COVID-19—the impact on the fintech sector, by Tom Bohills, Head of Legal at Red Deer

To begin with, the enforcement of working from home is driving consumers and businesses away from traditional ‘bricks and mortar’ venues. One of the greatest challenges to the adoption of new technology in the finance sector is habit and a deep resistance to change. Working from home is forcing the industry to think differently and to become more open minded about how they leverage tech.

Among certain larger institutions there has always been a suspicion about fintech challengers and the risk they pose to established industry names. Necessity is forcing change and those fintechs with off the shelf, innovative solutions will find certain doors are now open to them.  While new deals have stagnated, a number of my clients are reporting increasing interaction and log-ins from users on their platforms.

Shut off from their turrets and unable to meet face to face, volume in various securities is moving onto electronic platforms. A client who runs a digital marketplace for institutional lenders and borrowers in the money markets space has just seen one of the busiest months in its three-year history.

As the effects of the Coronavirus shutdown leak into the real economy, lending platforms will see increased activity. There is likely to be a big opportunity in both commercial and consumer debt, particularly for those borrowers who slip through the net of traditional lenders.

Opportunities in the public sector

There is also huge opportunity for the UK’s fintech industry to work hand in glove with the government and public sector. As the government becomes increasingly interventionist, it will need support from the private sector to implement its plans. Speaking as someone who has been personally involved in the procurement of resources for the NHS over the past few months—the cash and the will is there, but delivery is lacklustre and innovation is in short supply.

This is the same across every department in Whitehall, all of which are under intense pressure and jumping from crisis to crisis.  For example, there is huge opportunity for those fintechs who can help the Government and HMRC to administer the gargantuan support packages being given to industry.

From using artificial intelligence and know–your–client solutions to identify the correct recipients of support, to mobilising existing payment networks to ensure the finance reaches the right place. The big data engines built to extract sentiment or trends in financial markets may be used to help plot the spread of infection and manage supply chains. This has certainly proved fertile ground for similar companies in the US over recent years.

While there will be businesses lost, those that can weather the storm will face an environment that is ripe for disruption and a climate that is far more open minded about technology-driven change.

How is the negotiation and drafting of contracts in fintech changing in practice as a result of coronavirus?

Unfortunately, I am also seeing an increased focus on insolvency and post-termination clauses.

Licencees of fintech solutions are worried about the prospect of the licensor defaulting on its debts and being unable to perform the contract. Given the nature of software-as-a-service (SaaS), escrow provides little comfort and licensors are now being required to offer up inventive solutions to their clients’ fears.

At the very least, clients are requesting a novation of their cloud-hosted instance or a technical fix to extract all data in the event of liquidation. Yet even this gives limited comfort to financial institutions left without a solution to sometimes critical processes—particularly where regtech is involved. The industry is yet to provide a good answer to this. Perhaps this will be the catalyst.

I am also witnessing a greatly increased level of pre-contract due diligence and a focus on the policies and procedures of suppliers. What was once a simple checkbox on most due diligence questionnaires (eg ‘Do you have a written business continuity plan?’) is now an entire sheet of questions on a questionnaire.

This naturally then feeds through into a much tougher negotiation on service levels and the remedies for breach (namely, service credits and termination). Licencees now expect fintech companies to be able to maintain a good level of service remotely and are attempting to record this contractually.

For lawyers working on transactions now, are there any particular things that should be given attention in light of coronavirus?