How Can Fintech Herald the Next Phase of Compliance Management for Startups  

by Arun Bhatnagar

The fintech players have enjoyed a free ride for the last two decades as they faced minimal regulatory compliances or legal sanctions. This leeway was on the principle that fintech is an emerging area. Platforms are not financial institutions, so traditional compliances should not apply to them.

Fintech platforms have taken full advantage of the Wild West environment and developed deeper connections with their customers, created disruption for traditional players and successfully navigated market changes. However, things have started to change as more and more governments tighten the nooses around fintech and bring them under greater regulatory compliance. 

Understanding Fintech Compliance 

It means complete compliance and adherence to all the rules, laws, by-laws, and restrictions applicable to the fintech industry. Fintech companies must follow compliance obligations diligently. It shows their commitment towards safe and reliable data storage and assures their users about the safety of their sensitive information.

Additionally, due diligence with all the compliance obligations will save the company from expensive cases and hefty fines. Recently, many national governments have brought fintech under stringent regulatory control related to data storage, sharing, and money laundering. 

Fintech platforms will continue to innovate to bring better customer services. They must also navigate the quagmire of legal and administrative compliances to ensure secure operations. 

Navigating Fintech Regulations for Startups 

Just like traditional financial institutions, fintech platforms would also need to complete regulatory compliances in various fields like intellectual property rights, contracts, and licensing. However, governments are also aware of the fact that overburdening fintechs will disrupt the entire sector. Hence, there is a unanimous view among various regulatory bodies to frame the compliances so that fintech companies do not collapse under pressure.

Keeping Up With Regulatory Changes

A fintech platform needs to keep pace with regulatory changes incorporated by different agencies. Risk management exercises can enhance its chances of success. Moreover, a company that is up to date with regulatory changes acquires greater credibility and enhanced reputation. 

To overcome legal and regulatory changes, fintech platforms need to form a separate compliance department headed by specialists in law and regulations.

Addressing Compliance Challenges for Fintech Startups 

Compliance is a new area of concern for fintech platforms. Compared to traditional financial institutions, they have been exempt from all kinds of regulations and compliances since their inception.

However, concerns regarding national security and the safety of sensitive information drove governments to bring fintech companies under the ambit of regulations and laws. Fintech platforms can take the help of several AI-enabled companies offering financial compliance assistance.

Importance of Hiring a Chief Compliance Officer 

Here are the major reasons why fintech companies should look to hire a chief compliance officer to take care of all regulatory compliances:  

  • The Chief Compliance Officer (CCO) will ensure the company is updated on all regulatory compliance. A CCO is a specialist in compliance management, and they will handle all suits and cases arising as part of the compliance process. 
  • Another responsibility of the CCO is to take proactive steps to mitigate financial and non-financial risks. Financial risks involve corruption, money laundering and fraud, and non-financial risks include damages to goodwill and brand reputation. 
  • Another advantage of having Chief Compliance Officers is that they will inculcate a culture of compliance within the organisation and improve the company’s ethical integrity. CCOs will also help set benchmarks for current and future employees regarding all compliance activities.

Leveraging Outsourced Compliance Solutions 

A fintech platform can complete the compliance requirements by the in-house team or by outsourcing the entire compliance process. The major advantage of outsourcing compliance activities is that it incurs fewer costs and far less time than an in-house compliance team.

However, you must keep in mind that companies have to keep some core components of compliance with themselves and only the non-core components are outsourced. Therefore, outsourced compliance solutions support the in-house team in fast-tracking compliance processes and ensuring there are no errors in the process. 

Safeguarding Data in Fintech Operations             

Data is the most valuable component in fintech operations. Fintech platforms collect and process huge amounts of data, which is why governments feel the need to bring these companies under regulatory compliance.

The international payment system runs on the Payment Card Industry Data Security Standard, which contains 12 requirements that companies must follow when collecting, storing, and processing customers’ financial information. 

Moreover, the EU and USA have introduced stringent data protection laws like the GDPR and California Consumer Privacy Act respectively which call for robust data protection mechanisms for both fintech and financial institutions. Entities not following these regulations will have to face hefty fines and penalties. 

Ensuring Anti-Money Laundering Compliance in Fintech 

Incorporating strong anti-money laundering provisions in their functioning is a crucial step in the compliance system of fintech companies. National governments and intergovernmental organisations are pretty stringent regarding money laundering activities, as total losses from money laundering stand at $2 trillion.

Fintech platforms must ensure complete compliance towards anti-money laundering mechanisms as it is a top priority for regulators. 

Securing Fintech Platforms with CyberSecurity Measures 

Fintech platforms are facing a vicious challenge from hackers around the world. In recent years, we have witnessed an exponential increase in cyberattacks on fintech servers, leading to billion-dollar losses. In light of these developments, it has become imperative for fintech platforms to incorporate robust cybersecurity measures in their systems and secure customers’ information and operations. 

Many regulators mandate strong cybersecurity measures for fintech platforms as a part of the compliance structure.  

Conducting Compliance Audits, Examinations and Assessments

Regular checks, audits and assessments also form a core component of the compliance structure for the fintech platforms. These activities will allow companies to ensure no gaps and inadequacies in their documents and systems. They will ultimately result in successful compliance towards all rules and regulations mandated by regulators. 

Filling compliance reports can be a hefty task, given the huge volume of data and documents involved in the process. Hence, regular assessments and audits will increase the efficiency of the compliance process and reduce time and cost. 

Implementing Effective Risk Management Strategies

Here are different steps for formulating an effective risk management strategy for fintech platforms: 

  • The first step is to identify the risk faced by the organisation. It includes both financial and non-financial risks that fintech companies face.
  • The next step is categorising different risks based on severity levels. Companies can segregate the risks using different factors like the potential outcome of such risk, time horizon, etc.
  • After categorisation into different segments, the company should curate effective plans and strategies to mitigate the impact of such risks. 
  • After devising plans for risk mitigation, the next step is to monitor its efficacy continuously. 
  • Flexibility is important in any exercise, and risk management is no exception. Fintech platforms must be flexible and agile and continuously change as the situation demands. 

Developing Comprehensive Compliance Training Initiatives 

Every fintech platform should develop strong compliance training practices to inform its employees about the importance of every compliance process. Effective training methodologies will help employees learn the compliance processes, make the entire system seamless, and increase accuracy.         

Every fintech firm operating in the payment sector, wealth management, and cryptocurrencies is facing increased scrutiny and compliance worldwide. Fintech platforms operating in the payment sector need to obtain an Australian Financial Services Licence within 180 days of the product introduction.

This increases accountability in the entire payment ecosystem. The European Supervisory Authorities have targeted innovation hubs and mandated extra checks and regular information regarding the work done on new and emerging technologies. 

The International Organisation of Securities Commissions is focusing on investment frauds targeting retail investors. EU Parliament has passed a law establishing a separate anti-money laundering body with powers to oversee the entire fintech sector and develop cooperation systems for anti-money laundering and terrorist financing. 

Examples of Fintech Compliance in Practice 

Many AI-enabled companies are offering payment APIs as a solution to financial compliance for fintech platforms. Companies like PayPal, Stripe, and Decentro are leading players in the field of API solutions for completing financial compliance.

Some of the major benefits of API-enabled solutions are significantly lower costs, speedy completion of all processes, in-built self-check mechanism for review, and payment options in many currencies.

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