The future of fintech risk and compliance

Fintechs have evolved greatly since the term first became popular at the beginning of this decade. Initially, fintechs and financial institutions were pitted against each other with many proclaiming how new fintech innovation and digitally savvy entrants were poised to disrupt the marketplace and put banks and other financial institutions out of business. For example, UK-based Revolut has amassed over 20 million customers without even introducing any kind of direct customer-facing feature.

However, there has been a major shift recently in how people perceive the relationship between fintechs and financial institutions with banks such as Kotak Mahindra, Federal Bank and DBS Bank partnering with fintechs such as Pine Labs, CredAvenue and CredAble, respectively. Cooperation between financial institutions and fintechs has flourished in recent times as fintechs have begun to realize the appeal and importance of working with large companies that already have an established customer base. On the other hand, fintech can offer financial institutions the technology that they may not be able to develop on their own.

Regulatory scrutiny of Fintechs

While it’s safe to say that fintech has become increasingly popular over the past few years, their increased status has also brought them under increased scrutiny from regulators. The Indian fintech industry market size in 2021 was $31 billion. The sheer volume of online transactions means that Indian regulators are stretched thinner than before, making it exceptionally challenging for them to oversee the fintech industry. But things have slowly started to change. The Office of the Comptroller of the Currency (OCC) released its long-awaited proposal for a fintech charter in December 2016, which would allow fintechs to provide customers with full banking services and establish the same regulatory mechanisms for them as banks.

If the proposal is adopted, this could lead to bank-chartered fintechs increasing the competition manifolds. In fact, some fintech firms such as Social Finance, an online lending company known as SoFi, have already gone down this path. According to the application filed with the Federal Deposit Insurance Corporation (FDIC), SoFi sought to offer its customers FDIC-insured checking accounts and credit card products, and also emphasized that it will operate as an online-only solution with no branches or deposits. takes ATMs. The FDIC decision in this case could determine whether the industry will begin to see a whole new wave of digital-only players in the market, much like neobanks.

Fintechs are trying to figure out ways to fit into the anti-money laundering (AML) laws that govern the banking sector. These statutes are mostly relevant to banks and credit unions that want to work with fintechs. However, fintechs must also be prepared to comply with AML regulations. For example, in May 2015 while assessing a $700,000 civil penalty against a digital currency operator for failure to maintain an adequate AML program, the Financial Crimes Enforcement Network (FinCEN) determined that the fintech company did not fully implement its AML compliance program until nearly a year after it started sales despite starting to sell digital currency in August 2013.

Standards for Fintech Compliance

Many banks and credit unions often work with online lenders. While this can be a great way to offer their customers innovative digital lending products, they also need to be careful about whether lenders’ technology complies with fair lending and other consumer protection laws. Given the current environment of widespread fraud, ever-increasing cyber threats and increased focus by governments on wiping up terrorist financing, AML and KYC compliance has taken on even greater importance than before.

Fintechs often struggle with compliance requirements as customers can submit anywhere from five to a hundred documents to banks during the onboarding process. Therefore, fintechs must prepare to handle this huge volume in order to meet regulatory standards.

Opportunities for future Fintech innovation

Fintech companies that offer bank-like products may all be subject to the same bank secrecy laws that the financial services industry has been subject to for the past few decades. However, this can be challenging for a start-up firm that lacks the institutional knowledge or appropriate staffing resources to remain compliant. With regulators asking banks to comply with KYC laws, bank management is also making the same demands of the fintech firms they partner with. However, the G-20’s Financial Stability Board (FSB) has already begun drafting rules that can encourage innovation while protecting against abuse and risky behavior.

The bottom line

Regulators must ensure that fintechs fully comply with the established rules and regulations without stifling innovation. This can be achieved through the “regulatory sandbox” approach, which has been tried in many countries where a fintech can experiment with pilot programs in collaboration with a regulator in a controlled environment.

Fintechs are not going anywhere soon and are here to stay for a significant period of time. Therefore, certain regulatory issues will probably become more complicated in the future. Fintechs have not only changed the way consumers use financial services, but also have the potential to reach much of the unbanked and underserved population of the world. Therefore, regulators need to find viable regulatory means to govern fintechs and make their financial services fit into the wider landscape in the coming years.

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