Can FinTechs Win the Regulatory Compliance Game?

19 September 2022

Liubomyr Sirskyi

Content Manager

Compliance has always been challenging for the FinTech industry. However, the regulatory environment has become even more complex in the last few years. For example, In September 2019, the transition period to the new standards of the EU Payment Services Directive 2 (PSD2) ended. Among others, financial companies had to accept requirements for Strong Client Authentication (SCA) and anti-copy security. 

The pandemic and remote work phenomenon have also raised protection questions and launched FinTech compliance development. Brexit was another trigger that increased the tension. Thus, each step of FinTech companies became more closely scrutinised by regulatory bodies, which applies especially to business continuity planning. At the same time, the UK’s Financial Conduct Authority (FCA) has been striving to follow new business approaches and consider how they comply with current regulations. 

Multi-million dollar investments and massive valuations of FinTech startups make it vital to cut all risks. How can companies in this industry improve their risk profile?

Adapt Your Compliance Program to the Business Requirements

FinTech companies create a unique financial ecosystem that offers greater opportunities than traditional institutions and a more customer-centric approach. But such innovative startups still need to understand how the FinTech regulatory requirements affect the business development strategy (especially cooperation with other projects). 

If you have decided to partner with a specific service, you should be aware of any risks posed by your partner. Therefore, your compliance team should have a complete understanding of legislation at all levels, from local to international, and expertise across different industries. It makes the compliance officer role more complex, but the right knowledge is vital. 

Face Challenges

As we said above, FinTech is closely related to many other business sectors. Therefore, it might be challenging to merge a compliance strategy with understanding the requirements of the financial regulator. 

For instance, companies often face budget restrictions (in particular new projects that gain traction and look for their well-defined niche). They often lack the resources to invest in an ironclad compliance program, and labour and technology are the most significant items of expenditure. 

But if you have to contend with financial regulator representatives, a lack of funds for an extensive program will be a bad excuse. You still have to set a compliance strategy following as your priority and target it to your specific risks, whether you should implement a manual or automated approach. Therefore, FinTech startups should think about FinTech regulatory compliance financing as early as possible. It is better to set a budget at the first business planning stage than solve this problem during the project.

Of course, FinTech companies cannot always predict which processes to automate and what tasks are better to entrust to real employees. Heavy reliance on technologies speeds up transactions and reduces the fraud risks, but there are no clear recommendations on the automation level. It is especially complex concerning compliance when the human factor plays a decisive role and somewhat prevails over the digital one. Thus, you should combine and balance cutting-edge technology and human control when working on the FinTech product. 

Neobanks is a vital part of the FinTech ecosystem that aims to revolutionise the customer service approach, providing them with an all-in-one solution. Find out more about their outlook for 2022 here.

Vital Aspects to Consider

No two FinTech startups will operate in the same way, emphasising the need to implement a unique approach. At the same time, you can build a customised compliance approach based on proven methods. And here are four critical factors to consider when developing a risk-based program. 

  • The voice of management is a priority — Each business should ensure that project managers understand the significant role of solving FinTech compliance issues with a unique strategy and can convey this message to their employees.
  • Pay enough attention to the KYC algorithm — The reliable KYC (Know Your Customer) system helps FinTech startups assess customer risks adequately. By knowing the expected and actual behavioural patterns regarding transactions, you identify deviations and eliminate them quickly. After all, transactions with individuals and legal entities under sanctions are out of the question.
  • Set up the AML controls — As we said above, all FinTech projects have different features and objectives. When discussing payments, your startup has to set an AML (anti-money laundering) policy. Monitoring and mitigating vulnerabilities are crucial to having an ironclad legal and regulatory compliance strategy.  
  • Monitor the developments of regulatory body requirements — The requirements constantly improve, so your compliance team should check for new rules and regulations and update the service promptly. The compliance department is responsible for your relations with control bodies, so you should take this issue seriously.

Evidently, FinTech startups should collaborate with regulatory authorities and constantly ensure compliance with laws and regulations. It will help to please regulators and customers who rely on reliability.

Moving Forward

FinTech startups are the basis of the future financial system. Many businesses are skyrocketing, and if a certain industry needs a digital solution that makes payments more straightforward, FinTech will fill that niche. That is why regulatory body requirements constantly develop to keep up with the time. Thus, every FinTech company should set financial services regulatory compliance as a top priority and fit the program with possible risk events. It will help startups to tackle new challenges successfully. 

At Rocketech, we know how to develop functional and valuable software. Our dedicated teams provide quality assistance in creating digital products that comply with all industry standards and regulations. It will help your business increase revenue and expand the customer base. And if you are ready to skyrocket your project with marketable software, contact us now!

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