The FinTech Revolution – Part 3: The ‘Tech’ in FinTech

02 November 2015

Deloitte estimates that the FinTech industry has the potential to employ over 10,000 people in Ireland by the year 2020. So it’s no surprise that interest in Ireland’s FinTech ‘hub’ in Dublin is booming. Ireland’s FinTech market has become a buzz of activity with indigenous FinTech start-ups working alongside established international financial services companies. In Part 2 of this series we looked at some ways these FinTech companies can manage a variety of common legal and business risks. In this final instalment, we examine some issues a FinTech company needs to consider as it puts its technology, ideas and data out into the world, including cyber-security, data protection and intellectual property licensing.

Cyber-attacks and security

As recent news headlines illustrate, damages arising from a successful cyber-attack are no longer limited to financial loss but can also include intellectual property theft, business interruption, data loss, reputational damage, loss of consumer confidence, consumer compensation claims, and regulatory sanctions or fines. While banks have historically been one of the main targets of cyber criminals and extortionists, modern attacks over the internet are not confined to traditional institutions. The amount of data being collected today means that both the harm and likelihood of a successful attack against a FinTech company that stores or processes any sort of financial or personal data, continues to grow.

To minimise the risk of, and damage arising from, cybercrime, a FinTech company needs to be able to react quickly, isolate attacks, and eliminate the threat. Cyber-security is a powerful tool in tackling cybercrime, but it will not work if the FinTech company does not have in place clear organisational practices and training. At a minimum, all FinTech companies should have adequate security and data protection processes, as well as disaster management plans, which are simple for employees to understand and that they are trained to operate. While these strategies can help, it is important to keep in mind that the ultimate goal is prevention and to maximise the chances of preventing an attack before it can occur.

Another frequently overlooked security risk is closer to home – the FinTech company’s own employees. An employee who is not well-informed about various cyber-risks, such as malware and phishing, may inadvertently open the company’s systems to an attack. Further, if the FinTech company allows employees to use their own smartphone or tablet (‘bring your own device’) on a company mobile plan, it is vital for the company to have a comprehensive BYOD policy in place to ensure that all employees are properly securing their personal devices against unauthorised access and data breach.

Data protection & big data

In the current environment of ubiquitous data collection, data sharing and big data analysis, data protection and confidentiality are key concerns for regulators and customers. Therefore FinTech companies must also give these a high priority. Given the services that FinTech companies offer, and the types of data that they process, understanding data protection legislation and requirements, and how to fully comply with them in a cost-effective way, is a critical component to the success of any FinTech company.  In addition, we are seeing regulators starting to consider the implications of ‘big data’ and the implications resulting from financial services and FinTech companies striking up ventures or alliances that allow the sharing of these big data sets.

It is imperative that FinTech companies draft appropriate privacy policies and other data transfer arrangements to ensure that they are in compliance with applicable data protection and privacy laws, regulations and export controls. The issue of who owns and controls data applies to FinTech companies in the same way that it applies to any organisation processing and storing data. Moreover, the ability of a company to demonstrate that it takes privacy and security seriously also has the added benefit of building its reputation in the marketplace as a trusted provider.

If a data breach does occur, the Data Protection Commissioner in Ireland has approved a Personal Data Security Breach Code of Practice that, while not mandatory law, will assist FinTech organisations react appropriately when they become aware of breaches of security involving customer or employee personal data.

Intellectual property and innovation and asset protection

The rise of FinTech is directly linked to the disruptive and innovative software and technology being developed that puts the customer experience as a top priority. As a result, a significant portion of the value in a FinTech start-up for an investor will relate to its technology and brand.

A FinTech company can decide to license its technology directly to end-customers or it may ‘white label’ its technology so that it produces the product for an existing financial service company who can re-brand it to sell it under its own label. In either case, a suitable licensing agreement needs to be in place to ensure rights and obligations of each party are adequately addressed.

To avoid the frustration and expense of having to license its own intellectual property from so-called ‘patent trolls’, or the prolonged and expensive court battles required to defeat them, it is essential that all intellectual property, whether it is owned by the FinTech company  or licensed by them, is adequately protected. This can be done by entering licensing agreements, filing relevant patents, registering trademarks and service marks, protecting confidential information and trade secrets, and ensuring that all relevant website addresses and social media sites are secured for the FinTech’s brand.

Why compliance matters

Of the roughly €400 million in venture capital investments in high-tech companies in Ireland over the last three years, Deloitte research has found that €16 million was invested in FinTech companies. However, this number is growing exponentially as the FinTech sector in Ireland is becoming a hot commodity for venture capital investors. The Irish Independent reports a staggering amount of recent activity in Ireland’s FinTech market including Realex being acquired by Global Payments for €115 million, Currency Fair raising €10 million on the markets to fund their further expansion, Sentenial launching their Nuapay service as a bank alternative for business customers, and Marsh McLennan adding 100 high skilled jobs to their workforce with the creation of a ‘Fintech Innovation Centre.’

In order to continue this surge and be able to tap into future funding, it is vital for a FinTech company to be cognizant of the various technology related issues we have explored in this article. Failure to adequately address risks such as cyber-attacks, data breaches and loss of control over the company’s intellectual property may end up being barriers to investment from venture capital funds. Consequently, as a FinTech company puts its technology, ideas and data out into the world it should have plans to properly address these from both a legal and commercial perspective.

FinTech legal advisers - Mason Hayes & Curran

Mason Hayes & Curran would be delighted to lend our expertise to contribute to your company’s success in the FinTech industry. Our team consists of lawyers who are experts in a broad range of areas that directly affect FinTech, such as technology, intellectual property, outsourcing, payments and financial services regulation – to name but a few. Given our experience and understanding of FinTech business models, risks and challenges we are ideally placed to guide market participants through the legal and business issues. Please contact one of our team members below if you would like to learn more about how we can help.

Read Part 1: Why the Future of Money Is Rapidly Changing

Read Part 2: Managing Legal and Business Risks

The content of this article is provided for information purposes only and does not constitute legal or other advice.