According to Allen & Overy, many players in the FinTech industry are uncertain as to which regulators and governing bodies they have to adhere to. This uncertainty makes business planning difficult and often the associated cost of regulation is sufficient to deter new companies entering the market.
By overcoming regulatory uncertainties, FinTech firms can gain a competitive edge and pioneer innovative practices.
As a result, firms are looking carefully at three main areas to overcome these regulatory issues:
- Emphasis on security & transparency
- Investment in compliance solutions
- Collaboration with large Financial Institutions
Emphasis on security & transparency
Data is critical to the business models of many Fintechs. Firms can maximise new opportunities and reduce risk by deriving business insights from financial services data.
Yet recent breaches of data privacy has reduced public confidence in Technology and FinTech firms’ ability to safeguard customer data. Most recent example including Facebook's commitment to data privacy.
Thus, to derive most value out of data, it has become imperative for FinTech firms to create a positive brand for themselves based on security, transparency, and integrity. With the introduction of GDPR, more firms have started to invest in data protection & cybersecurity software, so that they can be seen as trustworthy partners to their customers.
Investment in compliance
According to Boston Consulting Group, banks across the globe have paid $321Bn in fines since the 2008 financial crisis. Yet, compliance exposure is not limited to traditional financial institutions. The recent $104M fine imposed on Blue Global Media provides evidence that FinTech firms also have significant regulatory exposure even when they are not directly engaging in lending business.
Benefits of investing in compliance:
- Mitigate financial exposure to fines
- Create competitive advantage
- Increase investor confidence
- Streamline onboarding processes to drive business growth & increase customer retention
Collaboration with large Financial Institutions
To compete in an uncertain regulatory environment, it has become paramount for FinTechs to collaborate with large Financial Institutions, especially as they deal with data handling & cybersecurity issues.
GDPR & Open Banking make collaboration through partnerships between FinTechs and Incumbent banks all the more attractive.
Recent examples include:
- Santander teamed up with Kabbage, to provide flexible access to business finance.
- Last year, Investec partnered with MarketInvoice to power business loans for their customers following a £50m commitment from the bank. This will enable Investec to use MarketInvoice’s proprietary technology to originate and underwrite credit decisions.
FinTech firms can take advantage of the complex regulatory environment by:
Offering customers innovative tools to build customer trust, whilst building a brand that emphasises the importance of data privacy and security.
Taking a customer centric approach to onboarding through automating and embedding compliance processes throughout the entire lifecycle.
Collaborating with large financial institutions to gain access to transactional data and develop tailored products for the benefit of customers.