Top 5 Biggest Risks Faced by Fintech Firms

Fintechs provide ease, adaptability, and lightning-fast service in a market dominated by traditional systems and institutions. Market expectations have moved swiftly due to improved goods and speedier services, and a new standard for financial instrument experience has been established.

However, working in a sector where accountability and security are crucial comes with some risks or many risks! In this post, we will discuss the five key risks confronting fintech operational teams today. But before that, let us shed a brief light on operational risk in fintech.

Fintech’s Operational Risk

Fintech firms’ operations teams face the weight of this risk. It’s a challenging task since, in several cases, the firm’s established procedures and operational norms are outpaced by the acceleration of work, fluctuating market circumstances, and rate of unanticipated changes.

Whereas conventional financial firms have the “benefit” of time in their favor, fintech demands everything to happen at breakneck speed. Moreover, fintech teams are most vulnerable in real-time operations management, in which ninety nine percent (99%) of the most significant errors occur.

5 Major Risks to Fintech Operations

Below are the five key risks faced by fintech operations teams today:

1. Unexpected Market Occurrences

According to the Financial Stability Board, “the financial system can overreact to news.”Gamestop was not the first, nor will it be the last, fluke occurrence to produce ripples in global financial and regulatory policy — apparently overnight.

Unforeseen market occurrences pose a significant operational risk simply since they are unexpected. Extreme reaction to a quick market occurrence can cause central solvency and liquidity issues for both financial institutions and fintech.

Excess volatility, pro-cyclicality, ccontagion, and other risks may arise in the market, disrupting fintech services. In such situations, customer support teams and operations must think quickly and devise swift, ad hoc answers — contingency planning almost always fails to deliver the necessary reaction. Since it is customary in fintech, timely and proper customer contact is critical.

2. Noncompliance with Regulatory Requirements

Risk is the primary emphasis of the fintech business in terms of regulations and compliance. Regulators must ensure that fintech businesses correctly analyze risk and implement risk-mitigation procedures.

Unfortunately, many countries’ regulatory breadth falls short of keeping up with the rate of technological progress. This implies that regulatory standards are changing rapidly for several fintech teams, rendering standardization of compliance practices exceedingly challenging.

Whereas several fintech sectors are not as severely governed as traditional financial institutions, rules such as PSD2 and GDPR define specific criteria for data protection and system security protocols, which influence European fintech sectors in general. National authorities frequently impose an extra regulatory layer that affects fintechs — for example, CFTC and SEC in the United States, FCA in the UK, BaFin in Germany, and ACPR and AMF in France.

If such standards are not strictly followed, businesses risk being detected in noncompliance, being penalized substantially, and damaging their excellent market reputation.

3. Personal and Professional Liability

Ultimately, most fintech firms either supply or facilitate a financial service. This alone exposes the organization to carelessness, service failures, fraud claims, and other usual hazards connected with financial services. Fintech firms, which provide fresh financial products via fresh creative service models, are highly susceptible to professional liability claims.

In general, the issue is one of maladjustment: Fintech businesses frequently overrun their operational capacity and cannot standardize new operational procedures, resulting in additional mistakes.

On the other hand, consumers are inclined to carelessly use fintech applications and fail to take preventative measures to safeguard themselves, their data, and finances. The fintech provider will be held liable 99 percent of the time in any situation.

4. Data Thefts and Cyber Attacks

One significant disadvantage of fintech is its ability to actively increase the risk to current financial institutions: the more systems linked by fintech, the more possible incursions for cyber assaults to exploit. Significantly, 2020 was a challenging year for fintech cybersecurity.

There is no “one size fits all” cybersecurity framework in fintech due to the diversity of business and operational structures. Hiring competent cyber risk management and IT-security teams is critical to identifying and mitigating elevated vectors for cyberattacks.

However, having the correct security assets somehow doesn’t eliminate the everyday anxiety of cyber incidents for fintech operations directors. Any cyber danger, like market events, will necessitate a quick, planned response from operations units, and any mistakes committed during the procedure might be costly.

5. An Increase in Global Rivalry

Existing financial institutions have hitherto been shielded by the national circumstances of their particular markets. Every national jurisdiction has its own set of financial circumstances and rules, complying with financial firms that provide services adapted to local demands.

However, these geographical limits have quickly crumbled in recent times, owing to the fast emergence of fintech businesses offering worldwide financial solutions. As a response, institutional finance has had to choose between competing head-on with nimble fintech businesses or learning to collaborate and form relationships with them. This agile vs. traditional dynamic has created a globally competitive environment, and firms that want to win the fintech race must carefully select their strategic relationships.

Moreover, pursuing third-party partnerships – with conventional finance or otherwise – is not possible for several fintech firms. Their business practices are entirely dependent on it. The extra strain of competition and the necessity to engage third-party services and alliances to stay at the forefront are elements of operational risk for operations teams that may put them at a disadvantage beyond their power. ‍

Want to know more about the risks facing by the fintech operations? Get in touch with our fintech experts for a demonstration of what Predict360 can do for FinTech operation. Predict360 is an American Bankers Association (ABA) endorsed risk and compliance management platform.