8 Common Compliance Challenges Fintech Startups Encounter

Have you ever considered the potentially tricky world of FinTech compliance? Read on to learn about some common aspects that should be considered before entering the market.

What is FinTech?

FinTech is just short for ‘financial technology’. They essentially offer people innovative ways that benefit businesses not offered by traditional financial services.

Such features include on-the-go access to bank accounts, automated loans, real estate appraisals, or more cost-effective investment advice generated by AI.

What is FinTech compliance?

It means adhering to regulatory laws regarding data privacy, consumer protection, and other issues relating to financial security. It’s better nipped in the bud during development stages or when considering new FinTech app features or products.

With people using apps to manage their finances, doing this reduces the risk of fines or suffering from a public relations nightmare that could destroy your company.

8 Common compliance challenges

The time and effort of getting compliant can be high, however, so understanding common compliance challenges is important for responsible startups.

Understanding why FinTech matters to governments

According to the United Nations, some 2-5% of worldwide GDP is laundered each year, accounting for up to $2 trillion. Whilst this is difficult to prove precisely, it’s a very important piece of the world economy and explains governments’ keen interest in regulating the financial sector.

Governments are also concerned about clandestine attempts to obtain data through various breaches and similar concerns relating to data privacy which can feed into criminal activity. Learning how to fax things without a fax machine could be a more secure way to prevent data loss.

FinTech businesses are also affecting consumers in other ways that they are unlikely to even recognise. For instance, think about a FinTech not structuring loans to allow customers to build a credit score, an honest mistake perhaps, but that could lead to huge fines and a very unhappy customer base.

Issues with data security

Finance tends to be one of the top markets for hackers, which is why the World Bank reports that 84% of countries have data protection laws.

This is important for FinTech as this is how they operate: apps usually involve sending money or data from one place to another, a breach in the walls of your financial information, making it a target for hackers. Faxing from Outlook is one way to make this more secure.

Add to the mix things like phishing or the security vulnerabilities of many apps and you can see the problem. However, there are many things you can do, like data encryption, testing your app, or putting secure invoices and receipts at your customers’ disposal.

Worried about getting compliant

For many startups, current regulation can often be very hard to deal with, so they often try extending this over a longer period and using things like no-action letters to avoid violation. If you are worried about this, consider compliance auditing to assess your organisation’s responsibilities.

It doesn’t stop at release day. If you develop your product or add new features to your app, run those same compliance tests. Likewise, when involving third-party organisations, ask yourself: do their compliance and security process live up to scratch? Any data breach there could also affect you.

Considering the cost of compliance

Financial institutions spend a fortune on compliance, and this increased by 60% in the aftermath of the financial crisis in 2008. More recently, the explosion of FinTech apps has brought attention from governments and increased costs to the industry through new regulations.

Ensure you have a budget to avoid any compliance-related headaches, and consider investing in AI to reduce tedious and repetitive compliance operations or start a virtual call centre to save money should customers wish to make contact. It will all be worth it if projections about FinTech market growth are looked at.

One way Anti-Money Laundering laws can be followed is by introducing a Know Your Customer process, which automates onboarding, and if you send ax with Google, it can improve document security.

The issue here is that it can take time for users of your app, making it less competitive, and new technology needs to be explored, like Liveness Detection Technology, to protect from hackers.

Using Blockchain

These data blocks have been proven time and again to be susceptible to hackers, despite their perceived security. Governments are still wary and lack understanding of this technology, which lacks a central authority and legal anonymity, making regulation incredibly difficult.

Riskier industries

Some products, like investments and gambling, are more prone to compliance-related issues, so app or product designers should take extra precautions in these industries. And it’s important to do this as fines from institutions like the Financial Industry Regulatory Authority can be catastrophic for a company.

Understanding your products and dealing with any related compliance law is better done sooner rather than later.

Geographical variations in regulations

For instance, the US has the largest FinTech ecosystem and an accompanying raft of legislation. However, in the UK, regulators are more friendly towards FinTech to maintain its market-leading role in the industry, as highlighted in government reviews.

Therefore, careful research about the various institutions that regulate in a specific country is necessary for safe and responsible financial services.

To prevent anything from coming back to haunt you, set clear goals about your target market in order to understand any geographically specific regulations, and you may even need to buy domain to do so.

Getting a fantastic team

This depends on your business needs, and it could extend from including a whole FinTech compliance team to outsourcing this to a compliance expert, who may be costly but will ultimately be perfectly suited to your industry requirements and geographical concerns.

If you end up involving a third party, you could put your company’s priorities at risk as interests between firms collide.

Let’s get compliant

Alongside having a sensible exit strategy from the get-go, knowing how to engage with compliance law can prevent a death knell for a company. This is due to the hefty fines from regulators and backlash from the public that accompany it.

It’s also an ever-evolving playing field, as governments themselves continue to react to this fast-paced industry. Some common compliance challenges include not understanding governments, why they regulate, and how this varies around the globe.

 It’s also a good idea to be keenly aware of your particular niche product and how this might change regulatory procedure, as well as prepare yourself for data breaches and the potential fallout of using third parties or blockchain.