Balancing Disruption and Compliance – the Fintech Dilemma

Disruptive capabilities define fintech businesses; fintech services and apps are proliferating by delivering financial services through new delivery channels. However, as the role of fintech grows in the economy, fintech businesses are facing increased regulatory scrutiny. As a result, companies characterized by disruption must also focus on the other side of the coin – compliance. It might seem like an impossible goal to make a disruptive service compliant with regulations. Still, many factors and tools are enabling this transition for innovative fintech businesses.

Fintech and Regulations

Many fintech apps and services have succeeded because they were not required to comply with the same regulatory requirements as traditional financial institutions. For example, a bank needs to ensure that it complies with all state and federal banking regulations. The rules outlined in these regulations may delay transactions. Many banking processes that may appear slow are not slow because the bank works slowly – the transactions are processed by digital systems instantaneously – but because it takes time to ensure compliance for all transactions.

Compare this to a service like Venmo. Users prefer Venmo because it allows them to transfer money faster and more conveniently than a bank. Since Venmo does not provide any banking services, it does not need to comply with any banking regulations. The regulatory bodies that have jurisdiction over Venmo are related to fraud prevention and national security, such as FinCEN, CFPB, and the FTC. This allows Venmo to deliver faster transactions than the banks, which must comply with many more regulatory bodies such as the Federal Reserve, FDIC, OCC, CFTC, and the SEC.

Limited Opportunities

Facing fewer regulations is a significant advantage for fintech businesses, but it is also a limiting factor. Fintech services and apps can only escape the regulatory purview of many regulatory bodies if they do not provide the services that come under the jurisdiction of those agencies. This limits the products that fintech apps and services can provide to customers. There are two possible solutions to this limitation for fintechs:

1. Register/charter as a traditional financial institution and comply with conventional financial institutions’ regulatory requirements, or
2. Partner with banks and other traditional financial institutions to expand the services through the fintech service delivery channel.

The challenge with the first approach is that it takes away the competitive edge of most Fintech apps and services. Secondly, it also complicates the work since the Fintech business will now have to ensure that all its work is compliant with regulatory requirements, not just the new banking services it is delivering.

However, the second approach allows the Fintech service or app to continue providing its services while offloading the regulatory workload of the new banking / financial services it offers to a bank or other traditional financial institution. This means that the existing Fintech services will continue to be delivered instantaneously for customers. Only the services that interact with conventional banking channels will be delayed, resulting in a much better experience.

Enabling Fintech and Banking Collaborations

Fintech businesses will need to focus on regulatory compliance to grow. Banks and other financial institutions have decades of experience in the current regulatory landscape; Fintech businesses will have to catch up quickly. The recent fine on Robinhood is an excellent example of the losses Fintech businesses can face due to compliance failures. Robinhood was fined $70 million, but that is far from being the only negative impact they have suffered. Arguably the negative effect of the extra regulatory scrutiny and fine on the IPO of Robinhood may be even more damaging. Binance is also facing increased regulatory scrutiny globally and is focusing on compliance to overcome its problems.

Fintech businesses will need to use risk and compliance management solutions if they want to successfully navigate the financial sector’s regulatory landscape. Advanced solutions make it easier for fintech businesses to visualize and understand the regulations and their impacts on business processes. Implementations will prove fruitful for fintech businesses because fintech businesses are already full of tech-savvy people. While the banking industry has benefited immensely from risk and compliance solutions, there were still some issues because bankers are not primarily IT experts, unlike many experts working in Fintech businesses.

Interested in knowing how risk and compliance management software can help Fintech businesses collaborate with banks? Get in touch with our regulatory experts for a demonstration of Predict360, the American Bankers Association endorsed solution for risk and compliance management.