Balancing Innovation and Compliance with Fintech

Fintech companies are defined through their disruptive powers; fintech services and apps grow through innovative delivery channels to supply financial services. However, as Fintech increases in its role in the economy, the regulatory scrutiny of fintech companies is being enhanced. As a consequence, disruptive enterprises should likewise concentrate on compliance on the other side of the coin. It may appear like an unattainable purpose to comply with regulations for a disruptive service. However, several reasons and techniques enable innovative fintech companies to make this transformation.

Fintech and the Rules of Compliance 

Many Fintech apps and services have been successful because they do not have the same regulatory restrictions as traditional financial institutions to comply with. For instance, a bank must guarantee that all state and federal banking standards are complied with. Transactions may be delayed by the rules set out in these regulations. Many slow-moving banking processes do not seem to be slow, because the bank is working slowly – digital systems process transactions in an instant - but because all transactions need time to comply.

Compare this with a Venmo service. Users like Venmo because it makes it easier and faster to transfer money than banks. Because Venmo provides no banking services, no banking rules are necessary. The Venmo regulators are linked to the prevention of fraud and national safety, including FinCEN, CFPB, and FTC. This enables Venmo to transact faster than the banks that have many more regulators such as the Federal Reserve, the FDIC, the OCC, the CFTC, and the SEC to comply with.

Limited Opportunities 

Faced with fewer rules, Fintech companies have an important advantage, but they too are a restrictive element. Fintech services and applications may not exercise the regulatory powers of many regulatory authorities unless they offer the services which fall within their jurisdiction. This restricts products that are offered to clients through Fintech applications and services. This constraint for fintech has two viable solutions:

1. Register/charter as a conventional financial institution and comply with the regulatory standards of conventional financial institutions.

2. Partners in the expansion of services via the Fintech service supply channel with banks and other traditional financial institutions.

The first difficulty is that most Fintech apps and services take competitive edge. Second, this significantly complicates the work as Fintech will now be obligated not only to provide the new banking services, but also to ensure that all of its activity complies with the legal standards.

The second way nevertheless enables Fintech to provide services to the bank or to other traditional financial institutions while unloading the regulatory strain of the new banking/financial services that they offer. In other words, the existing Fintech services are supplied to customers immediately. Only services interacting with normal banking channels are delayed, which gives a far better experience.

Enabling Collaboration Between Fintech and Banking 

Fintech companies must focus on compliance with regulations to expand. Banks and other financial institutions have decades of experience in the current regulatory environment; Fintech companies will need to quickly catch up. The latest Robinhood fines are an outstanding illustration of Fintech companies' losses because of inability to comply. Robinhood was fined 70 million dollars, but this is far from the only adverse effect they have had. The negative effect on Robinhood's IPO may be much more devastating from the additional regulatory attention and punishment. Binance faces more regulatory monitoring worldwide and focuses on compliance to solve its difficulties.

If companies are to negotiate the regulatory landscape of the financial sector successfully, Fintech will need to adopt risk and compliance management system. Advanced solutions enable visualizing and understanding the rules and their implications for business processes easier for fintech companies. For fintech companies, implementations prove lucrative, as fintech companies already contain many knowledgeable employees. Although risk and adherence solutions have greatly benefitted the banking industry, there are still certain problems because bankers are not primarily IT professionals, unlike many experts working in Fintech companies.

Fintech is the future, but it will have to be a future that is compliant with the rules of engagement in the financial sector. It will take some time to iron out all the laws and regulations and make them more Fintech friendly. Fintech businesses will also have to look at ensuring as much compliance as they can without sacrificing performance if they want to successfully integrate with the banking and finance sector. Being compliant will open new opportunities for Fintech startups and allow them to build more revenue streams.