Compliance Challenges for FinTechs: An Effective and Affordable Solution
In quickly changing digital environment of the financial world, regulatory requirements are one of the most challenging factors that enforce banks to look for the new ways to meet compliance although they seem to be advantageous in terms of their established clientele, capital and expertise in compliance. To be able to thrive fully and competitively, the adoption of a FinTech culture that can bring the power of technology into the landscape to tackle with regulatory issues is essential for the financial industry.
However, the emergence of FinTechs in financial industry also carries some risks. Regulators that are unfamiliar with the new technological developments like the non-bank financial institutions need to acknowledge the necessity for those new technologies that ensure better service for the whole industry and also make sure that these services that grow aggressively are covered by regulations.
Issues related to personal data protection, transparency and security have caused some uncertainties in terms of regulatory compliances for the non-bank financial institutions. Therefore, It is even more challenging for the FinTechs to meet compliance requirements in such a complex digital environment. The main areas that the FinTechs may need to focus on are related to the most common services they provide which can be prone to the financial crimes like real-time transaction monitoring and customer identification. Therefore, regulations related to KYC (Know Your Customer) due diligence, AML (Anti-Money Laundering) and CTF (Counter-Terrorist Funding) are the ones that concern them the most.
At this point, Regulatory technology (RegTech) has emerged as a new means of supporting FinTech companies to become well informed about the compliance requirements that directly or indirectly apply to their business. RegTech plays an important part in streamlining the regulatory compliance in the financial services industry just as FinTech has been doing the same in how the financial services are delivered. The cloud-based structure of the solutions that RegTech offers four key advantages: security, flexibility, scalability and cost-effectiveness. So, on the one hand it offers the most effective way to meet compliance, on the other hand the efficiency is ensured. Thanks to these affordable and functional features of RegTech, the compliance processes for the FinTech companies are facilitated as issues related to real-time monitoring, customer identification, affordability and keeping up with the new regulations are solved.
Real-time transaction monitoring
One of the responsibilities of the financial institutions is to monitor, detect and report suspicious transactions that may be related to criminal activities like money laundering or terrorist funding. Since there is a massive global system of transactions which is very difficult to trace and there is no single payment standard, AML (Anti-money laundering) and CTF (Counter-terrorist financing) regulations are among the most crucial and compelling ones that require the indication of the suspicious cross-border transactions.
What RegTech provides here is the opportunity to monitor the transactions in real-time by creating a connection that alleviates the communication in between different systems.
In relation to the regulations of AML and CTF regulations that require customer due diligence, the Financial Action Task Force (FATF), created a process called KYC (Know Your Customer) standards that can be implemented by the financial institutions in achieving customer due diligence.
To ensure a better identity verification of the customers and more efficient KYC standards application, it is important to have a centralized source like reference data utilities. However, in cross-border transactions, there may be limitations on how to use and transfer data. At this point, the ability of RegTech solutions to scan different online identity verification systems can contribute tremendously in overcoming such restrictions.
The standardized approach coming with the cloud-based RegTech services enables to set specific parameters to meet the necessities of differentiated datasets. So, instead of recreating new rules for each, a standard set of controls would be enough to perform a qualitative and effective control over the ever-changing regulations. Adoption of this method, although at the beginning requires some investment (at the implementation step), turns out to be a great investment in the long-term by preventing repetitive costs.
Another advantage of the RegTech is that you pay for what you use because the solutions that use cloud can manage, maintain and back up data remotely. Therefore, they offer better security (encrypted data), scalability (simply adding/removing features), flexibility (customization of data) and affordability.
Keeping track of the upcoming regulations
As the pace of technology is hard to keep up with, the regulatory necessities are constantly changing and challenging the financial sector in following and adapting their systems, but there is no other chance but to remain compliant to refrain from penalties. The compliance procedures can be even more tricky for the services that run internationally.
Cloud-based RegTech solutions may present the FinTechs with the best compliance offer at this point thanks to their services being able to track the most recent regulations in each specific area, region or country and operate audits accordingly.
To sum up, regulatory challenges that force FinTechs in many ways can actually be solved easily with a strategic move by consulting the help of a technology-based solution again: RegTechs. Just as FinTechs offered a new and successful way of delivering financial services, RegTechs is leading the way to a more effective and more affordable system in remaining compliant with the ever-changing nature of regulations.
At Fineksus, we offer FinCloud Solutions that include products ensuring a secure and functioning compliance integration process via secure authentication methods, reliable SWIFTNet connectivity solutions.
Necati Yavaş, Sales and Business Development Director