Is Compliance management a hindrance to FinTech evolution?
The consumer landscape is changing owing to the increasing digitization and automation needs. The fintech industry is hence creating exciting products to support evolving customer needs and regulatory technologies powered by AI, Robotics, ML. Additionally, some fintech companies are also optimizing their business models due to their partnership with highly regulated firms. While speaking of hindrance in the path of fintech evolution, the ongoing financial and regulatory market developments might have a major role to play.
But at the same time, it cannot be helped keeping in mind the increasing scenarios of financial crimes; the regulatory bodies worldwide had to make strict rules. Along with fintech firms are being pressed to increase their risk management capabilities in addition to building up a responsive operational risk and a compliance management program. There are many responsibilities and roles that fintech ecosphere must adopt apart from the functions mentioned above, which is probably slowing down their evolution.
Compliance Management Scenario in Fintech
According to a survey by Javelin Strategy and research, 126 million Americans will prefer peer to peer payment apps by the end of 2020, a straight 50% increase since 2019. Typically, customers will want to have user-friendly access for saving their money and more comfortable borrowing and spending options. Customers will always go for providers who will best meet their needs. However, fintech regulators have lesser experience of the customer's perspective, and all they are concerned about is protection against any financial crime. Hence, they introduced KYC and AML for risk management. In an attempt to counter financial risks similar to 2008, regulatory bodies like Basel increased the minimum capital requirements, which crippled fintech firm’s ability to invest.
The regulators must figure out a balance between the interest of the fintech firms and risk management by creating an efficient compliance management framework. Newer technologies are adopted to control operational risks that are caused by the enormous growth of unregulated financial service. But it should also be kept in mind that in the absence of the regulatory norms in nonbank financial services, there are chances of the consumer data breach. Some renowned peer to peer payment companies has faced data security and transparency issues lately. Though nonbanks need to follow similar consumer protection laws like banks, the regulatory bodies do not have the power to supervise their actions which makes them exposed to threats. Following are some ways Fintech can practice compliance management
- Building a compliance culture
- Identifying and closing gaps in the control structure
- Monitoring and testing compliant risk strategy
- Risk management strategies across the organization
Challenges by Compliance management to Fintech evolution
So, it is quite ubiquitous that compliance management can add a layer of protection to Fintech against financial crimes, like transaction monitoring, AML. Still, it has pitched particular challenges for the sector, which are:
Creating a balance between innovation and compliance - The costs involved in installing a compliance program in a fintech firm requires enormous costs. High cost is also involved in monitoring the implemented norms, no matter what the size of the organization is, which naturally burdens the operational expenses.
Compliance norms increase with expansion - The operation of a company and its geographical presence also influences the regulatory cost of a fintech business. For example, though in its early stages, a fintech firm might be regulated to limited regulatory surveillance, as the company grows, so does the regulatory monitoring on it.
Undefined regulatory policies - Another challenge that nonbank financial companies face from compliance management are the lack of a well-defined policy structure.
The idea of effective risk management has evolved to be a much needed concept both for the government and the fintech industry. Though, attaining it is still elusive, be it a startup or a regulated financial institution. Hence, a business which is capable to manage security and compliance will be empowered effectively and efficiently. However, this does not mean that abiding by regulatory compliance will block the way of FinTech evolution. So, as the saying goes ‘prevention is better than cure’, regulatory compliances might slow the pace of fintech evolution, but it ensures a smooth operation for the financial organizations.