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

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Tom Bohills

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TMT analysis: As hiring budgets tighten, deals get put on hold and investors sit on their cash, the UK fintech sector is facing real challenges. Inevitably, some excellent businesses will be lost but there are reasons for optimism about the future. In this piece Tom Bohills, Head of Legal at Red Deer and fintech consultant, gives his view on the state of the market and how fintech lawyers, both in-house and private practice, can help. He finds that businesses that can weather the storm will face an environment that is ripe for disruption and open minded about technology-driven change.

How has coronavirus impacted fintech?

It goes without saying that coronavirus has had a crippling effect on the UK economy and fintech, the jewel in the UK’s crown, has not escaped unscathed. Not only am I aware of a number of larger enterprise deals that are on hold indefinitely (the kind that can make or break start-ups) but the chaos caused by the spread of the virus has created a deep freeze in the availability of funding. Investors who were very active in the fintech scene are now sitting on cash reserves given the current climate of uncertainty.

One of the biggest pull factors for fintechs incorporating in the UK is our deep, mature and flexible talent pool. Coronavirus has tightened hiring budgets and has brought an incredibly mobile workforce grinding to a halt.

As deal flow tails off and funding tightens, it is inevitable we will lose a number of potentially excellent companies over the coming months. That said, I’m a natural optimist so will try to pull out the positives, because there are some for fintech, both now and in the future.

There are reasons to be positive

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?

Well, no-one will ever cruise past the boilerplate provisions at the end of a contract again! It goes without saying that force majeure clauses—once seen as obscure relics that were only relevant to shipping contracts – are now firmly back under the spotlight. The designation of coronavirus as a pandemic by the WHO and national governments has piqued the interest of many practitioners given its frequent use as a listed example of force majeure.

However, while this makes for wonderful academic discussion among lawyers, there is unlikely to be mass termination on these grounds in the fintech sector. The threshold under English law remains a high one and, given the almost universal move to cloud-hosted services, there is little reason to expect a complete cessation of service.

It’s not all about force majeure

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?

Lawyers should be aware that a number of clients may be in financial distress, whether or not they are willing to admit it. This is the time, more than ever, to be absolutely transparent with fees at the start of any engagement. I expect the slide towards fixed fees will accelerate even more in this climate and payment dates may slip. Margins will be tight for everyone and work may need to be discounted.

Do you anticipate any longer term implications for transactions or general practice?

As with all difficult situations, there are upsides to those who are on top of their subject area and quick to react. This is the time, as lawyers, to really step into the businesses you represent and get a feel for the challenges facing them.

There is no template or precedent for some of the situations the fintech community is facing. Try to be flexible with your risk parameters to reflect the situation we are in. Be sympathetic while also remaining firm on what can and cannot be done.

There will be a lot of good people making incredibly tough decisions and it is your job to counsel them as both their lawyer and their trusted advisor.

So often lawyers are seen by the business as a cost centre—a final hurdle to clear before something is signed off. This is an opportunity to change that mindset.

In my view, every boardroom table in the country should have a lawyer sitting around it. As lawyers, we have a unique view on the world. We have an ingrained ability to analyse and summarise effectively but also to make quick, risk-weighted decisions.

Now more than ever, fintech businesses need their lawyers to step up, be innovators and help find solutions.

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