The business environment has changed dramatically since mid-2020. Due to the increasing collapse of conventional methods of working, businesses in all sectors were forced to adapt to a wholly digital environment — whether they were prepared for it or not. In addition, many organizations have accelerated the adoption of technology to keep their businesses operating in the face of national lockdowns caused by necessity and design. As a result, Fintech apps are rapidly becoming an essential component of trending financial services businesses.

In a mature industry, financial services companies’ corporate governance and culture have kept up with emerging technology. Fintech has made banking and investing more convenient than ever. Yet, the increasing dependence on contemporary collaboration technologies such as chat, phone, and video combined with a lax approach to Fintech security, may result in problems that threaten to disrupt Fintech companies.

The effect of Fintech extends beyond regular consumers, enabling businesses to enhance operational efficiency and overall engagement. Nonetheless, with new technologies comes a more significant duty to safeguard customers’ financial and personal information. How? By ensuring compliance with emerging regulations and meeting Fintech security targets.

Also, to prevent regulatory infractions, hefty penalties, and security breaches, Fintech companies must evaluate procedures linked to the increasing use of collaborative technologies that provide work-from-anywhere capabilities and guarantee that its security and compliance are adequate today and in the future.

Do regulations stifle Fintech innovation?

Every year, Fintech apps attract millions of consumers because of their simplicity of use, efficiency, and cheap cost of entry. Often, many organizations in this industry want to stand apart from traditional and outdated banking institutions. Fintechs have enjoyed more ease in building long-term client relationships, handling market changes with agility, and challenging conventional rivals without the constraints placed on banks and other financial institutions through many regulatory regulations.

On the other hand, Fintechs are becoming more susceptible to anti-money laundering (AML) laws in the countries in which they operate. Authorities continue to stress the need for businesses to maintain robust anti-money laundering (AML) compliance procedures or risk increased scrutiny and possible penalties as the sector evolves and disrupts banking as a whole.

And the repercussions of non-compliance are formidable. A steep financial penalty, for example, may damage a fledgling business’s capacity to compete in a competitive market and expand its user base by decreasing investor financing, R&D expenditure and permanently harming its image by eroding consumer trust.

Traditional financial firms have long seen regulations and compliance as a barrier to innovation. However, Fintech has not been as impacted by regulatory compliance–yet. Thus, Fintech companies do have a competitive edge. Still, consumers expect regulatory protection in connection with Fintech products and services similar to those offered by banks but delivered via non-traditional channels emphasizing ease of access and speed of execution. Having systems in place that can help Fintechs meet compliance will streamline the process and make it a win-win for businesses and consumers alike.

Let’s take a look at Fintech regulations

There are numerous regulations that do and will impact Fintechs moving forward.

One of the regulatory difficulties associated with Fintech is the peer-to-peer (P2P) structure of many transactions. Because Fintech can increase the pool of end-users, it isn’t easy to establish fair and enforceable regulations. Fintech rules are widely dispersed, and businesses are primarily responsible for determining/researching if restrictions apply, at least until a citation is issued. We have listed a few critical regulations below:

  1. The National Automated Clearing House Association (NACHA), which sets payment industry regulations and standards, submitted a new Fintech Act to the US House of Representatives in March 2019. Although the law is still in its early stages, it was designed to establish a Fintech Council inside the Department of Treasury and “innovation” offices within other financial agencies and eliminate unnecessary rules.
  2. The JOBS Act created an Internet-based intermediary to improve the security of online financial transactions. The legislation aims to make crowdfunding more accessible to small companies. As a result, the Securities and Exchange Commission now mandates that all such websites register. The legislation also limits the amount a person may donate in proportion to their net wealth.For instance, when a lending platform collaborates with a bank to provide peer-to-peer lending, the platform is considered a third party, and the bank is responsible for regulatory compliance. In contrast, a  lending platform is susceptible to SEC supervision if it offers loans as securities. Further, the JOBS Act boosts public trust in new financing methods, the majority of which emerged as a result of Fintech innovation.
  3. The E-Sign Act (Electronic Signatures in Global and National Commerce Act) of 2000 established rules for electronic signatures and electronic documents both inside and outside the United States. Businesses must describe the availability of paper copies made, any disclosures of electronic records, how future electronic communication with clients will be handled, and how consumers may request hard copies of files. Customers may prefer virtual bills and documents in the digital age, but physical copies are occasionally required or helpful. Therefore, Fintech companies should aim for clarity in how they receive documents, such as electronic transaction records.
  4. The Financial Stability Board published ten high-level suggestions in April 2020 to address supervisory, regulatory, and oversight issues. In addition, it emphasizes the need for coordination, cross-border collaboration, and information-sharing procedures.
  5. The International Organization of Securities Commissions (IOSC) issued a consultation document in June 2020 to assist its members in developing appropriate regulatory frameworks for the supervision of market intermediaries and asset managers that use artificial intelligence (AI) and machine learning (ML), these include:
    • Testing and continuous monitoring
    • Data quality and bias
    • Outsourcing
    • Ethical issues
    • Governance and oversight algorithm development
    • Transparency and explainability

Cybersecurity issues in Fintech

Fintech, like other kinds of technologies, may help to optimize efficiency, but there are also significant operational dangers to consider. As a consequence, it’s critical to understand a range of Fintech security concerns, such as the ones listed below:

Cloud migration. The usage of cloud computing services entails a particular risk. They must be carefully watched, safeguarded, and adequately secured. While cloud providers may advise and recommend best practices, it is ultimately the customer’s responsibility to implement financial services on such platforms. Thus, firms are increasingly relying on CASB technology to enforce Fintech security requirements across cloud providers, end-users, and devices to achieve optimal service delivery and cost savings.

Distributed Denial-of-Service (DDoS) Attacks. Self-interested hackers may interrupt service and hold companies hostage. Availability and dependability are critical in a competitive market. DDoS defenses, such as CDN services and advanced web filtering may aid in mitigating any vulnerabilities.

Money laundering: Fintechs, especially those that deal with cryptocurrencies worldwide, are easy targets for money laundering. Fintech platforms may also be used as channels for threat actors to fund criminal activities, and some Fintech companies have difficulties monitoring these often anonymous transactions. Therefore, using sophisticated audits and being open with business partners may aid in the detection and prevention of illegal and terrorist money laundering.

Omni-channel services. Fintechs serve today’s digital consumers, which requires the availability of many interfaces. Traditional websites and mobile applications on many platforms should be maintained and appropriately assessed from an application standpoint. Penetration testing and ethical hacking activities may aid in the detection of possible risks before they are exploited. As a result, best practices for using and assessing open-source technology are critical in these complex, interconnected financial settings.

Authentication. Fintechs and financial institutions confront the never-ending problem of authenticating their clients and partners directly or indirectly, yet authentication itself has its obstacles. To establish and verify identification, multi-factor authentication and biometrics are often employed. More advanced options include IAM systems that operate across applications and artificial intelligence (AI) that detects and responds to abnormal user behavior. Passwordless authentication methods are also gaining traction since they combine security and usability.

New regulations. As regulators and compliance regimes catch up with technological advancements, Fintech is now subject to more scrutiny. It must comply with standards such as PCI DSS,  PSD2,  and GDPR, among others. A similar narrative is unfolding in the realm of cryptocurrencies, where legal entities are now attempting to bring order to the new frontier of virtual money.

Therefore, it’s crucial for Fintechs to comprehend all commercial risks. Undoubtedly, noncompliance may result in substantial fines or the total removal of a business from a market.

In conclusion

The decentralization of Fintech makes it more difficult to manage risks and adhere to applicable laws. Fintech firms may improve their chances of compliance success by implementing robust risk management processes, regardless of how they enter regulated markets—whether as chartered institutions or as unchartered firms. Given increased regulatory scrutiny and the need to maintain processes that correctly identify and handle consumers, a compliant organization may enhance customer appeal.

Clearly, security and compliance should be at the top of your list when considering a new fintech partner, but those aren’t the only things. Be sure to check out our blog post, “Outsourcing Fintech Development – 10 Questions to Ask Your Vendor.”

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