It’s Not One Size Fits All

The world of financial technology (fintech) has grown at a breakneck pace over the past several years, driven by advances in technology and a focus on personalizing solutions to meet specific consumer needs and preferences. These companies cover numerous disparate sectors, from fintechs that help travelers split up payments in advance of a big vacation to shoppers investing in rare memorabilia. Innovation, though, can sometimes outpace compliance. This can result in heightened risk for businesses engaged in the emerging fintech marketplace. To lower your risk profile, consider the below.

Tailor Your Compliance Strategy to the Business Strategy

Fintechs carve out a unique area in the financial sector because they often promote financial inclusion and wider consumer access to products than the more traditional financial institutions. But just like traditional banks, fintechs need to consider how compliance factors into their overall strategy, including how their partnerships with other companies will figure into the mix.

Take, for example, Affirm, a digital lending fintech. It is working with the popular vacation rental website VRBO to enable users to book their rental homes in advance of their trips and pay for their getaways in installments. Affirm’s priority is being responsible for its own compliance, but it also must be aware of any risks posed by VRBO. That means the compliance team needs to have expertise across multiple sectors, focusing on international, federal, state and local laws. This dynamic certainly adds a certain level of complexity to the role of a compliance officer, so the right expertise is critical.

Tackle Challenges

As mentioned, the fintech world is broad and crosses over into many different established business sectors. This can cause real headaches when putting together a compliance strategy and understanding your regulatory requirements. One such challenge is often tied to budgetary limitations, particularly for newer companies that are still growing and finding their footing as a business. Often these companies won’t have the necessary resources they need to pour into an airtight compliance strategy. Common areas of significant spend for a compliance program include labor and technology.

However, thinking you don’t have the budget for a comprehensive program will not be viewed as an excuse if you get into hot water with enforcement officials. You still must prioritize compliance to the best of your abilities and targeted to your own unique risks, whether that results in manual or automated processes. Fintechs should, therefore, budget what they can for compliance early on in their business planning. Spending early can save you from huge issues down the road.

Of course, fintechs don’t always know which of their processes should be automated and which should require a human touch. Some benefits of automated processes include faster transaction rates and the reduction of fraud. There’s no right or wrong answer to how much to rely on technology. Fintechs are, of course, technology products at their core. But when it comes to compliance, a human element is often needed to provide a perspective that technology simply cannot. Combining and balancing multi-layered technology and human oversight at the right decision points is recommended.

Factors to Weigh

Importantly, no two fintechs will do things the same. This emphasizes the need for a customized approach. Though there is no one size fits all playbook, a customized approach to compliance can be built on a foundation of what is known to work well. When considering a risk-based compliance strategy, fintechs should:

●     Prioritize tone from the top – Fintechs must ensure that management understands the importance of building a strong compliance program and can demonstrate that to employees.

●     Know your customer – It’s important that fintechs have a strong Know Your Customer program in place to assess customer and client risks. If you’re on top of both the anticipated as well as actual transactional activity patterns of a customer, you’ll be able to identify behavior that aligns with your expectations and identify aberrations. There’s no margin for error when it comes to something like transacting with a sanctioned individual or entity.

●     Pinpoint where to build anti-financial crime controls – Since every fintech is different, this will vary from business to business. At the point of payment, however, is a typical example of a point in time at which fintechs should likely have strong anti-financial crime controls. Identifying and shoring up vulnerabilities is key to having a strong compliance program.

●     Monitor regulatory requirements – Regulations and laws constantly evolve, so it’s imperative for compliance teams to keep up with those changes and have protocols in place for when they occur. A compliance department may be the last line of defense when it comes to staying on the right side of regulators and it should be treated with that level of importance.

Paving the Way Forward

Fintech companies are the future of business. Many fintechs are growing at an astounding rate and if there is a digital solution available to make daily life and its transactions more seamless for consumers, a fintech company will fill that space. That’s why regulatory regimes are constantly evaluating how to keep pace. With new rules and regulations being created, compliance must be viewed as a top priority at fintech companies. By implementing a risk-based approach that tailors compliance responses to individual situations, compliance teams can keep up with the exponential growth and change in the world of fintech, safely and securely.