Why Fintech companies need to take their compliance to the next level when working with banks

The fintech industry is lagging in catching up to the rapidly evolving regulatory landscape. The reality is that 93% of fintechs find it challenging to meet compliance requirements, according to the latest data. So, it shouldn’t be all that surprising to find out that over 60% of fintech companies paid at least $250k in compliance fines in the past year, stemming from the lack of transaction monitoring, insufficient customer due diligence, and failure to report suspicious actions, to name a few.

Most tech companies focus on the product, and creating a user experience that is enjoyable and functional. This means the pursuit of reducing friction and ensuring seamlessness often takes precedence over compliance matters, where companies wish to avoid disturbing the delicate equilibrium established with their customers.

There’s also the lack of internal expertise to tie everything up in a nice bow. Smaller fintechs typically don’t have a developed compliance team or an in-house compliance officer, which tends to result in misinterpretations of various regulatory directives.

What does this mean for the banks, though?

Those engaged in Banking-as-a-Service (BaaS) arrangements with fintechs inherit the aforementioned compliance issues. Fintechs are often contractually obligated to comply with regulations through their sponsor bank, even if they are not being regulated at the moment. Hence, the bank in question gets exposed to the risks in case the business practices aren’t aligned with obligatory laws and external regulations relevant to a specific process.

There are direct and indirect costs that factor in here, from the exact dollar amount that fraudsters ripped off to expenses steered to investigations of how the fraud came to be in the first place, recovering losses, as well as addressing vulnerabilities and amping up prevention programs.

Then, let’s not forget about the long-term repercussions, including legal consequences, monetary penalties, damage to corporate image, and ultimately, loss of customers.

All of this points to one thing: having a bank-grade solution platform is the X factor for the collaboration between fintechs and banks.

Banks are doing due diligence and use external companies to examine the solution fintechs provide as a whole and look at the code and security to make sure there are no security breaches. Fintech companies need to comply with demands related to the code, security, compliance, and corporate governance.

This has high costs that mostly only mature fintechs can offer but at the end of the day, no cost is too great - especially when your business is at stake and the fines are high, right? So, here are some key areas fintech companies should focus on to make this collaboration with banks and financial institutions work:

Have a compliance officer

In the United States alone, fintech businesses are subject to regulation by numerous regulatory agencies, both on state and federal levels. Thus, ensuring operational compliance means not only keeping up with national regulatory changes and industry standards but also with state laws and licenses that may apply.

Interpreting all the guidelines and specifications is a huge task that requires a dedicated person (or a team) who will see to it that the AML and KYC programs are both up and running and in line with the latest developments.

Take a holistic view of compliance

Adopting regulations and standards in full is the golden crown. Tier-1 financial institutions will not take services from companies that did not fully adopt compliance with day-to-day processes, habits, and operations.

One example is the SDLC (Security Development Life Cycle) process, implemented in a way that every piece of code is reviewed, inspected, passes automated gatekeepers, and is examined multiple times by different security solutions before it reaches production environments. Another example is the zero trust architecture and break-the-glass approach, meaning no permanent access to production is given by default.

These, and many other daily processes that are implemented, are what FinTech is - and should be - all about from a compliance perspective.

Automate compliance workflows

To find the proper balance between internal controls and legal directives, some fintech companies are deploying AI and ML solutions to automate compliance procedures. Through automated data collection, analysis, and reporting, these tools can greatly enhance existing workflows and increase efficiency across the board.

Though human review will still be necessary to a certain degree when it comes to fraud prevention, automating as much of the compliance processes as possible minimizes manual errors and provides a more effective way of navigating all the complexities of regulatory laws. Plus, it saves time and resources that can be better spent on other business-critical tasks.

Provide ongoing training

The entire workforce should receive ongoing training on various AML and KYC rules, including any adjustments made by governing bodies since employees were hired so that they stay updated. The importance of following these guidelines can’t be overstated.

The pressure to prevent fraud and stay compliant is always going to be there. There’s no escaping it. As technology evolves, new solutions will always be required, which is why leveraging advanced tools and comprehensive data will become all the more important to ensure accurate user identity verification. As it stands now, that’s the only surefire way (if there truly is one) to manage risks associated with compliance and fraud.

In doing business with banks and financial institutions, especially if you are working globally, you must take their security and compliance as seriously as they do, if not more. You must embed yourself in their reality.