Trends and Imperatives of Fintech Regulatory Compliance

FinTechs focus on building strong relationships with customers and quickly adapting to changes in the market. However, recent regulatory and business developments indicate a stricter compliance regime, driving newer tools and processes.

Banks are collaborating with FinTechs to capitalize on their disruptive potential and fulfill the needs of tech-savvy customers. However, new risks to data and customer data privacy come with newer technologies. Regulatory authorities seem to keep up, resulting in very stringent compliance requirements for the FinTech and banking sectors.

What is FinTech Compliance

According to an expert blog at The Pulse,” Fintech compliance is the adherence to regulatory laws that govern new business models and technologies in the financial industry. It refers to the processes and policies FinTech companies implement to ensure their operations comply with applicable laws, regulations, and industry standards. This may involve managing risks associated with data privacy, cyber security, and consumer protection.”

FinTech solutions are more sensitive to data risk since they retain personal and financial information and facilitate money transactions. Compliances and regulatory authorities recognize this fact. As a result, FinTech is one of the most impacted sectors as far as data privacy rules go.

Regulations differ depending on the type of business, the amount and type of data gathered, and the service location. Therefore, no single set of rules applies to all FinTechs worldwide.

Furthermore, the regulatory landscape is fragmented. FinTech compliance regulations can be enforced through multiple organizations.

It is not always easy for a CIO to track all sorts of compliance globally, and this drawback could pose challenges.

So, enterprises need expert guidance in the area of compliance. This expert resource can be their compliance advisor and help ensure adherence to applicable compliances and revisions. They can keep an enterprise updated about the potential penalties and fines in case of non-adherence to these rules.

Also read: Best Practices for FinTech Compliance

Why do FinTechs need regulatory compliance?

In the FinTech industry, compliance is critical for a variety of reasons. Regulations establish a regulated framework within which FinTech companies can develop and do business while adhering to high ethical standards and legal requirements.

Staying compliant with relevant legislation allows firms to achieve the following:

• From the market point of view, it promotes trust and confidence among consumers, investors, and stakeholders. It shows the brand demonstrates the company’s commitment to ethical business practices and data protection.  They can rest assured that the company follows the rules set for the safety of their data and processes. It ensures protection from data breaches, fraud, and financial crimes.
• Compliance helps to ensure that FinTech is a fair and safe environment for businesses to operate in and that their clients receive the best services possible.
•  Protect consumers by ensuring the company’s offerings are fair and transparent. This involves controlling interest rates, fees, and the usage of client information.
• Contribute to the general stability of the financial system by discouraging excessive risk-taking and reckless lending practices, which can lead to economic crisis.
• Impose strong FinTech compliance rules, such as KYC and AML procedures, to help combat financial crimes like money laundering, terrorism financing, and fraud.
• Implementing effective data security measures can help protect sensitive consumer information and reduce the risk of data breaches.
• Help to make financial markets fair and transparent by preventing market manipulation and insider trading.
• Help to control cross-border transactions and ensure regulatory uniformity.
• Ensure clarity on authorized practices, lowering the chance of legal challenges and penalties.

Regulations can be national or state-specific, as well as global. For example, the United States has the California Consumer Privacy Act for data privacy. Fintech brands must adhere to that if they want to do business in the US. For data privacy regulations, the EU has the GDPR, which is also very stringent.

Globally, there are organizations such as The Financial Action Task Force (FATF), an intergovernmental G7-initiated body that sets rules to combat money laundering and terrorism financing.

These are just a few of the regulations that Fintech brands need to adhere to.

Trends in FinTech compliance

Here are the top five trends for compliance that every financial practitioner should know:

1. New Rules for Digital-only FinTech firms

Regulators may soon issue new rules governing how FinTech and digital-only banks operate.

Last year, the Office of the Comptroller of the Currency (OCC) proposed a national FinTech charter, allowing FinTechs to provide full banking services. However, this move also subjected them to more stringent regulations.  Furthermore, it intends to be a digital-only bank with no branches or deposit-accepting ATMs.

There are already sharply different viewpoints in the business. Some brands are not even waiting for the OCC before making big plans. Recently, a popular internet lending company went all in on an application with the FDIC for an industrial bank license. The startup plans to provide its users with an FDIC-insured bank account and a credit card offering.

The industry must watch how the FDIC ultimately rules in this case. It could influence if a huge number of additional digital-only providers assess the market and decide to try their hand at full-service banking.

2. AML investigation

Banks have long been required to deal with the many parts of anti-money laundering (AML) compliance. Now, FinTechs must adhere to strict regulations in this field.

One such example occurred in 2015 when the Financial Crimes Enforcement Network (FinCEN) imposed a $700,000 penalty on a digital currency operator for failing to maintain an acceptable AML procedure.

This company has already formed agreements with numerous banks. Some of these may have been implicated due to their association with the company. This emphasizes the significance of banks conducting due diligence before entering into FinTech collaborations.

3. Focus on the Consumer  

Consumer Financial Protection Bureau (CFPB) ardently works to protect the customers of this sector. They stringently prosecute financial companies that violate consumer rights.

This has affected not only established financial institutions but also FinTechs.

Many financial institutions work with online lenders that enable fast and easy online financial assistance. Their digital nature makes them popular in the market. However, they also need to adhere to the CFPB guidelines.

4. The Increasingly Critical ‘Know Your Customer’

FinTechs also struggle to meet the compliance requirements of ‘know your customer (KYC).

With banks focusing more than ever on detecting fraud and preventing terrorist financing, KYC compliance with FinTechs must be top-notch.

There are innovative tools that support this process. Fintech brands may use AI or ML data collation capabilities. This helps to speed up the process of identifying customers and makes KYC easier.

5. Compliances still WIP

Finally, it is worth mentioning that the regulatory approach to FinTech is still in its early phases and continually evolving. Regulators are still unclear on the rapidly changing digital scenario in which FinTech operates. They know about banking operations, but B2C FinTech is evolving too fast for regulators to keep track.

However, authorities are increasingly ensuring FinTech companies comply with financial regulatory frameworks. Their task is not to enforce rules that impede the speed of innovation that makes FinTech tools so enticing to customers.

FinTech companies should continually engage with regulators to stay updated on the newest compliance developments. This will guarantee that their innovation process does not suffer due to newer rules.

They can thus ensure that their consumers continue to have access to the digital financial services they have grown to rely on.

Conclusion 

The FinTech sector’s strongest advantage is its innovative use of technology and ease of use. On the other hand, compliance and security issues remain their most difficult obstacles.

Data breaches, thefts, and violations of regulatory regulations can cause businesses to lose a significant amount of capital, as well as customers and reputation.

Fintech brands must understand and follow rules and compliances to ensure that transactions and data usage inside their product are secure.