Top 5 Legal Risks Faced by Fintech Companies

What is Fintech?

Fintech is the overlap between technology and finance. The Fintech sector includes companies providing technological solutions or innovations to traditional financial service businesses. Fintech has proved disruptive and transformative to the highly regulated financial service industry. The Fintech market is growing exponentially and has become increasingly crowded.

What are the top legal risks faced by Fintech companies?

1) Regulatory Non-Compliance

Nearly half of American Fintech sector leaders think that regulations have the potential to slow the growth of their industry. Navigating the myriad of relevant regulatory requirements can be daunting for an emerging Fintech company. Fintech entrepreneurs should always conduct an exhaustive review of their business plan against applicable financial regulations. This will help determine whether their company can avoid becoming regulated or needs to seek appropriate licenses.

Conducting this proactive regulatory review process is easier said than done. Cutting-edge Fintech often does not fit neatly into preexisting regulatory regimes, especially if the company wishes to scale internationally.

2) Data, Privacy, & Cybersecurity Mismanagement

Regardless of their specific niche, data is fundamental to the business model of many Fintechs. By collecting, storing, and managing huge amounts of customer financial information, these companies can garner poignant insights allowing them to tailor products and services to the marketplace.

But with great informational power comes great responsibility. Fintechs must be transparent regarding their security practices, to ensure they maintain the confidence of customers, stakeholders, or regulatory authorities. Fintechs must be extra wary of the European marketplace, which has increasingly robust data privacy laws.

No company is immune to the threat of hacking. However, due to the vast amount of sensitive information Fintechs collect about their customers, they may find themselves increasingly singled out by cybercriminals. The theft of data can destroy an emerging Fintech by disrupting business activities, tarnishing its reputation, and dissipating its customer’s trust. Fintechs would be wise to focus on prevention and contingency planning as their best approach to cybersecurity.

3) Intellectual Property Blunders

Software and technology innovation is at the heart of the Fintech sector. Legal protection of these inventions is imperative to the viability of any Fintech enterprise. But recent U.S. case law has called into question the patentability of certain business methods. In the European marketplace, patent protection can be even more elusive for Fintechs, given the stringent requirement that their product solves a “technical problem.”

Given these patent restrictions, Fintech companies would be wise to consider other intellectual property protection options such as copyrights and trade secrets. Fintech enterprises should also take contractual measures to ensure that none of their key employees, suppliers, or customers infringe on their intellectual property. It can be a challenge to determine when to register and enforce intellectual property rights in the Fintech space. Companies must balance the competing demands of wanting to encourage industry-wide adoption of their product while making sure their innovation is protected.

4) Collaboration Missteps

Traditional financial establishments have recognized the benefits of Fintech innovators. Increasingly, these institutions have looked to partner with emerging Fintech enterprises. But the form of these collaborations varies greatly and have legal implications.

There’s the classic M&A model but the commercial collaboration and corporate venture routes have also become a popular method for large financial institutions to tap into early-stage Fintech innovation. Fintech companies should be careful when negotiating these partnerships as oftentimes the goals and needs of the two organizations can be very different. Fintech companies should be aware of these differences during the regulatory due diligence process and when the commercial parts of the deal are structured.

5) Funding Mistakes

It has been widely recognized that the funding landscape for growth companies has been changing rapidly. Companies have been forgoing the traditional IPO route and instead have held a greater number of larger private funding rounds. The array of investors participating in these late stage private company rounds has also diversified. No longer the sole domain of venture capitalists, fund managers of all kinds have been moving into this marketplace.

So how do Fintech companies who opt to stay private longer navigate this wide range of investors and decide which funding option is appropriate? There is no magic formula but Fintech company leaders would be wise to weigh investor exit timelines with their own company growth plans. In addition, Fintech company leaders should consider planning for a future liquidity event. Ultimately, whatever funding option is chosen should not make it harder for the company to gain access to public markets in the future.

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