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Leveraging Fintech: Using Financial Technology Products as Collateral
Leveraging Fintech: Using Financial Technology Products as Collateral
Leveraging Fintech: Using Financial Technology Products as
Collateral
Fintech
is an amalgamation of “financial” and “technology,” encompassing a broad range
of digital innovations transforming the financial services landscape. In the
context of collateralization, fintech assets can include proprietary
algorithms, user databases, software licenses, and revenue streams from digital
platforms.
The
financial landscape is evolving, and fintech products are carving a niche in
the world of collateral for credit facilities. This concept unlocks new
pathways for businesses and individuals to access funding. Let's dive into the
possibility and explore the processes involved in using fintech products as
collateral.
What are Fintech Products as Collateral?
Traditionally,
collateral involved tangible assets like land, property, or equipment. However,
the rise of fintech brings innovative financial instruments into the equation.
These can include:
a)
Intellectual Property (IP) & Intangible
Assets: Patents, trademarks, copyrights, or proprietary software can be
pledged as collateral.
b)
Revenue-Based Financing (RBF) Platforms:
Fintech companies can use future recurring revenue streams from subscriptions
or sales to secure financing.
c)
Alternative Data Platforms: Fintech
companies provide scores based on alternative data (web traffic, app usage) to
assess creditworthiness, potentially influencing loan decisions.
d)
Blockchain-based Assets:
Cryptocurrencies, NFTs, and fractional ownership in assets like art or real
estate can serve as collateral, although regulatory frameworks are still
evolving.
Unlocking New Avenues for Financing
Leveraging
the above fintech products presents exciting possibilities including:
a)
Democratized Access: Startups and
entrepreneurs often lack traditional collateral but can now leverage their IP,
future revenue streams, or even online brand presence to access funding.
b)
Efficient and Data-Driven: Fintech
platforms automate processes, use alternative data for better credit
assessment, and facilitate faster loan approvals.
c)
Flexibility and Innovation: Fintech
products offer diverse options for lenders and borrowers, enabling tailored
financing solutions.
Collateralization of Fintech in Kenya
The
legal sphere in Kenya needs to quickly adapt to protect the interests of all
stakeholders at the forefront of these innovations and the consumers of the
services created as a result. The bedrock of protection of the rights of the
fintech service providers is intellectual property (IP) rights. In Kenya, the
basis of the protection of these IP Rights is the Constitution of Kenya, 2010
that mandates the state to support, promote and protect these rights under
Article 40 (5).
The
Movable Property Security Rights Act, 2017 provides for registration of
security rights in movable properties where movable properties are defined to
include intellectual property. Additionally, the Companies Act, 2015 provides
that that a company may create a charge over the company’s good will or
intellectual property.
The
jurisprudence on the securitization of fintech services is still developing
albeit slowly, however, there is sufficient legal statutory backing to protect
the interests of the entities involved in these transactions.
Challenges and Considerations
There
are hurdles to consider in leveraging fintech as collateral.
a)
Regulatory Frameworks: Not all fintech products
have established legal frameworks for use as collateral, adding complexity and
uncertainty.
b)
Valuation & Liquidity: Accurately valuing
and readily liquidating non-traditional assets like IP or crypto can be
challenging, leading to higher lending costs or stricter terms.
c)
Technology Dependence: Relying on fintech
platforms raises questions about their operational and technological
resilience.
The Future of Fintech Collateral
Despite
the challenges, the potential of using fintech products as collateral is
immense. As regulatory frameworks evolve and technology matures, this approach
can significantly improve financial inclusion and unlock new frontiers for
business growth.
Conclusion
In
conclusion, leveraging fintech as collateral requires a multifaceted approach,
encompassing technological expertise, legal acumen, and regulatory awareness.
Collaboration and adherence to best practices will be key in unlocking the full
potential of this innovative financial landscape.
By
Sitienei
G. sitienei@alakonyalaw.co.ke
Otieno
R. otieno@alakonyalaw.co.ke
25th
January 2024
