Israel has become a center for blockchain technology and is recognized by leading global financial institutions as being a central hub for innovation. Israel continues to grow and is attracting more startups and funding, with the most recent prominent example being Israel’s Facebook team who developed the global digital currency, Libra. Israel has a number of advantages which makes it attractive to investors, including its small size, which acts as a great testing ground but also its legal and regulatory landscape which provides for more certainty and clarity for startups and investors who are coming to the region new.
FinTech, short for Financial Technology, describes tech-enabled products and services that improve or “disrupt” traditional banking services. It is not a new concept but the pace at which new and upcoming financial services of the 21st century are being created is new.
Where once financial institutions only focused on back-end technology solutions, they are now focusing on front-to-back processes driving improvements to and disrupting traditional financial services, ensuring that the customer experience is enhanced from the outset.
Financial institutions are investing significant amounts of money in FinTech solutions globally and regionally in a number of ways, most notably by collaborating with FinTech startups or by setting up challenger banks.
With the expected increase in new technologies entering the market over the next few years, the time in which services are offered and transactions are completed will also improve, ultimately reducing the need for hard cash. The high-speed pace at which we will become accustomed to will become the norm; consumers’ expectations in this regard will increase which in turn highlights the dependency that we will have on the technology working, being available and being fit for purpose.
Key legal considerations
From a legal perspective, it is crucial to pay attention to contractual provisions when negotiating contracts with third-party technology service providers and FinTechs. Contractual provisions will need to be robust and drafted to cater for such dependencies including:
- Appropriate service levels and performance obligations and liability: The willingness of suppliers to commit to performance assurances is likely to depend on their risk/reward profile with the allocation of risk between the parties needing to be balanced appropriately. Suppliers typically prefer to provide the technology on an “as is” basis, with a limited availability service level, excluding warranties regarding performance of the services and limiting their liability. This is unlikely to be acceptable to financial institutions, however. Stronger commitments and remedies for suspension or failure of the service will be required as the risk to financial institutions of systemic issues with banking-related infrastructure and services could be material from a financial and reputational perspective. Top priority risk areas for financial institutions include security and confidentiality of data and, if trade-related infrastructure is used and trades settle incorrectly or not at all, the right to remedies will be paramount as will be a workable and clearly defined step-in and exit plans (see below).
- Intellectual property (IP): Traditionally, financial institutions would expect any IP in software developed for them to be owned by them or in the alternative, to have equivalent rights in the form of a license. FinTech providers, on the other hand, will no doubt want to capitalize from the commercial benefits generated from the technologies. With the creation of new technologies, shared ownership models can also be considered and may be appropriate in certain circumstances. Ahead of shared ownership models being agreed, specific rights with respect to IP still need to be worked through on a case-by-case basis.
- Step-in rights and exit plans: To the extent that the services are performed at unacceptable levels, it is important to be clear on what rights financial institutions have to step-in for business continuity purposes (to the extent this is practicable). In addition and most importantly, exit plans need to ensure that the transfer back to the financial institution or a replacement supplier of the data, assets and/or people happens in an orderly, timely and agreed manner.
- Compliance with financial services regulation: As financial institutions are governed by their local regulators, the contract must contain provisions which allow the relevant financial institution to be compliant with the standards imposed on them. This includes, for example, the right to audit or request records from the supplier either on its behalf or on behalf of the regulator, the right to exert control over the supplier and the right to achieve operational continuity.
There is no denying that FinTech in the region is rapidly emerging and with it the associated legal issues. It is important to remember however that the contractual provisions are not too dissimilar to what we would typically see in software license and development agreements. There are a number of risk-based issues that will need to be carefully considered when entering into relationships with FinTechs however these are exciting times, not only from a technology perspective but a legal perspective. As an industry, we need to ensure that innovation is encouraged and through experience and time, we form a legal and regulatory framework that helps financial institutions and FinTechs understand the acceptable perimeters in which to operate.