Fintechs are moving at such break-neck speeds that they’re struggling to mitigate the risks
The “challenger” moniker has been given to a new generation of financial brands because they are disrupting the status quo set by the financial institutions of the past.
But it may be that the speed at which these tech-focused firms are expanding will leave them open to significant risk in the near future.
In fact, we are finding that a number of UK challenger firms are growing or expanding their operational footprint at a rate that outstrips their current insurance policies. As a result, they are left exposed to issues, such as new sources of criminal activity and technology-triggered complaints.
It’s a potential ticking time bomb that could undermine the reputation that challengers have built for delivering customers innovative and seamless financial products and services.
Many fintechs and challenger brands that are growing beyond startup status still have off-the-shelf insurance policies that are no longer fit for purpose.
The language of their basic policies may have been adequate when a small team was developing the proposition, but now that they are taking part in more complex financial activities for thousands of people, the policies fail to match up.
This is a concern where challengers are growing at break-neck speeds and have gone to market without first mitigating their business risks.
The problem is that the product or service a challenger brand is providing is so new that an insurer may not readily understand what future risks the business is exposed to. In the past, the risk for financial institutions was black and white – bank robbery or giving bad advice to a fee-paying client are easier risks to understand.
But the business models of today’s challengers are more nuanced. They rarely hold physical assets and their fees may be garnered through services that go beyond traditional transactional activities.
Risks have to be fully defined and addressed to ensure that, if something goes wrong, all bases are covered. This takes time and dedication on the part of the challenger brand and the insurer, but it’s necessary.
To compete with established financial firms whose brands carry a high level of trust with consumers, challengers have to ensure that their brands are as or even more trusted – brand equity is the make-or-break factor in finance.
But a lack of adequate insurance cover is leaving the corporate reputation of challenger brands hanging in the balance. We have seen instances where, if the challenger had faced losses as a result of a sophisticated digital crime, for example, they would have not been insured, and their business and client loyalty may well have been in peril.
As the financial regulators wrestle with how to police our evolving financial sector, they will undoubtedly begin to take a closer look at how well challengers are mitigating their own risks.
Too many challengers are putting insurance at the bottom of the list – it becomes a last priority as they rapidly expand. But that has to change for the good of the sector.
There are many hurdles ahead for challenger brands – but being fully insured shouldn’t be one of them.