Key compliance measures for Fintech firms on board

Several industries have had to innovate to ensure business continuity in the last two years. It was also important from the point of view of developing consumer connection to gain a competitive advantage. A relatively emerging sector like fintech has had to work hard to carve out a good place for itself in India. Last year, Indian fintechs raised an impressive $9 billion. The funding came with the promise of innovation, with the promise of building models that haven’t been built before to serve customer needs that haven’t been addressed. But the regulations must be followed while working so closely with money and finances.

Considering the tremendous pace at which Fintech is growing, potential threats such as fraud, breaches and cyber security risks are also increasing. Currently the third largest FinTech ecosystem in the world, behind the US and China, the Indian fintech sector is expected to grow at a compound annual growth rate of 22% over the next five years. New payment systems and models can compromise security and market integrity. Blockchain, crowdfunding and distributed ledger technology (DLT) are also vulnerable to fraud and hacks. Because of these risks integrated with the financial sector, the financial sector must be heavily regulated across geographies.

Let’s look at some of the key best practices fintechs can follow to safeguard the financial security of their customers, especially while evaluating partners and vendors that offer employee financial wellness.

Consumer-centric digital businesses

Regulations exist to protect the interests of end customers. They exist to ensure that short-term benefits do not harm long-term financial independence. For example, a new innovation like lines of credit, which flourished for a while, was shut down soon after. In June this year, the Reserve Bank of India (RBI) issued a circular saying that lines of credit cannot be loaded into prepaid instruments.

Businesses that processed transactions worth more than 3,500 crores were now at risk.

With regulators bringing extra scrutiny to new innovative technologies, fintechs and the banks that work with them must be extra careful that they comply with regulations, both new and old.

Lines of credit are a pre-approved loan amount, usually from a bank or NBFC, that can be used when the customer requires it.

Customers also have opportunities to use overdraft facilities provided by the bank or access to their earned salary (Salary-on-Demand) provided in collaboration with employers. In a world full of emergencies, where employees may need urgent access to funding, Salary-on-Demand is a great system for employers to ensure the well-being of their employees. However, employers are also responsible for ensuring compliance to avoid regulatory problems in the future.

Make getting to know your customer mandatory

Fintechs replicated credit cards without going through the necessary Know Your Customer (KYC) requirements and underwriting norms required for a credit card. The latest guidelines for digital lending also re-emphasize that a credit limit must be transferred from the lender’s bank account to
borrower’s registered bank account.

The main differentiating factor between prepaid instruments and bank accounts is that the KYC requirements for opening prepaid instruments (PPIs) are relatively relaxed and not subject to
same degree of scrutiny. This should be changed. Making KYC mandatory helps add security cover.

Identify fraudulent models

Some basic questions one should ask before using credit from fintechs and non-banking companies (NBFCs) are: Where does the money come from? What is the underlying instrument? A bank account? A credit card? A prepaid instrument? How does the money flow between the several entities involved? Are payments made directly to end dealers without going through the borrower’s bank account?

Regulators cannot monitor all financial institutions and only audit non-compliant models after they become large enough to be actively audited. Until then, it is important that you as a customer stay informed and aware of such models that can cause problems. Using services from non-compliant organizations can jeopardize your credit score and financial security. Moreover, if organizations are willing to ignore regulations in one aspect, they may do the same in other aspects, such as data security and collection/recovery processes.

Prioritizing consumer safety

Leveraging technological advances to deliver financial services has greatly facilitated financial inclusion. Several banks and financial institutions have partnered with Fintechs to incorporate modern technologies such as blockchain and artificial intelligence into their products, services and operations.

Digital financial services, payment aggregators and processors, stand-alone platforms that interface with regulated institutions, and digital banks are growing in popularity. While we all appreciate innovation, one cannot ignore the responsibility for the security of their customers not to fall victim to the failed experiments of overzealous organizations. It is important to help employees manage their finances, but even more important, it is done with utmost care. Ultimately, the organization’s commitment to managing employee finances and promoting financial well-being will contribute to employee well-being and positively impact the organization.

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