Partner Nicola McKinney comments on fintech due diligence and fraud in Raconteur

Partner Nicola McKinney comments on the recent collapse of several fintech companies resulting from due diligence failings, improper governance or large-scale corporate fraud.

Nicola’s comments were published in Raconteur, 12 June 2025, and can be found here.

Are recent failed fintech deals reflective of a wider trend in the market such as investors running high-stakes deals without the right visibility into company fundamentals?

“While I would hesitate to identify this as a trend, there is likely a correlation with the pace of innovation. Companies failing in this way – as a result of large-scale and systemic fraud, and leaving huge creditor losses – will inevitably go hand in hand with investors trying to keep abreast of rapidly developing technology, and wishing to exploit opportunities quickly. There may be a reluctance to miss out on the next fintech unicorn, and the potential for huge profits. There could also be internal pressures to move forward and to take bold investment positions, and not to delay by taking a longer period for due diligence. Given the speed of advancements in blockchain, AI, and quantum computing, that fear of missing out could continue to drive riskier investments.”

Why do fintech deals continue to attract inflated rounds despite patchy governance?

“A herd mentality may develop; if one top-tier investor invests in a new fintech company it can lend it a gloss of legitimacy, with other investors following suit. The first investor will apparently have accepted the governance structure, and even if there are other concerns, there may well be an assumption that the first investor has carried out thorough due diligence, and so it is safe for followers to perhaps abbreviate their own independent due diligence processes.

“The inadequacy of the governance may also not be obvious and there might be a veneer that proper controls are in place – particularly where professional audits are being carried out. Issues like the siloing of information or departments – which was a feature in the alleged Stenn fraud – might not be obvious, particularly when a company is smaller, as it is likely to be before the huge investors come in.

“Even if the governance is more clearly ‘patchy’, this might be accepted as a feature of a start-up which can be improved as it grows, rather than demanding perfection immediately. There is also a narrative around fintech start ups that the ingenuity and creativity of the founders does not necessarily sit well with traditional governance, and that it will take time for the company to mature to develop more traditional internal governance. Some riskier behaviour and rule breaking might be willingly tolerated early in the life of a company, even by more traditional, risk averse investors.”

What are the major consequences of poor due diligence in the fintech space?

“The major risks will be to investors and creditors. For each big fin-tech collapse that occurs, there will also be reduced confidence in the sector, which needs investment – often in very large sums to develop proprietary technology, or to scale up – in order to thrive.”

How can better transparency prevent future blow-ups?

“The degree of due diligence which might be required ahead of an investment may well be context led, and an investor might decide to take on the greater risk and invest early with less scrutiny that might be ideal. What can often fall by the wayside are opportunities after the initial investment to continue to challenge, to seek independent verification of information where that is possible, or to question any contradictions. It can be useful for investors to think of due diligence as an ongoing process; continue to ask questions and to sense-check representations, particularly if further investment might be considered.

“For example, in the Stenn fraud, the investor companies were provided on a monthly basis with lists of the names of the blue-chip companies allegedly selling invoices to the relevant Stenn entity. The veracity of those lists were eventually checked, and pulling at that thread was at the heart of the HSBC investigation that led to allegations of fraud, the appointment of administrators, and the collapse of Stenn. But independent verification of what the lists represented could seemingly have been sought much sooner by any investor with a more proactive approach.”

What trends are driving investor behaviour, risk appetite, and due diligence?

“There are a number of factors which investors – and fraud lawyers – will probably keep an eye on, most of which probably suggest that interest in fintech investment will not diminish.

“For example, the rapid pace of innovation; trade policy volatility in the USA following the change in administration; and the SEC departing from the Gary Gensler-led approach to crypto – which has had a buoying effect in that sector. But, weighing against that are high profile frauds like Stenn and Frank.

“Temasek, which manages Singapore’s sovereign investments, also recently announced that it would move away from start ups, partly as a result of failed investments in FTX and eFishery, both of which collapsed following frauds, all of which could reduce investor appetite for the sector.”