Fintechs and banks need to be careful to comply with new and existing regulations in light of the increased scrutiny from regulators.
The global financial system faced many new challenges in 2022 due to the industry’s dynamic nature. Moving into 2023, a new problem presents itself: how can financial institutions find a happy medium between the potential downsides and upsides of adopting disruptive technologies?
There were more threats to the international financial system in 2022 than in any other year on record. There have been enormous challenges, ranging from a pandemic to the fallout of the Russia-Ukraine conflict. The aftermath includes disrupted global supply chains and the highest inflation levels in decades.
While these problems remain, a new one emerged in 2023: how financial institutions weigh the risks and rewards of adopting cutting-edge, potentially disruptive technologies. Because of this technological change, regulators are working harder than ever to make sense of the increasingly intricate financial markets and steer them responsibly.
The convergence of these economic, technological, and regulatory headwinds suggests that the financial services ecosystem will transform significantly.
Compliance is at the epicenter of this shift, providing a vital link in the network that improves how financial institutions operationalize and derive value from their data while informing regulators about creating safer financial systems.
Financial institutions and fintech firms have reconciled after initially being at odds. Both parties benefit from the partnership: banks and credit unions gain access to cutting-edge technology without building it themselves, and fintech gains a pre-existing customer base. However, there are some downsides to bank-fintech collaborations as well.
Fintechs and banks need to be careful to comply with new and existing regulations in light of the increased scrutiny from regulators. Therefore, to ensure that all financial professionals are on the same page regarding fintech compliance, here is a list of the best practices.
Businesses that only exist online
New rules for the operation of fintech and digital-only banks may be forthcoming from regulators. The OCC proposed a national charter for financial technology companies last year. If approved, this would help fintech provide full banking services to the public while being subject to stricter oversight.
Already, it has sparked heated debate in the business world, and some aren’t even waiting for the OCC to weigh in before moving forward with ambitious plans.
Recently, a well-known online lender actively sought an application for an industrial bank charter from the FDIC. Company officials want to provide clients access to FDIC-insured checking accounts and credit cards.
In addition, the bank intends to operate solely online, doing away with physical locations and ATMs that accept deposits. The industry must wait for the FDIC’s decision on this matter. How many other digital-only businesses evaluate the market and decide to offer traditional banking services could hinge on the outcome of this experiment.
Keep the customer in mind
Its common knowledge that the Consumer Financial Protection Bureau (CFPB) has been aggressive, even excessive, in its pursuit of financial institutions it believes have violated consumers’ rights since the agency’s inception. This is now true of both traditional banks and newer fintech companies.
The Consumer Financial Protection Bureau fined one such fintech, a consumer lending company, USD 6 million because it did not provide borrowers with adequate opportunity to improve their credit or obtain loans at lower rates, violating consumer lending laws. Due to the prevalence of partnerships between banks and online lenders, the latter must be extra vigilant in protecting their customers’ data.
Act in advance
It’s important to remember that regulators’ perspectives on fintech are still developing and likely to change. Fintechs initially presented unique challenges for regulators because of their differences from conventional financial institutions.
Fintech firms appeal to customers because of their innovative nature, but regulators are still working to ensure that they comply with a financial regulatory framework without stifling that innovation.
Germany, the host country of the most recent Group of Twenty summit, argued that fintech regulation is crucial to the health of the global financial system. Fintechs, like banks, should prioritize working with regulators and keeping up with the latest compliance developments to keep providing the digital financial services that customers have come to expect.
Creating more secure ecosystems by adhering to regulations
Many believe regulators’ inability to comprehend and, thus, properly oversee the financial systems contributed to the 2008 financial crisis. Despite this historical lesson, there is a wave of failures at US regional banks today, which once again begs the question of whether regulators are knowledgeable enough to manage the increasingly complex financial systems we operate.
Regulators’ ability to respond to financial crises is even more worrisome by looking at historical examples that the financial institutions’ persistent adoption of new technologies further weakens. To put it another way, how can authorities deal with threats that have never existed before? It is critical because predictable crises, like a bank run, are less dangerous than those we can’t anticipate.
However, just as communication compliance can help improve how financial institutions function, it can also assist regulators in ensuring the security of economic systems. If the submission makes potential risks visible to regulators early, the central problem of the unforeseeable risks attached to new technology need not be the case.
When capturing and monitoring the communications of the world’s largest financial institutions, Smash knows the value of applying its own machine learning and artificial intelligence tools to massive data sets to spot emerging trends and areas of concern. Regulators can take preventative measures to ensure the financial system’s stability if they are alerted to new threats in time.
Marketers often portray banks and regulators as adversaries, but banks rely on regulators to maintain a stable financial system. These organizations benefit from regulators having the most up-to-date information to better prepare for future risks.
Eventually, businesses will work with their clientele to educate the regulatory body on what they should be on the lookout for. Compliance is poised to be pivotal in linking these two pillars in the ever-evolving financial field for the mutual benefit of a safer, more secure financial ecosystem.