2022: The year for fraud, fines, and fintechs.

2022 has witnessed record growth for fintechs, but wherever there are opportunities, there is increased competition, and greater scrutiny from regulators.

There has never been a time of greater opportunity for financial technology businesses. 

Continual advances in artificial intelligence, machine learning, and data analytics are delivering digital-first solutions to meet ravenous consumer demand for instant, mobile-led products and services.

A glance at Forbes’ fintech rich list reveals half of the top 50 are new entrants, with cryptcompanies and start-ups vying to make banking services cheaper, more accessible, and more convenient for the public. As more fintechs launch, venture capitalists continue to pump money in; a total of $133 billion globally was invested last year, almost three times the amount of the previous year.

“New” newcomers are jostling with the “old” newcomers; digital banks such as Starling, Monzo, money transfer service Wise, and retail investing apps Robinhood, Freetrade and 2-1-2 have already carved out revenue streams from services that were formerly the preserve of traditional institutions. 

Risky business.

However, the knock-on impact of having a packed field of fintechs, and such huge sums of money swirling around is that the risks have also exacerbated. Competition is more intense than ever, with major names in technology entering the market to compete with the stalwarts and app-based digital banks.

Regulatory pressure is also at a level unseen, with penalties for poor anti money-laundering controls spiking to record levels in recent years. The $10 billion in fines collected by regulators last year puts into sharp focus the $26 billion total for the entire post-financial crisis decade of 2008-2018, with no sign of a slowdown in enforcement.

Multi-million-dollar fines have long been commonplace for banks that step out of line, but now fintech firms are finding themselves on the receiving end of increasingly hefty sanctions. 

Mobile trading app Robinhood landed a record $70 million fine by FINRA for multiple failings of systems and policies, while in the UK, audit watchdogs have shown concern over the lack of understanding around systems and controls inside some major digital banks such as Revolut. According to comments by a company insider to the Financial Times, Europe’s second most valuable fintech “needs to have a back office like a bank and it’s got the culture of a tech firm,” which is sure to sound familiar to many within the sector. 

Fintechs are not exempt from fines.

The number of firms hit by AML fines more than doubled in 2021. The largest sanctions were still reserved for banks, with Malaysian lender AmBank stung for $700 million for its role in the 1MDB financial scandal, however, the wider spread of offences embroiled several fintech firms. Although the official figures of 2022 fines are unlikely to be revealed until early 2023, all signs are that they are likely to follow a similar pattern to 2021. 

Over the last 12 months, the cryptocurrency sector has increasingly found itself in the crosshairs of enforcement agencies. In February, BlockFi agreed to pay $100 million, the largest-ever enforcement penalty for a crypto firm, for systems and control failures. A few months earlier, Helix, a large cryptocurrency-centric organisation, was fined $60 million for darknet money laundering offences, and the chief operator of the organisation, Larry Harmon, faces 20 years in prison. 

In October, another crypto trading platform was fined $29.3 million for violating multiple sanctions, including those outlawing US companies from doing business with individuals operating in Iran, Sudan, Syria, Cuba and the Crimea region of Ukraine. Regulators discovered that the Washington-based Bittrex failed to maintain an effective anti-money-laundering program from February 2014 through December 2018. As few as two employees were responsible for reviewing over 20,000 daily transactions for suspicious activity during that period.

Other notable penalties over the last year include a $360,000 fine for Wise, formerly known as TransferWise, by the regulator of Abu Dhabi’s free zone financial centre. Indeed, the UAE is a perfect example of a region experiencing unprecedented regulatory scrutiny following its banking sector’s recent growth. The local subsidiary of Wise paid $360,000 for breaching anti-money laundering requirements and failing to identify and verify the source of funds or wealth held by high-risk customers carrying out transactions on their behalf.

Wise did not “consider customer nationality as part of its risk-based assessment of its customers,” along with other breaches, the regulator said, indicating a serious escalation of financial regulatory enforcement in the Middle East.

With added scrutiny from regulators, exposure to geopolitical shocks, economic uncertainty, and the prospect of a long period of cheap money and leverage winding down, an entirely new set of risk management tests has materialized for fintechs to pass.

Speed to market times are decreasing alongside these pressures, but firms that streak forward without a solid foundation of compliance risk losing it all. 

“While growth is the top priority, the need to manage risk, optimize costs and increase efficiency also requires new technology innovations,” said Gartner analyst Moutusi Sau. The research consultancy is predicting a $63 billion outlay on new technology by financial services firms in 2023. 

Looking forward.

As fintech challenger banks are now invariably competing for customers based on the customer experience, rather than, for example, account opening bonuses, they must ensure their customer onboarding experience is as safe and secure as it is intuitive and convenient. 

Through every technological advancement that fintechs implement, the KYC and AML process needs to remain front and center, and at the very cornerstone of any customer onboarding experience. It needn’t necessarily be an either (security) / or (consumer experience) situation. Read more about the steps that the UK banking sector can take in our ‘How UK’s banking sector can meet its AML challenges’ blog.

IDnow provides the most powerful, configurable, and secure platform for identity proofing. Whether automated or expert-assisted, IDnow’s identity-proofing methods have been optimized to meet the strictest security standards and regulatory requirements without compromising on customer conversions or the consumer experience.

Any fintech company or traditional bank that wants to avoid falling victim to fraud or fines in 2023, needs to invest in the right KYC technology and risk management platform. Smart thinking and better technology can provide fintechs with the necessary stability and assurance the market needs as they navigate obstacles in a febrile trading environment.

Learn more about the challenges facing new entrants to the financial services space by reading our ‘The growing pains of fintech start-ups’ blog.


2022: The year for fraud, fines, and fintechs. 1

Jody Houton
Content Manager at IDnow
Connect with Jody on LinkedIn

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