What Kind of Business Insurance Do Fintech Startups Need?

Fintech companies are sometimes known as disruptors in the financial services industry because they can move much faster when creating products and services that customers seek. Some of these fintechs compete directly with large institutions, while others have made brand new service and product offerings.

Examples of fintech companies include robo-advisors, peer-to-peer lending, accounting providers, and online mortgage lenders. Canada has more than 1,200 fintech companies, most located in Toronto. Vancouver and Montreal are also home to many fintechs.

Some of the more well-known fintechs include Wealthsimple, Borrowell, Lending Loop, FreshBooks, and Properly. In addition, fintech insurance brokerages, such as Zensurance, are also known as insurtech firms.

What Unique Business Risks Do Fintechs Face?

Fintech risks vary and are unique to this sector. Here are just a few:

• Cyber breaches. Fintechs possess a lot of sensitive information about their customers. Hackers may launch a cyber-attack on a fintech to get this valuable information. Also, payment processing fintechs are a primary target of hackers because they can steal funds from the company. These threats require fintechs to invest more in cybersecurity measures and cyber liability insurance.

• Shareholder lawsuits for financial misrepresentations. Company founders typically need to raise money from investors such as venture capital firms. Investors might sue the fintech’s directors and officers if their financial representations are misleading. Having directors and officers (D&O) liability insurance makes sense in this case.

• Customers’ financial losses. Creating a financial product or service means there’s a chance that customers can experience a financial loss when there are technical or operational errors. Even if the mistake isn’t the fintech’s fault but that of a third-party provider, the company still needs to pay the legal costs if sued. Errors and omissions (E&O) insurance is important for this reason.

• Theft of intellectual property (IP). Fintechs may create technology or software that is unique to them. They should copyright or trademark any IP to protect innovations and ensure that contracts stipulate that the company owns work created by employees or contractors.

• Being outflanked by a large financial institution. Canada’s big banks control much of the market in the financial sector. They have the resources and money to take on smaller competitors easily. While some fintechs have a first-mover advantage, the banks have billions of dollars of annual profits that can be invested in creating a similar product or service and easily promoted to millions of clients online or through their branch networks.

Do Fintechs Face More Risks and Requirements Than Other Kinds of Startups?

Fintechs’ risks and requirements differ from other startups because they focus on the financial sector. Here are some examples:

• Regulatory. The financial sector is highly regulated, and many fintechs may be subject to various regulations. There isn’t a specific federal or provincial/territorial regulation for fintechs. However, the products or services the fintech offers will determine what regulatory bodies will have jurisdiction.

• Reporting cybersecurity or technology incidents. Some fintechs may have to report cybersecurity breaches to regulatory authorities. The Office of the Superintendent of Financial Institutions (OSFI), which regulates banks and insurance companies, requires federally regulated financial institutions to report an incident within 24 hours. And the Investment Industry Regulatory Organization of Canada (IIROC), a self-regulating organization that regulates investment dealers, requires member firms to report an incident within three days.

• Anti-money laundering legislation. While there are no specific anti-money laundering or financial crime rules for fintechs, they may be considered a reporting entity under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). If that’s the case, fintechs have additional obligations, such as complying with record-keeping requirements, reporting suspicious transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), and reporting certain cross-border transactions to the Canada Border Services Agency (CBSA).

• Decline in available funding. Fintechs typically rely on large investors to grow. However, funding can dry up quickly if the industry falls out of favour. If there’s a recession, it may be harder for fintech companies to get the funding required.

What Insurance Coverages Do Fintechs Need?

Technology and startup insurance is a must for any fintech. Their risks are unique, and their insurance needs often differ from what companies in other sectors require.

A comprehensive policy for fintechs may include other types of coverage, including cyber liability, D&O insurance, commercial property insurance, errors and omissions (E&O) insurance (also called professional liability), commercial general liability, and legal expense insurance.

Get a free quote from Zensurance by filling out an online application for your fintech business. We’ll shop our partner network of over 50 insurers and provide a customized policy that protects your assets at the best price.

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