Navigating Compliance for Fintech Startups

Around the world, financial technology industry regulations differ significantly. Fintechs must be compliant and stay up to date with a wide range of rules, including security, data privacy, and chartered banking laws. Banking, money transfer, consumer protection and privacy, credit cards, insurance, and more are all subject to regulatory authorities. Non-compliance can cost businesses hefty fines. As such, fintech startups need to protect themselves from day one. Embed compliance in their business strategy, building their own compliance programs or working with well-established regulation technology companies.

The state of compliance

The fintech industry has been in hypergrowth over the last decade and is now maturing, set to grow three times faster than the traditional banking sector before 2028. The regulations have evolved, too, even though the level of regulation might differ from one country to another. However, most countries where fintechs are striving, such as the USA, European Union, Singapore, Australia, and more, currently have strict regulations.

For instance, the USA has federal as well as state regulators, such as the Financial Crimes Enforcement Network (FinCEN), Commodities Future Trading Commission (CFTC), and the California Department of Financial Protection and Innovation (CADFI), to name a few. The UK has the Financial Conduct Authority (FCA), fintechs in Germany are regulated by The Federal Financial Supervisory Authority, and Singapore’s financial services industry is under the Monetary Authority of Singapore (MAS).

It’s no wonder that fintech startups feel overwhelmed with laws, requirements, and procedures that must be followed in every country where they operate and where their clients and users are from. Here are several steps and recommendations to consider when building a company.

Know the compliance

If you develop a fintech startup, you first need to hire a compliance expert or seek legal counsel. Fintech compliance is not a job that a founder or any manager can do without experience in the field. However, it doesn’t mean a founding or management team should fully rely on an expert. It’s essential to understand the basics of compliance and have at least a high-level view of it.

Starting with a compliance overview, you’re going to encounter:

• Geographical jurisdiction.

  Identify regions where you’re going to operate and where your users are going to be from. Today, the majority of fintechs operate in several countries and have clients all over the world. So, ensure you have a list of countries to work on compliance with, considering all required regional regulations.

• Regulatory compliance.

  The fintech industry includes a variety of businesses (such as SaaS platforms or neobanks) and may also offer services in many different areas (traditional currency, cryptocurrency, decentralized finance, etc.). Some will be affected mainly by anti-money laundering (AML) and consumer protection laws. On the other hand, fintechs with a full banking license will face the same regulations as traditional banks.

• Penalties for noncompliance.

  Know what you’re facing if you do not meet the compliance requirements, such as fines, losing a license, and reputation damage (losing the trust of its customers, investors, and other stakeholders).

Now, let’s go through the most important compliance factors fintech startups face:

Licensing

Fintech startups must be licensed first before offering any product or services to the market. Different types of fintechs need different licenses. Companies providing banking services, such as money transfers, deposits, withdrawals, loans, etc., require a banking license. Payment systems that are processing payments and transfers will need a payment institution license, and companies working with cryptocurrencies have to obtain licenses to operate cryptocurrencies.

Data security and privacy

As fintechs collect and use large amounts of customer data, data privacy is one of the most critical legal issues in the industry. Some of the regulators are global, such as the Payment Card Industry Data Security Standard (PCI DSS). Still, many regional and even state-level regulators exist, such as the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA) in California, US. User data protection is a big issue right now, so be ready to meet hefty fines in case of non-compliance and any data leakage.

Anti-Money Laundering (AML)

AML laws and programs for fintech regulation are set to prevent financial crimes and illegal activity. They require fintechs to monitor customer activity for suspicious transactions and report it to the appropriate authorities. It includes following the Know Your Customer (KYC) requirements and customer due diligence (CDD). All fintechs are obligated by regulatory bodies to use KYC at onboarding to verify the identity of their customers. In the meantime, CDD regulations demand that fintechs organize and maintain ongoing customer verification, customer risk profile development, verifying the identity of company account owners, and monitoring suspicious transactions.

Best practices for fintech startups

Apply a risk-based approach.

Implement frequent risk assessment and regular monitoring of the regulatory and legislative landscape. Startups tend to pivot frequently, and fintech regulations evolve drastically and differ from country to country. Therefore, keeping up with the business changes and adjusting to the regulations is essential.

Make compliance part of your product development.

Seek constant involvement from the company’s legal team throughout the fintech product development process. Make sure your product team is well-educated in compliance and understands its importance.

Always remember why compliance is essential.

It’s a law, yet it’s not the only reason why businesses should comply with regulations:

— It establishes credibility and trust.

— Compliance helps fintechs scale.

— Regulations create fair competition among companies.

Conclusion

Developing a startup is a daunting and highly risky process on its own. Working on fintech startups and following all required regulations will require a lot of additional preparation, patience, and attention to every detail. However, as the fintech industry is currently rising and maturing simultaneously, and is projected to become a $1.5 trillion industry by 2030, it is worth the effort. Fintech startups have to have a close look at always-changing regulations, and the top management should be aware of the most common downsides and potential compliance risks to be ready to launch a successful business.