Fintechs face a host of unique challenges in developing an effective compliance program. Simultaneously meeting the demands of delivering technology disruption and high levels of customer service under the watchful eye of more vigilant regulators demands a difficult balancing act. But through a combination of technology enablers, strong processes, and employee training, they can gain competitive advantages in the ruthless fintech industry.

Six Biggest Compliance Challenges for Fintechs

The most common compliance challenges that fintechs face are the constant requirements of managing customer data, identifying risk, and monitoring transactions. Fintech’s unique place in the market creates additional challenges. Below are their six biggest challenges in meeting AML, KYC, and other compliance requirements: 

  1. Data Security – To provide a trusted, personalized, and unique customer experience, fintechs require airtight security measures. Otherwise, they risk quickly eroding customers’ trust. Fintech’s sustainability depends on ensuring the protection of customers and partners from data breaches. 
  2. Staying Current with Requirements – Keeping compliance processes and technology up-to-date while new requirements are coming online remains one of the most difficult challenges for fintechs. For example, KYC regulatory requirements have been increasingly getting more stringent. 
  3. Overlapping Regulations – Fintechs face a distinct regulatory challenge due to their variety of services and industries served. They support many other industries through payment and niche financial-related services. This overlap creates additional burdens in ensuring compliance with an often tangled web of US governmental rules. 
  4. Culture – From their time as startups, many fintechs retain a more free-ranging culture than banks. This culture can create disincentives to dedicate resources to improving risk management and compliance. Walking the tightrope to balance the entrepreneurial drive and strong growth focus against the need for ensuring tight control and disciplined processes can be challenging.
  5. Cost of Compliance – For many smaller fintechs, the cost of compliance programs can be onerous. Keeping up with the myriad regulatory requirements and ever-evolving criminal schemes is resource intensive. It takes a significant amount of time and money for a startup to get up to speed on its needs and maintain that focus as they grow. 
  6. Fast Pace of Product Rollouts – Maintaining compliance while churning out a rapid succession of new or updated products can be difficult for companies. Many fintechs have stumbled and incurred penalties due to a lack of controls during product rollouts. Potential exposure is not only from new products but also new features, services, or partners.

Creating Competitive Advantage through Regulatory Compliance

“Little things are big.” Yogi Berra, Hall of Fame Baseball Player

While Yogi was undoubtedly not specifically talking about fintech regulatory compliance, he did concisely describe the required approach for fintechs to create a competitive advantage through compliance. To achieve the advantage, many little “things” must be put in place and operated in conjunction. 

Without these fundamental building blocks, the latest technology alone is insufficient for a stout compliance program. Nor will a cookie-cutter approach suffice. A fintech’s compliance strategy must be tailored to align and complement its business strategy, including partnerships. 

It is understandable that companies with a DNA geared toward delivering the next “big thing” in financial services would not be focused on the little things required for regulatory compliance. As a result, leadership must strike a balance in encouraging the aggressive entrepreneurial culture that characterizes fintechs while also demanding stricter controls and holding the organization accountable for meeting compliance requirements. 

5 Steps to Turn Compliance into a Competitive Advantage 

1. Know Your Regulations: 

Rule #1 in compliance management is knowing what regulations you must comply with. For Fintechs, this can be no small task. With the pace of financial regulatory changes from the variety of governmental agencies converging on fintechs, and the dynamic nature of the market, it is critical to utilize compliance management systems to help keep abreast of compliance specifications. 

2. Build a Robust Governance Structure:

Whatever the size of the organization, a formal governance structure over compliance management must be in place. A survey showed that only 27% of fintechs had a dedicated compliance officer. The structure must be agile and adjust as the company grows and changes. Internal oversight helps provide the checks and balances necessary to ensure continued compliance monitoring and adjustment when required. 

3. Regular, Required Training: 

Another prerequisite is instituting compulsory compliance training for management and staff to stay up-to-date on the latest regulations and technology. With the often rapid changes in regulations and the impact of the business’ evolution, this training is a necessity to help build a culture that views effective compliance as a differentiating factor. 

4. Set Clear and Comprehensive Policies and Processes: 

A little thing that can mean the difference between meeting compliance requirements or not is a formal set of policies and procedures. Regulators require policies that are broadly communicated, comprehensive, and up-to-date. Failure to do so can result in fines and penalties. 

5. Invest in a Collaborative Approach:

Increasing collaboration with regulatory agencies is gaining traction as a best practice among fintechs. Ongoing dialogue between fintechs and government regulators helps both parties through the exchange of information on compliance requirements, new technology tools, and a better understanding of compliance issues. 

Your Partner in Solving Compliance Challenges’s KYC/AML and other compliance solutions can provide your organization with customizable risk screening, automated customer onboarding, and ongoing monitoring to create a more efficient and cost-effective compliance process. Read more about the steps you can take to turn compliance into a competitive advantage in our eBook: AML, KYC, and Compliance for Fintechs. Please contact our experts today to learn more and receive a free demonstration of our enterprise fraud and compliance applications.