Regulatory Compliance Challenges Fintech Organizations Face Today

Regulatory compliance is a set of guidelines that organizations and businesses follow to ensure a safe work environment and smooth operations. The regulatory requirements may vary depending on the industry and the nature of the business.

An example of regulatory compliance is Sarbanes-Oxley Act 2002, which is an act protecting investors from any fraudulent financial reporting by corporations.

The Fintech industry has grown in recent years with a breakthrough pace driven by focusing on personalized solutions for consumer needs and preferences. However, the innovations that Fintech has also sometimes outpaced regulatory compliance within the industry. The result is a heightened risk for businesses engaged with Fintech and the emerging marketplace.

Importance of Regulatory Compliance in Fintech

The strict following of regulatory compliance within a Fintech company ensures that it operates according to national, international, and professional standards. Additionally, it also helps in regular audits when executing design systems to identify potential risks before they appear.

Being a part of the Fintech industry gives organizations a rapid growth chance without strict oversight like banks. However, as the industry grows, so does the need for scrutiny and compliance functions. Most emerging Fintech companies struggle to align their compliance features due to common misconceptions like:

• Managing compliance is only for large corporations as it is a costly feature
• Companies can manage their compliance as it comes their way
• There is no need to invest heavily in compliance if it does not generate revenue

In short, Fintech companies often overlook the importance of having regulatory compliance that increases the level of risk present. The importance lies in ensuring that they bring strict adherence to compliance functions to mitigate risks as much as possible.

Challenges Faced by Fintech Market

Fintech, also termed the technology that encourages innovation in the financial sector, is a new emerging market. It has brought changes to business applications, services, and products to improve financial transactions for consumers and businesses. Naturally, this new market has its set of regulatory challenges related to sensitive data.

Fintech is a globally competitive market, but still, it has issues in data, information, finances, and technology. These might include underestimating creditworthiness, non-compliance, cyber fraud, data theft, etc.

The following points will highlight the significant challenges faced by Fintech today.

1. Technical Vulnerabilities, Data Security and Privacy

Data security and privacy is a worldwide regulation, with over 80% of the world governments enforcing them to ensure digital shortcomings stay minimum. However, the number of technical vulnerabilities you need to cover makes compliance with data security tricky.

Most Fintech apps or software involve multi-channel data passing. For instance, an app needs to send the user’s credit card information to a server and transmit it to a payment processor.

There is a high chance for hackers to breach and steal the data during this process. Any slightest loophole within the entire ecosystem is an open invitation for data thieves to intercept.

Another key vulnerability is human error, a target of phishing and other social engineering attacks. One mistake opens the gateway for someone to breach the system. There is also a chance that the app itself is not safe. Surprisingly, Fintech apps sometimes have weak encryptions that hackers can exploit in their favor.

Fortunately, new data security and privacy measures have started countering these attacks, including secure coding, data encryption, and plenty of testing. The most crucial point for Fintech apps is to weave data security during every stage of development for maximum protection.

2. Costly Regulatory Compliance

The higher cost of implementing regulatory compliance features is the most significant deterrent for Fintech companies. In recent years, the emergence of Fintech apps has captured the attention of governments, and it has inevitably led to the creation of laws to regulate the industry.

As a result of these new regulations, there is a chance that companies might ignore compliance due to incurring costs. Besides, the cost, penalties, and fines due to non-compliance make a massive chunk of issues for Fintech.

Unfortunately, changes in technological perspective do not mean that compliance has become less expensive. The issue has no immediate solution except for having more budget allocated.

Regulatory Technology or RegTech is one solution that can help Fintech by automating and streamlining processes such as tracking, monitoring, and reporting. It also provides a better KYC (Know Your Customer) feature, which is one of the staples for Fintech.

The bottom line is that compliance is expensive, and the best way to avoid issues is to have more money distributed as a compliance budget.

3. No Compliance Synchronization in Fintech Apps

Another challenging aspect for Fintech is the broken compliance synchronization whenever an addition of new features happens in existing apps. A significant hurdle arises when businesses add features independently and fail to add compliance considerations. At this point, the availability of a compliance team is necessary to ensure hands-on assistance during additions to apps.

4. Blockchain

Most Fintech companies have turned to blockchain for improved customer experience and banking support. Unfortunately, these blockchain features bring their set of potential compliance risks for Fintech. Primarily, they share the same issues as machine learning and big data.

Big Data analytics have machine learning and automation requirements, but most remain unrealized. The compliance challenges for Fintech related to blockchain are all well-documented and relate to anonymous transactions within these networks. Since the financial market relies heavily on identity and verifications, blockchain supports more potential in fraud markets.

Governments are still in the understanding phase of these blockchain technologies and are thus reluctant to approve them. It makes an additional issue on top of regulatory challenges. Anonymity is the main hurdle that prevents user KYC and makes compliance next to impossible.

4. Anti-Fraud Compliance

Money laundering and fraud is the most sought-after and strictly monitored financial crime worldwide. Governments worldwide have passed Anti-Money Laundering Laws (AML), and naturally, Fintech organizations must abide by these laws to remain compliant.

KYC is one of the key features to ensure legal and financial transactions, which is an identity verification ensuring the person is who they say they are. The goal here is to stop fakers and fraudsters from gaining access to personal data.

The problem is that KYC takes time and is not cheap either, and the time consumption can break the deals and makes an app less competitive with others. Then there are identity thieves who bypass these KYC features. Investing in solutions that help prevent fake user verification is the need of the hour for Fintech.

Conclusive Statement

Although Fintech is an emerging market, it is still in its infancy and has many challenges. Block chain, money laundering, lack of KYC, etc., are some common ones that the Fintech industry must face and try to mitigate. Predict360 is a risk and compliance management solution that offers Fintech a chance to adhere to regulatory compliance and ensure financial transactions remain transparent without any issues. You can request a free demo to understand the features and usage before purchasing.