For the past 20 years, the fintech industry has operated in something of a wild west, with some prosperous firms staying under the radar and away from lawmakers and regulators. However, the public and government organizations are now more aware of the advantages and services that fintech offers, as well as how dubious some aspects of the sector might be.
For Fintechs, What Does Compliance Mean?
The observation and adherence to all laws, rules, limitations, and regulations that are relevant to a fintech firm is known as fintech regulatory compliance. However, each organization has a different interpretation of what it actually means in practice, so navigating the complex web of rules and regulations may be intimidating.
Financial regulatory compliance, no matter how annoying, is a must for every business working in the fintech sector. It safeguards the business, its clients, and consumers and helps prevent costly, even bankrupting, fines for noncompliance with regulatory requirements.
Complying with fintech regulations necessitates knowing the financial regulations established by national and international government authorities, which is no easy task. Sometimes you need a compliance specialist or team at your side to bring things entirely under control.
Risks And Dangers
Fintech rules aim to mitigate three primary risks, which are common to financial services in general: cyberattacks, money laundering, and data breaches.
Information Breaches
Fintechs frequently handle enormous volumes of personal data, which might include social security numbers, names, contact details, and account numbers in addition to financial data like security and account numbers. According to IBM's 2022 Data Breach Report, 83 percent of the firms under investigation have experienced a data breach. If businesses don't implement sufficient security measures, a single breach may lead to massive data breaches or thefts, ruining a company's brand.
Cyberattacks
Cyberattacks are the cause of unlawful access to mountains of private data annually, whether through data destruction, alteration, disabling, or theft of system functionalities. Data targets are not a must for a cyberattack. Certain types of cyberattacks are expressly designed to destroy a system or prevent access to it until a ransom is paid.
Laundering of Money
Given the nature of the activity, the UN estimates that between $800 billion and $2 trillion are laundered annually, which is a preliminary estimate that might represent up to 5% of the world GDP. Anti-money laundering (AML) laws and regulations are implemented by nations to curb illicit activity by preventing the transfer of funds between financial accounts or the conversion of illegally obtained assets into other assets, all while trying to hide their true source from law enforcement.
Mary Kopczynski, CEO of US-based regtech RegAlytics, commented on the upcoming compliance phase, saying that "future challenges will be based on the next market shock, whatever it is." All businesses of that sort will be suddenly in deep water if you see another "Robinhood"-like scandal, the person said, alluding to the stock trading app's decision to stop trading on specific high-volatility equities. Just weeks before the business was supposed to submit an IPO prospectus, that decision cost it $70 million in regulatory fines alone.
Regulatory Organizations
Rules need to be enforced. Additionally, there are five pertinent entities that deal with enforcement for fintech companies operating in the US.
FinCEN
The US Department of Treasury oversees the Financial Crimes Enforcement Network, or FinCEN. In order to discover both domestic financial crime and foreign money laundering, it is in charge of gathering and evaluating data pertinent to criminal investigations, such as financial transaction analysis.
FTC
By eliminating what its mission statement refers to as "anticompetitive, deceptive, and unfair business practices," the Federal Trade Commission safeguards consumers and maintains a competitive corporate environment. The FTC is able to impose federal restrictions and keep an eye on companies to make sure they are complying. The FTC will play a major role in developing new laws for the financial services sector as authorities start scrutinizing tech-driven financial services more thoroughly. The FTC's cases and processes make a great lunchtime read (if you're searching for something to eat with your burrito).
FDIC
Most bank regulations, including those pertaining to mobile banks, are within the purview of the Federal Deposit Insurance Corporation. It not only decides if a bank is eligible for the insurance, but it also insures bank deposits.
SEC
The US Securities and Exchange Commission is in charge of overseeing compliance and regulations pertaining to all stock market-related corporate activities. Its job is to safeguard investors as well as the market. Honest disclosure of the risk and value of the securities being offered is a requirement for SEC inspections. In order to guarantee equity in their interactions with investors, it also keeps an eye on securities brokerages. (Also worth reading are the press releases from the SEC; nothing quite compares to the drama of the stock market.)
OCC
The Office of the Comptroller of the Currency, or OCC, keeps an eye on banks to make sure they're adhering to lending practices standards, federal consumer protection legislation, and general financial regulations that affect the majority of financial institutions. When the FDIC supplies the insurance required to safeguard customers, the OCC closely monitors banks to ensure they meet the requirements necessary to be eligible for protection. (It's worth listening closely: early in 2023, the OCC will launch an Office of Financial Technology.)
How To Continue Being Cooperative
A unified framework for fintech compliance does not exist. Because fintech firms vary so significantly, there are several routes that organizations may take to become compliant. A company that processes payments through mobile devices, for instance, may face different rules than an investing firm that offers robo-advisor services. (And yeah, we also think it's awesome that there are "robo-advisors"!)
However, regardless of the area of the fintech industry your company operates in, there are tactics that can position you for success.
Adapt Your Compliance Plan To The Needs Of Your Company
Numerous facets of compliance remain mostly unchanged: Whether it's online banking, payment processing, or any other tech-based financial service, your niche probably has clear rules that all businesses operating in it must follow. The differences lie in the companies themselves, which differ in terms of their size, kind of work, clientele, and funding source.
Finding out what your company's compliance requirements are—not someone else's—is the first step towards attaining compliance. You may avoid wasting money on unnecessary adherences by making sure you're checking the boxes that pertain to you and not the ones that don't. This will also provide you the security of compliance.
Read Also: Prepare for the Future of Fintech
Locate the Skill
You've examined your company, have a general understanding of your spending plan and organizational structure, and are now prepared to begin developing a unique compliance framework that is suited to your particular requirements.
What are your current alternatives, then? Hiring an in-house compliance specialist or outsourcing your compliance needs are the two most common options for fintech firms. Once more, the best option will rely on your company.
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Appointing a special compliance specialist. Including a compliance specialist on your internal team makes it possible to have a thorough grasp of how your business upholds compliance. Additionally, it sets you on the path to formalized process archiving and the capacity for course correction. You get a go-to specialist from whom you may seek guidance and implementation customized for your company.
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Contract out the handling of your compliance. Using an outside compliance organization is particularly common amongst beginning companies because it's an affordable means of guaranteeing that your business has knowledgeable and seasoned compliance specialists. External compliance solutions ensure that the work is done by qualified personnel and allow businesses to maintain cost-effectiveness and lean operations.
Include Technological Solutions
Software designed to make the process simpler and, in certain situations, automated has proliferated in modern compliance, and this has had a significant impact on compliance. According to Andrew Haines, Global Head of Fintech at Vention, "KYC and AML have become the main checkpoints for financial services organizations and electronic money movement in general." "It used to take days to complete manual tasks like client checks and identification verification. It now just takes a few seconds thanks to AI and ML.
What Comes Next?
You've made significant progress toward regulatory compliance by first realizing its significance and then learning how to identify an individual or group within your organization that is experienced in bringing compliance to fruition. After then, it's only a question of implementing the solutions—including those that are integrated into your software—that your compliance officer or compliance service suggests.
The ongoing discussion about how governments should regulate digital platforms means that there could be significant changes in the way and locations in which fintechs operate in the years to come. These changes could be brought about by new international regulations, operating in areas with different laws, as in the case of the EU passing the Digital Markets Act, or the establishment of completely new organizations, such as the Office of Financial Technology at the OCC, which we previously mentioned. This implies that, for fintechs, flexibility must be a guiding concept in compliance strategy, following the establishment of a compliance procedure.
