The fintech revolution is currently taking place with the epicenter being firmly entrenched around the Silicon Roundabout in Shoreditch. The spellbinding combination of geeks in jeans and venture capital that has disrupted other industries such as travel, transport and retail are now targeting the financial sector.
Investment into UK fintech in 2015 rose by 35% to reach over $900m and is expected to grow by up to 50% in 2016.
A large sector within fintech has been established by developers who have previously been salaried employees in the established banking sector and have embraced entrepreneurialism developing software that provides solutions to problems they faced in their old jobs.
The challenge these fintech entrepreneurs face is convincing the established sectors that they will be around to support their technology in the future. Due to massive increased regulation and a traditionally risk averse industry, banks and financial institutions are concerned about licensing software or technology developed by a startup.
The concern of the financial institutions to the long term stability of fintech startups is not unfounded. As in all disruptive technology industries there are many shining stars but also many failures.
Two recent examples of failure include:
- Mobile payments company, Powa technologies once valued at £1.8 billion ($7 billion) collapsed into administration in February 2016 with Deloitte being appointed as the administrator.
- Silicon Valley based identity verification software company Jumio initiated voluntary chapter 11 proceedings in the US bankruptcy court in March 2016.
When evaluating the licensing of a technology or software by a financial institution the institution will need to be comforted by the startup that their exposure to risk is minimised. One powerful arrangement being implemented by fintech startups is to have a pre-existing multi beneficiary software escrow agreement in place.
A software escrow service works by the fintech developer depositing their source code with a trusted 3rd party on an ongoing basis. In the event that the developer is unwilling or unable to support the software usually through bankruptcy, the customer can initiate a trigger to release the source code out of trust.
To provide additional comfort to the financial institutions, verification that the code can actually be recompiled is often performed after the code has been deposited.
This arrangement protects the intellectual property of the fintech developer but gives the established financial institution clients comfort that their risk is minimised allowing the fintech startups to play in the big league.
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