Christine Ing is an equity partner and co-leader of McCarthy Tétrault’s Information Technology Law Group and FinTech Group. She is based in Toronto and is nationally recognized as an expert in commercial transactions involving information technology, data security and intellectual property. Ing corresponded with MMG about how technology is transforming the financial services industry and considerations for investors.
Q. How will fintech innovation change middle-market financial services?
Fintech innovation is shifting the way organizations engage with customers, particularly in the consumer and small and medium- sized business segment. Financial services players have embraced a customer-centric approach to their services. This means knowing your customers and their preferences and anticipating and meeting their needs in a personalized way. Innovation is being used to leverage many different data sources (both internal and external) to enhance an organization’s understanding of customer needs.
Fintech innovation is also enabling organizations, such as private equity firms and investment banks, to use big data to supplement traditional business intelligence on investment opportunities. This allows for more insightful decision-making, increasingly through the use of machine learning models.
As a result of fintech innovation, we continue to see the middle market rely on next-generation service providers that extract insights and value out of data. We are also seeing tech- and data-savvy financial services players emerging in the market. They are identifying areas that are ripe for disruption, including those where convenient, digital, user-focused experience appeals to customers.
“THERE IS NO ONE SET OF REGULATIONS THAT APPLIES TO FINTECH, SO NAVIGATING COMPLIANCE REQUIREMENTS FROM MULTIPLE REGULATORS BECOMES CRITICAL.”
Q. Which fintech applications are attracting the most investor interest?
The challenge for investors is discerning hype from reality. Technologies like cryptocurrencies generate a lot of buzz, but they still face challenges with commercial viability.
At the moment, there is strong investor interest in fintech companies that offer lending, payments and personal finance services, often in the consumer and small business domain.
Fintech lenders can quickly assess the creditworthiness of borrowers and underwrite loans based on automated processes. The largest fintech lenders now have portfolios that rival middle-market financial institutions.
The payments and transfers space is ripe for disruption because of the many frictions in moving money from A to B in the incumbent model. Sending money quickly and cost-effectively is an area begging for new investment.
In the personal finance space, robo-advisers are among the leading fintech companies for attracting venture financing and developing customer relationships. Having financing to expand quickly will become even more important in a future with open banking.
Q. What are the key due diligence considerations during a fintech acquisition?
Although many of the same considerations related to the acquisition or sale of any technology company apply, regulatory and compliance considerations are key in fintech. Appropriate due diligence of a fintech target involves a heightened focus on compliance issues, including privacy, consumer protection and anti-money laundering, and knowyour- client matters. Because fintech companies often collect, process and use personal and sensitive financial information, cybersecurity hygiene is of paramount interest to potential acquirers. Thorough diligence requires understanding what a target’s compliance programs have looked like since the very beginning and the details of any significant hiccups along the way. For prospective sellers, this means being aware of buyers’ interest in compliance matters and ensuring the target’s compliance procedures are implemented such that they reflect risk tolerances that are acceptable to potential acquirers and enhance the company’s value.
Q. What are the regulatory hurdles to be aware of when it comes to fintech?
There is no one set of regulations that applies to fintech, so navigating compliance requirements from multiple regulators becomes critical. It is also important to continually monitor evolving laws and requirements, which vary across jurisdictions.
If the business collects individuals’ personal information, it will be subject to privacy legislation. Data protection is an important consideration and the reputational consequences of experiencing a data breach are quite severe. Anti-spam legislation also restricts the types of electronic communications that can be sent based on whether the business has consent and the nature of that consent. Businesses serving retail consumers should be aware of consumer protection legislation, such as reporting requirements for the cost of consumer credit. In addition, securities laws may apply to fintech business models such as cryptocurrency trading, crowdfunding platforms, peer-to-peer lending and robo-advising.
This article originally appeared in the September/October 2019 issue of Middle Market Growth.