The fintech industry is growing rapidly. But the insurance industry largely hasn’t kept up. Many of the coverage options available are suitable for tech companies or financial services companies, but rarely both. How can agents and brokers find the right coverage for the unique needs of fintech clients?
Twenty years ago, a banking transaction required visiting a physical bank branch. A deposit or withdrawal might have involved a visit to the teller counter. Something more complex, like business banking or a loan, may have required a meeting with a banker.
Today, all of those things can be done online, and often in a matter of minutes. It’s not just banking that has gone digital. Investing, insurance, and nearly every other type of financial service can be found online through various providers.
These online financial services providers are often called “fintech” companies — businesses that offer financial services primarily through a digital platform. Venmo and Cash App are among the best-known platforms in the banking and payment space. Robinhood is a popular fintech platform for investing.
The fintech industry has exploded over the past decade. However, in many ways insurance coverage has failed to keep pace with fintech’s rapid evolution. Few carriers offer policies that meet the needs of fintech companies, especially regarding errors and omissions (E&O) insurance. Many carriers offer coverage for either traditional financial companies or tech companies but not a combination of the two. Retail agents that are well-versed in the fintech industry’s needs are better positioned to serve their clients and offer innovative, unique solutions.
THE FINTECH EXPLOSION & INSURANCE INDUSTRY COVERAGE GAPS
In 1998, Confinity was founded to offer digital wallets to the blossoming e-commerce community. Two years later, the platform officially launched under its new name - Paypal. Paypal went on to revolutionize shopping and paved the way for the fintech industry.1
The launch of Square in 2009 took fintech to the next level. Between 2015 and 2020, venture capital funding for fintech companies nearly doubled, jumping from $19.4 billion to $33.3 billion.2 Today, fintech touches nearly every subsector of the financial services industry, from investing platforms like Robinhood to payment and banking services like Cash App.
And, fintech is poised for continued growth. Revenues for fintech companies are expected to grow from $245 billion to $1.5 trillion by 2030. By then, banking fintech is expected to account for roughly 25% of all banking industry valuations.3
As fintech has grown, the insurance industry has struggled to meet the sector’s unique needs. Few carriers offer coverage that aligns with the specific risk profile presented by fintech companies. Carriers offer a wide range of technology E&O and cyber liability policies. Many carriers provide directors and officers (D&O) as well as E&O policies to financial services companies. However, there are few carriers with policy options that combine both tech and financial services coverage in one seamless policy.
This often means that fintech companies may be only protecting one side of their business. For example, they may carry financial services E&O coverage, exposing themselves to tech liability. Or they may carry only tech liability coverage, thus increasing the risk of a financial services E&O claim.
Of course, carrying both tech liability and E&O coverage is possible. However, with two different policies and carriers, a claim may lead to a dilemma - is the tech or the financial services policy responsible for covering loss? Often, that question is not answered quickly, or a claim that should and can be covered may fall through the cracks.
Another market challenge is the lack of solid actuarial data related to fintech claims. Data is the engine that drives the insurance industry. Without reliable claims data, it’s challenging for a carrier to project risk and price a policy accurately. Rather than misprice a policy, many carriers opt not to offer coverage until more reliable data is available.
BEST PRACTICES FOR AGENTS AND CLIENTS SEEKING FINTECH COVERAGE
For agents seeking coverage for a fintech client, it’s critical to answer the question: What does the client actually do?
The fintech industry is still growing and evolving, so the nature of fintech businesses is often fluid. However, in many cases, a fintech company primarily handles one side of the tech/financial equation. For example, a bank may offer a fintech platform. However, the “tech” portion of the platform is handled by a third-party tech company, and in reality, the bank is responsible for traditional banking activities.
Another example is a fintech mortgage company. The company is simply a provider of mortgage software, and the actual underwriting of mortgages is handled by a traditional lending company. In this example, the fintech company is more of a tech company than a financial services provider. While the company may need some level of E&O coverage to satisfy licensing requirements, it may not need a robust E&O policy. Its need is likely more focused on the tech side of the business.
Detailed, thorough fact-finding is critical in the fintech market. What is the client’s actual business? How do they earn revenue? What operations do they engage in on a daily basis? What are their most significant vulnerabilities for loss?
Armed with the answers to these questions, an agent is in a much stronger position to find the right coverage for a fintech company’s unique exposures. A knowledgeable and experienced wholesale broker can help an agent find the right carrier and policy. A broker can shop coverages, assist with due diligence, explain the client’s needs, and find the right coverage at the right price.
BOTTOM LINE
The fintech industry can be challenging to cover. Carriers lack the actuarial data to estimate risk and price policies accurately. It’s often unclear whether a fintech company is more of a tech company, a financial services company, or a mix of both. As the industry grows, the insurance market will continue to develop. However, until that time arrives, agents can best serve their fintech clients by working to fully understand the company’s business, operations, and risk coverage needs.
CRC offers specialized industry and product knowledge enabling retail agents to navigate complex insurance landscapes with confidence. With a wide network of market and underwriter access, Team CRC provides unparalleled opportunities for securing the best coverage options for your clients. When partnering with CRC Group, you gain access to a comprehensive suite of services and support that empower you to deliver exceptional results.
Contact your CRC broker today for assistance obtaining optimal coverage for your fintech clients.
CONTRIBUTORS
END NOTES
- History of Paypal: Timeline and Facts, The Street, January 2, 2020.
- What is fintech?, McKinsey & Company, January 16, 2024.
- Fintech Projected to Become a $1.5 Trillion Industry by 2030, BCG, May 3, 2023.
- Fintech, Dealroom, 2023.
- The Fintech Industry, Tipalti.
- 50+ Fintech Statistics You Need to Know in 2024, G2, June 9, 2024.