For the past 5 years, Finance and Technology have been the hottest couple of the startup world. FinTech is a match made in heaven with technology grabbing finance's hand, introducing it to the miracles of the electronic world.
Archaic manual processes and outdated operations have been replaced by state-of-the-art applications and elaborate software, to make finance as customer friendly as ever. As it's the case with most couples though, problems will start to appear after the honeymoon period.
FinTech's staggering growth has produced an impressive array of revolutionary products and services but at the same time has created a set of unique questions and challenges regarding the role of compliance. Is current regulation equipped to deal with FinTech's newly formed dynamic? What are the areas of danger and how does compliance adjust to deal with the questions this new industry poses? Let's take a look.
Traditional financial services have a very clear idea of the regulators and governing bodies they have to adhere to. This is not the case with FinTech companies. Often times FinTech companies will behave like banks or established payments providers in one way - but they will not usually provide the full range of services and will hence not be subject to all regulations that conventional banks with a wider service spectrum might be subjected to. One of the most obvious challenges for FinTech companies is to identify which agency governs them and distinguish the sets of regulations that apply to them.
New internal processes
Being hybrid entities means that FinTech companies have to create novel, often complicated compliance processes from scratch. It is very important to remember that in the early years of their life, the majority of these companies are funded, meaning that keeping operational costs low is essential. What that translates to, is that compliance teams within these companies are non-existent or very poorly staffed. With regulations such as Dodd-Frank and the Foreign Account Tax Compliance Act, the past couple of years the pressure on companies to follow the law is only growing. FinTech companies have to get creative and figure out the most cost-effective way to perform their due-diligence.
So how can regulatory compliance catch up with the pace of digital innovation? The answer is simple – it can't. The tempo with which FinTech companies have evolved is breathtaking, making it virtually impossible to keep up for both compliance regulators and managers alike. Let's take the digital payments space for example. On the one hand you have this amazing rate of development for companies and on the other hand you have growing regulatory pressures to safeguard the highly volatile sets of information included in the process. Do you slow down the rate of development by implementing granular, time-consuming processes or do you go ahead and let the market flourish under a more lenient and risky compliance regime? The answer comes if we think outside the box.
The digital payments space is evolving, it's changing and so should our compliance approach. You can't put wheels on a horse and expect it to work. The same way finance gave half its name to technology, so should compliance. The only way forward is trusting and embracing technology, making compliance an automatic component of any new product or service. It should be a function embedded in the production process, executed by technology and managed by people.