How Fintechs Can Deal With Regulatory Compliance

How Fintechs Can Deal With Regulatory Compliance

Today we live in a global ecosystem where technological advances are imposing a brand new order. Changing customer demands, open source softwares, free-to-use services are all driving significant change in the way products and services are being created and delivered. As barriers of entry seem to be crumbling down, once strict lines between industries and businesses are becoming more and more blurring. And the financial industry is no exception.

When it all started, fintechs were coming to disrupt the traditional banking sector. Yes, they found the gaps banks were not aware of (thus unable to fill in) and began to address the unmet financial needs/demands while improving customer experiences. Yet, the current situation shows that fintechs and banks are headed to a future that they become more intertwined and dependent to each other. As the technology progresses, and as it advances the rise of fintechs has been accelerated. That being said, the more fintechs start acting like banks, they come closer to becoming banks. And it creates a ripple effect and triggers banks to act like fintechs too. German online bank, Fidor, calling itself as the first FinTech bank, provides its customers access to a large selection of financial services, products and offerings through its partnerships.

Irony is that distruptive fintechs may now face disruption themselves. Because the more fintechs venture into the area of banking, the more they attract attention from authorities and of course, some malevolent 3rd parties. Therefore, it’s high time for fintechs to quickly adopt compliance culture and address compliance issues while handling risk management.

What Are the Compliance Risks For Fintechs?

Payments Landscape

Fintechs are taking its share of the growing pie of global remittances. Global remittances have grown to a record level of $613-billion in 2017, a 7% increase from $573-billion in 2016. However, such rapid growth of payment market is bringing more challenges and risks for Fintech MSBs’. Because as the market grows; regulators wants to have more control on how these services are used.

Products and Services Powered by Emerging Technologies

Fintechs have already started providing banking functions to end-users. Such functions include money transfer, payment and digital money storage. Fintechs are also creating new business models. One dramatic example is cryptocurrencies. Since cryptocurrencies attracted same attention from the finance industry and governments, now regulating cryptocurrencies is being discussed. If that can be achieved a wider field is expected to be opened up for fintechs.

Increased Regulatory scrutiny

Today some authorities have even started including fintech companies to regulations that bind the finance industry or specifically banking. Some fintech have even been found guilty, or responsible for their negligent participation in such events. Cryptocurrency maker Ripple Labs fined $700K for flouting financial regulations is one of the latest examples of this. This is the reason why in some countries fintech are also being subjected to some of the regulations that are imposed on banks.

The Financial Responsibility of Fintechs

In this new financial order, fintechs must be vigilant and proactive. They must seek the solutions before the incidents occur. Otherwise, it’s obvious that they cannot evade taking responsibility for the consequences.

By law, when it comes to the fight with financial crime, fintechs have similar responsibilities with banks; Service Registration, AML compliance officer assignment, applying CDD/EDD measures, Sanction screening, monitoring transactions and reporting, suspicious transactions to local regulator. In addition; new regulations like PSD2, 5AMLD, GPDR are raising compliance bar each year and regulatory enforcement is becoming more stringent with substantial fines is being given who violates AML regulations.

How Can Fintechs Mitigate AML Risks

Fintech companies have a wide area to expand and great risks to face at the same time. Lucky them that Fintechs don’t have to learn by mistakes. Cause they have a very good example right in front of them. Financial institutions have been around for more than a century and have been a leading target for cybercrime and financial crimes. And they know how to protect themselves from being the medium to illegal actions like money laundering.

The very first thing fintechs need is to have a effective risk management policy in place. Next step is to establish a rigor risk assessment system. One crucial thing here is to implement an adaptive risk-based approach, the risk assessment process while identifying the specific products, services, customers base, entities, and geographic locations. Implementing KYC (Know Your Customer) is another very crucial step to mitigate risks because proper risk profile creation onboarding stage will help you assess inherited risk and increase control effectiveness. Since risk management is an endless cycle, fintechs must continuously map, investigate and report the suspicious activities. Therefore, they need to conduct periodic testing for risk identification and control mitigation.

Choosing the Right AML Software Vendor

While establishing such complex and solid framework along with regulatory risk processes and programs are in place, fintechs may cooperate with anti-money laundering software vendors. When selecting the right AML software vendor, fintechs should consider high tech analytical capabilities and ease-of-use.

As anti-money-laundering regulations are changing and the threat of money laundering continues to evolve, fintechs should choose anti money laundering applications powered by AI. Because AI can help them to fight money laundering by driving insight and value from large volumes of complex data while learning from the patterns of suspicious financial activities and adopting to changing environments and inputs.

At the end of the day, if fintechs can overcome all these risks, there are endless opportunities lie ahead. And they still have a lot to learn from the allies along the way. Leveraging its experiences of preventing banks from becoming mediums or victims of financial crimes, AML software vendors can guide fintechs with effective risk management and efficient compliance architecture.

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