Strategic Insights on Corporate Governance and Fintech

Arthur Bryan once said

“And so, while the great ones depart to their dinner, the company secretary stays, growing thinner and thinner, racking his brain to record and report what he thinks that they think that they ought to have thought.”

Where we have come from

Financial services firms have moved a long way from the 20th century view on corporate governance when the focus was on shareholder return more than anything else and now consider wider responsibilities and provide evidence that a governance framework works to create good business.

Fintech is a rapidly growing sector impacting financial services in the UK and global economies.  With a wide range of innovative technology solutions for business and people to manage their financial affairs or deliver services and products. This sector grows and matures, industries, investors business regulators and the courts are increasingly engaged in the profitability and utility of this technology and the solutions offered. 

Sadly, there have been many examples of technology in financial services having bad outcomes.  

There are challenges to meet the opportunities, evidence product and service design so that Fintech solutions meet the specified needs they are intended to meet and operate in a way that keeps users, stakeholders and investors safe and secure. 

Corporate governance is an essential part of this process.   Governance provides the framework necessary to minimise the impact of risk, promotes accountability and transparency, and manages the competing interests of Fintech business, its investors and customers.  The FCA has written much on the topic and has set out various rules for the firms it regulates to follow.

Challenges, Corporate Governance and  the Fintech Industry

The opportunity created through Fintechs shows no signs of slowing.  Business and people’s appetite for digital solutions and subsequent activity is only increasing and reshapes business interactions through online solutions.

The Fintech industry renews and reinvents itself as firms become part of the ecostructure of the financial services industry and provide new solutions.  Some firms believe that they operate outside the financial services’ regulatory environment, although their customers do.  With new technologies entering the market, regulators and governments follow and try to set a regulatory pace to meet the pace of innovation and respond to stay up-to-date on best practices. This can give regulatory gaps in clarity reducing risk appetite for businesses for novel solutions, as they are uncertain of the implications of their decisions and the outcomes of their actions.

Fintech however developed and delivered exposes regulated businesses to risks that must be managed through effective risk management processes. These include cyber security risks, compliance risks, operational risks and market risks. 

This means that even where a Fintech firm is properly out of scope of a financial services regulator, it should be able to present itself and its corporate governance so that its customers can take comfort that their chosen supplier will not add to regulatory burden, issues and concerns.  And if it is regulated it simply has to embrace corporate governance.

Why should they? Because failure to do so can lead to serious financial and reputational fall out. 

In the cybersecurity space as business increasingly uses and relies on technology to store and process data, that data needs to be adequately protected from unauthorised access or use. This means robust data security systems and infrastructure , and adoption of industry best practices and strong compliance frameworks.

Operational governance and risk management is a given.  Fintech companies need corporate governance structures to ensure and evidence that they are managed responsibly. Proper oversight and accountability, adequate board structure and knowledge, governance policies controls, process and procedures. Without these structures in place, it is difficult for companies to ensure that their operations operate in a risk controlled framework.  This counts against them when winning customers and clients

The role of corporate governance 

It’s common for corporate governance to be thought of as a hindrance to innovative and disruptive technologies and businesses doing business (Mr Bryant’s comment is still apt). But Fintech’s challenges with risk and cybersecurity, plus the strict regulatory environment within financial services, make good governance a must-have. Knowing that products and services will be delivered first time on time by design is more than just good service, it is profitable service. Functional boards and effective senior managers and governance are critical to a Fintech’s success. That’s why it’s crucial for Fintechs to make governance a part of their overall strategy, right from the start.

Fintech Boards and Corporate Governance

All Fintech business formed as a company start their corporate governance with a quality board of directors. Fintech boards must ensure that they are made up of people who have wide-ranging knowledge, not just technology or product specific knowledge but knowledge of financial services, banking, security, finance, legal, risk and compliance backgrounds as well. A  balanced, diverse board has more experience to draw from, and more areas of expertise, ensuring that the strategy they’re developing and the decisions robustly made in a positively challenging environment for well-informed refined decisions. 

Fintechs and Risk

Fintechs must plan to mitigate risk. Some do this well others not so well.  A strong board is strategically important to Fintechs. Their diverse experiences can see solutions to risks that others involved in delivery of specific objectives might not—the processes that they implement and oversee are fundamental to the company’s growth and long-term success.

Fintechs that aren’t prepared with strong boards and corporate governance risk losing financing and winning customers more difficult. Investors won’t necessarily expect anew company to have anything other than a well-selected board that manages risks and their investments.  Customers will need to see that their services that they receive are not delivered well by happy chance but by design.  These factors lead to a Fintech’s commitment to growth.

Fintechs and Cybersecurity

According to the UK government². half of businesses (50%) and around a third of charities (32%) report having experienced some form of cyber security breach or attack in the last 12 months.

In the first quarter of 2024 there were aprocimately Because of the collection and storage of consumers’ data, cybersecurity is also a paramount concern for Fintechs. As digital transformation accelerates, cyber threats to increase, making it crucial for Fintechs to maintain stringent security standards. Recent headlines involving ransomware and cyber-attacks on Hackney Council, health boards and charities, Discord Samsung  various health boards—underscore the dangers of security breaches that threaten businesses every day. By their nature, Fintechs are particularly vulnerable, and protecting peoples’ data is imperative to maintaining trust.

Some Fintech firms are tempted to minimize the importance of adding a cybersecurity expert to their board, focusing on other aspects of establishing strong corporate governance. They’re confident relying on their internal IT and security processes and choose to wait until they’ve grown big enough to attract the attention of regulatory bodies that demand a high level of cybersecurity. Again, a strong board of directors and corporate governance practices can improve cybersecurity and mitigate the risk the company faces.

Resource

² Cyber security breaches survey 2024 – GOV.UK (www.gov.uk)

Fintechs and Compliance

Fintech’s strict regulatory environment makes good corporate governance a necessity, and most companies understand the need to quickly add a compliance expert to their board. Compliance hurdles differ across industries, but Fintechs face growing and ever-changing  regulatory scrutiny and are expected to establish and nurture an unwavering culture of compliance. Creating a strong board at their foundation helps Fintech firms keep up with compliance trends—the board will present expert insight, critical skills, and best practices that will ensure the company is meeting or exceeding its compliance obligations.

While it’s easy for Fintech companies to populate their boards with envelope-pushing technologists and the VCs who have funded them, it’s important to ensure that their boards also include the expertise of bankers, regulators, and other financial professionals, who understand the risks and rewards that are inherent to Fintechs.

Opportunities for Corporate Governance in the Fintech Industry

The introduction of corporate governance structures within the Fintech industry presents both challenges and opportunities. On the one these structures help businesses manage the risks associated with utilising Fintech solutions, such as cyber security and compliance risks. By implementing proper risk management procedures and strong data security systems, businesses mitigate these risks and ensure that their operations remain secure and compliant.

For a firm, corporate governance leads to:

• greater transparency and accountability within the organisation.  Through clear standards and policies, companies ensure that their operations are run to a plan, properly monitored with any breaches identified and addressed accordingly and appropriately. This helps to promote a culture of trust and integrity within the organisation, which is invaluable in the long run.
• Increased transparency and accountability making it easier for businesses to stay compliant with relevant regulations, the framework in place ensures that they are following the applicable laws and regulations as colleagues and operating systems confirm KPI stats. This in turn promotes improved efficiencies, as businesses are no longer burdened with the complexities of an unstructured environment.
• improved stakeholder alignment. By allowing stakeholders to have a greater voice in the operations of the business, companies ensure that their decisions are representative of the interests of all stakeholders, making it more likely that these decisions will lead to favourable outcomes for all involved.

For a Fintech firms’ customers, the Fintechs corporate governance leads to:

• assurance that their supplier has considered risks associated with utilising Fintech, including the customers own regulatory issues and data security improved risk management, increased transparency and accountability, and policies that can be shared so that the customer can evidence that its own risk profiling has been mitigated. 

As the Fintech industry matures, corporate governance can only continue to play a critical role in ensuring that businesses are managed responsibly and equitably.