Regulatory risks every fintech should have on their radar

How regulatory risk and growth go hand in hand

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 operating in every banking area have impacted the way banks innovate and customers bank. 

As fintechs consider their growth plans, there are many factors to consider, such as international expansion, what type of additional licenses to obtain to expand their product suite and how to utilise the most innovative technologies. These considerations and subsequent decisions lead to increasingly complex regulatory requirements and more regulatory risk, specifically in the area of KYC and AML. fintechs must essentially balance between sustainable growth plans and taking on the right amount of regulatory risk. Without considering regulatory risks due to new licenses and international expansion, fintechs run the risk of a material impact on the business. 

Regulatory risks every fintech should consider

The European eKYC mix varies by country, with different options, norms, and standards. Similar national identity systems in Scandinavia, such as BankID, make for a relatively easy international expansion for a fintech based in Denmark to expand into Sweden or Norway. However, most countries experience differences not just in national KYC regulations but also in how the majority of customers approach data privacy and views on using fully digital financial services. For example, a UK fintech looking to expand in Germany will need to consider different KYC regulations stipulated by the BaFin (German Federal Financial Supervisory Authority) and a higher proportion of customers who value digital privacy and may not have experience in undertaking digital KYC. 

A second risk involves acquiring new licenses to operate. In general, fintechs either hold an e-money institution, a banking license, or passport off the license held by a Banks as a Service (BaaS) provider.  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, as fintech “grow up,” they acquire the coveted banking license, either by application or by acquiring an existing bank. When a fintech company 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. 

A third risk applicable to fintechs is how to implement and potentially experiment with new technologies which could be subject to regulation. Fintechs pride themselves on their “digital-first” mentality. Specifically, fintechs operating in the cryptocurrency space, or using AI and Machine Learning for robo-advice or lending products, face a high risk of medium to long term regulation in how these technologies can be used in a financial services context, regardless of the type of license they hold.

Although fintechs face a range of regulatory risks as they scale, maintaining and re-assesing an effective risk management strategy and implementing future-proof KYC solutions are key. 

Finding a future-proof solution to mitigate regulatory risk

An eKYC solution, such as AI-driven ID verification is one way fintechs can ensure they are mitigating regulatory risks at almost any stage of their growth plans. These solutions are highly customizable, ensuring that fintechs are adhering to the necessary KYC requirements based on their license, technology uses, and geographies they operate in, and provide a seamless customer experience, a critical factor as fintech disruption has been the result of putting a good UX front and center. Solutions that can also similarly AML screening and monitoring with KYC can create a quicker, user friendly and memorable onboarding experience, ensuring fintechs keep ahead in the battle for user experience. 

For fintechs from various areas, such as Buy-Now-Pay-Later companies, early and late stage cryptocurrency companies and fintechs with an EMI looking to broaden their product offering with a full-banking license, regulatory risk should be top of mind. In particular, mitigating risks through a future-proof KYC strategy are critical in ensuring the technological, product, legal and cultural growth of any fintech are aligned to the future vision and plans for growth. Looking to a customizable, future-proof eKYC solution, such as AI-driven ID verification, can ensure that your fintech can seamlessly launch in new markets, mitigate significant changes in maintaining compliance with the addition of new licenses, and mitigate risks when using new and unchartered technologies.

By

Meaghan Johnson

Meaghan Johnson
CX & UX Consultant for fintech and digital banking
Connect with Meaghan on LinkedIn

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