions and fintechs themselves, the monetary gain from financial technology data is not the main driver of hacking attempts against techfins. Rather, it is the potential to cause high business interruption to big-name clients. This is an important distinction, and it is owing to this that techfins typically carry a lower risk exposure than fintechs.
Nevertheless, techfins remain exposed to a number of key risks. Insurers will bear these in mind when it comes to providing a quote.
Primary techfin risk exposures include:
Project delays where firms are building databases for other companies, or where clients allege that a firm’s software is malfunctioning – these account for the majority of Technology Errors and Omissions (Technology E&O) claims
Project costs can often increase significantly beyond initial estimates, with end clients flooding projects with additional internal or external resources to complete the project, the costs of which may be demanded from the technology provider
Ransomware or Distributed Denial of Service (DDoS) attacks – dependent technology such as payment systems can be considered as highly vulnerable to disruption, with such attacks forcing companies to shut down their services to stop the malware from spreading, potentially preventing clients from accessing vital services
Dovetailing of standalone services exposures with those of clients, including big-named banks, may compound underwriters’ fears
Liability associated with the failure of a payment solution – this may push the technology services outside of the appetite for many insurance markets
Insurers may also be wary of providing coverage to techfins in light of the high volumes of sensitive data transacting through their technology systems, compared to the relatively low income derived from the service itself.
How techfins can reassure insurers – the importance of transparency
The insurance market for techfins has limited competition, with relatively low appetite for exposed risks. Some markets have very strict revenue thresholds, and while there could be appetite for very large (+£1bn in revenue) payment processors, the appetite for sub-£250M companies is extremely limited.
In order for techfins to maximise their chances of securing coverage, it’s important for firms to be upfront and transparent when it comes to articulating their risk exposure. In doing so, firms can reassure insurers that they are in control of their risk profile. This in turn will give insurers greater confidence to underwrite the risk.
By contrast, failure to be transparent or a refusal to acknowledge evident risks will likely dissuade insurers, who will decline to underwrite risk where they are without full visibility. Typically, insurers are wary of underwriting risks that they shouldn’t, and will default towards a more conservative profile without proper assurances.
Where techfins choose to partner with a broker, this may also give more opportunity to educate insurers as to the subtle differences between themselves and fintechs, and will give firms the best chance of securing coverage at an appropriate cost.
To give themselves the best chance of success, early-stage techfins should find an insurance advisory early on before going to market, test this advisor’s knowledge on their technology, and seek assurances that they understand the risks associated to that solution.
Where a techfin has already gone to market with another firm and not secured the results needed or wanted, this can produce increased challenges. However, it doesn’t make it impossible to re-set the understanding and re-educate insurers in the future.
For further information, please visit our Fintech (opens a new window) page, or contact:
Bob Williams, Vice President
T: +44 (0)7769 242297
E: bob.williams@lockton.com
