INTRODUCTION
Consumers and businesses in the financial industry can benefit from innovative solutions provided by the fast evolving financial technology sector. Fintech, however, also faces substantial regulatory problems because it operates in a highly regulated environment that necessitates compliance with a variety of rules and regulations.
WHAT IS FINTECH COMPLIANCE?
It means yielding to regulatory laws concerning data privacy, consumer protection, KYC, tax, and other issues relating to financial security. With people using apps to manage their finances, compliance to the laws reduces the risk of fines or suffering from a public relations nightmare that could destroy your company. In this post, let us explore key 5 compliance challenges that fintech companies face.
UNDERSTANDING WHY FINTECH MATTERS TO GOVERNMENTS
According to the United Nations, around 2-5% of worldwide GDP is laundered each year, which accounts for about $2 trillion. Whilst this is difficult to prove exactly, it’s a very important piece of the world economy and important in understanding why governments are interested in regulating the financial sector.
Governments are also concerned about undercover attempts to obtain data through miscellaneous breaches and similar concerns relating to data privacy which can aid criminal activities.
FinTech businesses are also affecting their users in some ways that they are even unlikely to recognise. For example, think about a FinTech not structuring loans to allow customers to build a credit score, probably an honest mistake, but it could lead to huge fines and unhappy customer base.
TOP 5 COMPLIANCE CHALLENGES
1. WORRIED ABOUT GETTING COMPLIANT
For many startups, current regulations can be hard to deal with, so they may try to extend this over a longer period, using things like no-action letters to avoid violation. And when a new fintech application or product is in development, many companies may be tempted to postpone compliance for the future due to a lack of resources. However, it is important to note that lack of investment in compliance in the early stages of development can end up costing the company much more in the end. Fines for being guilty of violation of regulations can be expensive.
If you are worried about the consequences of violation, you can consider compliance auditing to assess your organisation’s responsibilities.
It goes beyond the release day. If you add new features to your app or make developments to your products, run those same compliance tests. Likewise, when involving third-party organisations, ask yourself: do their compliance and security process live up to scratch? Any data breach there could also affect you.
For any fintech startup, keeping track of all of the different current and future regulations that their product and services may need to be in compliance with can be overwhelming. However, investment in compliance can be made early by creating a financial compliance legal team in-house or hiring the services of a consulting firm and many expenses and headaches will be spared further down the road.
2. LICENSING AND REGISTRATION
Banking, insurance, securities, and fund management are all regulated services; fintech companies that offer these kind of financial services are required to obtain licences or registrations from the relevant authorities, such as the Reserve Bank of India (RBI), or the Financial Services Authority (FSA) in the United Kingdom. These licences or registrations require compliance with various cautional, operational, and consumer protection requirements, such as capital adequacy, governance, disclosure, and fair practices. Obtaining and maintaining these licences or registrations can be time-consuming, costly, and complex for fintech companies.
3. DATA PROTECTION AND PRIVACY
Data security is a major challenge for any business in this decade, especially for fintech companies that maintain extremely sensitive data. Finance tends to be one of the top markets for hackers, which is why the World Bank reports that 84% of countries have data protection laws.
Fintech companies often collect, process, and store large amounts of personal and financial data from their customers. Protecting that data at all costs is a major challenge which makes them subject to data protection and privacy laws. These laws impose strict obligations on fintech companies, such as obtaining consent, providing notice, ensuring security, and respecting data subject rights. Failing to comply with these laws can result in hefty fines and reputational damage.
4. GEOGRAPHICAL VARIATIONS IN REGULATIONS
Fintech companies that operate across multiple jurisdictions face the challenge of complying with different and sometimes contradictory laws and regulations in each jurisdiction. For example, a fintech company that offers cross-border payment services may have to comply with the payment system regulations, foreign exchange regulations, tax laws, and sanctions laws of each country involved in the transaction. This can create legal uncertainty, operational inefficiency, and regulatory risk for fintech companies.
Take for instance, the US has the largest FinTech ecosystem and a raft of legislation follows. But, in the UK, regulators are more friendly towards FinTech. Therefore, careful research about the various institutions that regulate in a specific country is necessary for safe and responsible financial services.
To prevent anything from coming back to haunt you, set clear goals about your target market in order to understand any geographically specific regulations, and you may even need to buy a domain to do so.
5. PREVENTING FRAUD AND INSTILLING TRUST
Bad actors can pretend to be specific users to access their personal and financial information and steal funds and individuals or organisations can also launder money. Preventing such frauds is a must for fintech companies.
Fraud prevention starts right from the customer onboarding phase. Safe customer onboarding is the first and most important step of the KYC processes that a company’s risk and compliance team should consider applying. Investing in a thorough and completely digital customer onboarding process can not only be effective in preventing fraud, but it can also leave customers feeling secure and trusting of a company’s product or service.
When users has been securely onboarded, fintech companies can use AI and machine learning to automate transaction monitoring and keep track of a customer’s financial behavioural patterns. These patterns can be used as parameters to identify when potentially fraudulent activity is about to happen. An automated notification can then be sent to the user who can then verify the activity.
CONCLUSION
Fintech faces significant regulatory challenges that require compliance with various laws and regulations. knowing how to engage with compliance law can save a company from dying, due to the hefty fines from regulators and backlash from the public that accompany it.
Fintech is also a very dynamic sector as governments continue to react to this fast-paced industry. It’s a good idea to be keenly aware of your particular niche product and how this might change regulatory procedure. You must as well be prepared for data breaches and the potential fallout of using third parties or blockchain.
