3 regulatory risks every fintech should have on their radar.

With increasing numbers of regulatory risks for fintechs that operate internationally, it has become essential to know the differences in legislation and legal requirements.

The fintech revolution has led to significant disruption in the financial services and banking sector. Through lower cost, fast development, use of better technology, and superior customer experiences, fintechs have impacted the way banks innovate and customers bank. For more information on what incumbent institutions can learn from fintechs, read our ‘The growing pains of fintech start-ups’ blog.

As fintechs consider how to expand internationally, there are some incredibly important decisions to make, such as which additional licenses need to be obtained, whether to expand their product suite, and how to make better informed decisions regarding the latest innovative technologies. Associated with these decisions are increasingly complex regulatory requirements and more regulatory risk, specifically in the area of KYC and AML. At the very heart of these decisions is to how to balance sustainable growth with regulatory risk.

3 regulatory risks every fintech should know.

Different KYC processes

eKYC processes tend to vary by country (check out our ‘eKYC: Balancing regulation and customer experience in Europe’ blog to learn more. There are exceptions, though; similar national identity systems in Scandinavia, such as BankID, would make for a relatively easy international expansion for a Danish fintech to expand into Sweden or Norway, for example. However, most countries do have differences in their national KYC regulations, and in how their customers approach data privacy. For example, a UK fintech looking to expand in Germany will need to consider different KYC regulations as stipulated by BaFin (German Federal Financial Supervisory Authority), alongside a higher proportion of customers who value digital privacy and may not have experience in undertaking digital KYC.

Licence to operate

The second risk that every fintech should be aware of involves acquiring new licenses to operate. Fintechs tend to start with either an e-money license (EMI) or using a BaaS provider, as the time, resources, and capital requirements for a banking license are arduous. However, when fintechs begin to scale, most take steps to gain the coveted banking license, either by application or by acquiring an existing bank. When a fintech becomes a licensed bank, there is greater regulatory scrutiny and requirements. Although the door is opened to offer a broader range of products and services, such as loans and investments, new products are inherently subjected to greater risk. 

Technology first, risk second

A third risk applicable to fintechs is how to implement and experiment with new technologies that could be subject to regulation. Fintechs pride themselves on their “digital-first” mentality, especially those operating in the crypto space. However, with such reliance on AI and machine learning, fintechs face a constant risk of whether such applications of technology will be subject to further regulatory scrutiny.

Although fintechs face a range of regulatory risks as they scale, maintaining an effective risk management strategy and implementing future-proof KYC solutions is key to successful growth.

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Finding a future-proof solution to mitigate regulatory risk.

An AI-enabled eKYC solution for fintechs, is one way fintechs can ensure they are mitigating regulatory risks at almost any stage of their growth plans. As the automated KYC solutions by IDnow are customizable, they can also be used to complete AML screening and monitoring to create a quicker, more user-friendly and memorable onboarding experience, ensuring fintechs keep ahead in the battle for superior user experience. 

For Buy-Now-Pay-Later companies, early and late-stage crypto exchanges, and fintechs with an EMI looking to broaden their product offering with a full-banking license, regulatory risk should be top of mind. Mitigating the above risks through a future-proof KYC strategy is crucial to growth plans. A future-proof eKYC solution can ensure your fintech can seamlessly launch in new markets, mitigate significant changes in maintaining compliance with new licenses, and mitigate risks when using new and unchartered technologies.


Meaghan Johnson

Meaghan Johnson
CX & UX Consultant for fintech and Digital Banking
Connect with Meaghan on LinkedIn

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