Companies in the financial technology sector, commonly known as FinTech, are often seen as bold innovators willing to go where traditional banks fear to tread. Major problems, however, are regulatory non-compliance. Many FinTechs, at least initially, do not see themselves as financial services providers.
As FinTechs grow and mature, they need to take a serious and close look at financial regulations and how they might apply to them. In addition to current regulations, upcoming regulations are also relevant, as FinTechs often enter new markets in which the regulations that apply to the company may change.
1. Customer due diligence
The keyword is the Know-Your-Customer (KYC) process, which is quite well known and established in the financial services industry. For FinTech companies, it is crucial to make it an integral part of their daily business practices. Performing this type of due diligence protects companies from risk by ensuring that the clients are really who they claim to be.
Validating and verifying customer information upfront provides the basic framework for managing risk throughout the customer-lifecycle. It is the first step in reducing fraud and abuse. Equally important, as with traditional banks, is the ongoing monitoring that must be performed.
Comparably, bypassing customer due diligence is like speed dating on your way to the altar. Neither the identity nor the data quality or the character traits of the customer can be trusted blindly, and negative consequences might follow.
2. Fraud detection and prevention
Building on the benefits of validating and verifying customer information, KYC measures serve to prevent and detect fraud. For example, identity theft can be prevented or, at least, risks can be reduced before serious damage is done.
Qualitative and transparent compliance put in place by any FinTech itself helps to ensure that trustworthy customers are attracted. Strong and targeted controls deter fraudsters, attract honest clients, and result in a competitive advantage that cannot be ignored.
3. Avoidance of regulatory fines
Among the most serious consequences of non-compliance with regulations are fines of regulatory authorities. For example, globally individual regulations specify in great detail which measures have to be implemented to be compliant with money laundering or terrorist financing regulations. Failure to comply with these strict regulations can be extremely costly and potentially cause FinTechs to lose important and necessary licenses.
It is therefore important to pay close attention to the latest regulations and address them both in communications with customers and on the technological level. For example, by January 1st, 2021, all payment systems in the EU had to be converted – if they had not already been – to strong customer authentication (SCA) in electronic payment transactions.
Companies that had already introduced such security systems had a competitive advantage in two respects. Firstly, they were able to guarantee their customers strong security standards beforehand and thus better protect their data and property. Secondly, the early integration of the PSD2 payment services directive into app and web applications avoided complications compared to switching systems on New Year’s Day.
4. Prepare for audits
What two words can fill a FinTech CEO’s heart with dread? Compliance audit. This doesn’t have to be the case. If the company has a system in place that allows it to review transactions that have a consistent history of proper due diligence, CEOs can be rest assured that they’ll be ready when auditors knock on their door.
This goes hand-in-hand with avoiding the regulatory fines discussed earlier. Another benefit is growth through good compliance measures, because they are a prerequisite for often sought investments by VCs or traditional banks into the FinTech to support and sustain its growth. Such partnerships only come about if FinTech can show that it operates securely, in compliance with the rules, and transparently.
5. Building brand reputation
By maintaining high ethical standards and operating an effective compliance program, FinTechs can build a positive brand based on integrity. A good reputation built on a solid track record will inevitably raise a FinTech’s profile and attract more business through good publicity and referrals from satisfied customers.
In summary, compliance is not only important for FinTechs within the legal framework, but also forms the basic building block for long-term and sustainable success. In particular, technological know-how and the implementation of state-of-the-art security standards are of great importance. IT and cybersecurity are gaining value for many industries, especially in the bank and FinTech sector. In this regard, our blog article on cybersecurity in the financial industry might be of interest to you.
Do you have questions about the implementation of your IT projects in the financial sector? We are already working with two well-known banks and are happy to share our experience with the use of freelancers in the banking and FinTech sector. Feel free to contact us at any time with your individual questions and check out our Fintech Case Study.