Fintech compliance regulations may seem like an unnecessary leftover from a pre-fintech world to some people. Especially in an innovative area such as fintech, many entrepreneurs consider dedicating resources to remaining compliant as a necessary evil at best. They see fintech as an opportunity to break free of the old world of slow-moving institutions and cumbersome regulations. But that perception is actually flawed. When planned and implemented properly, a robust regulatory compliance program helps fintechs find new sources of growth and revenue, ultimately resulting in a competitive advantage.
Using Fintech Regulatory Compliance to Drive Business Growth
In the real world, the story could not be more different. Many fintech innovators have crossed into investment advising, trading, money transmittal, lending, and other financial services. Many more others are thinking of doing so. These activities will continue to be regulated. In fact, scrutiny is likely to increase.
Deep expertise in fintech is what makes the difference. While a generic approach can limit a company's opportunities, focusing on the unique challenges of a fintech company gives companies more growth opportunities than they otherwise would have had. Done correctly, fintech compliance creates a competitive advantage.
For example, a robo-advisor might initially believe that registering as a broker-dealer is too difficult and time-consuming to undertake. Deciding not to register can drastically limit their future opportunities because it then precludes them from pursuing additional revenue streams available only to broker-dealers.
Similarly, a cryptocurrency app may initially want to avoid registering as a money transmitter. As the company's user base grows, they may find they cannot meet customer demand to exchange virtual currencies for fiat currencies.
How Fintech Compliance Consulting and Outsourcing Helps
An expert fintech compliance consultant can help such companies understand those trade-offs and their long-term implications. Companies can also use such expertise to help them through the challenges of the registration process because fintech experts have carried it out time and time again while understanding the unique requirements for a digital innovator.
The need for expertise goes beyond compliance consulting, however. Once companies are registered, they need to plan and operate compliance programs. That is the role of a full-service outsourcing company such as InnReg. Outsourcing operations—from day-to-day activity to executive leadership—means relying on experienced professionals from day one. Such professionals have handled similar programs and managed similar risks before.
Experience in fintech is essential because it gives more flexibility in tailoring programs to make technology infrastructure compliant. Access to the right level of experience also gives companies more of a strategic advantage by anticipating future risk rather than only managing current risk. This thinking applies both to choices about registering as well as choices about technologies.
Strategic Discipline and Technology Choices
Another key part of these efforts is having the strategic discipline to delay some technology decisions. There are many technology solutions that can help automate suspicious activity monitoring, for example. However, such technologies are built on certain assumptions about the patterns of activity that they should flag. Suppose a company's platform evolves and its user base grows to include activity that the technology does not flag (such as certain types of transfers between accounts). In that case, it has the worst of both worlds: an expensive technology purchase and an unaddressed area of risk.
Alternative Lending Case Study
An example from InnReg's client work helps illustrate the competitive advantage that compliance can deliver. We worked with a US-based alternative lender before their launch of a mobile-only lending app targeting millennials and college students with thin credit.
The client wanted to deploy effective and efficient account origination processes for people with thin credit files while complying with all relevant origination regulations. In addition, their planned underwriting and payment processing system was 100% mobile. They were very concerned that complying with all applicable regulations would create a cumbersome experience.
InnReg worked with this online lender to design and deploy underwriting and payment processing systems. As a result, it was possible to deliver origination decisions within three minutes. The client was able to originate accounts, transmit funds, process payments, and share sensitive customer data with credit reporting agencies without hiccups.
This approach gave the client a significant strategic advantage. They opened thousands of accounts within the first few weeks of launch. A major trade publication named them Start-Up of the Year. The decisions made in the technology and compliance planning played a significant part in making this possible.
Alternative Trading System (ATS) Case Study
In recent work with an Alternative Trading System (ATS), we also provided a significant competitive advantage to a client whose business model is based on algorithms and high-volume trading. Using proprietary algorithms also compounded the frequency and depth of the client’s regulatory interactions. As a result, the client needed to scrutinize its workflows and processes to optimize its strategy and execute on it efficiently. It also needed to satisfy regulatory expectations.
InnReg performed a thorough review of existing processes. We then revised and implemented a comprehensive set of processes to accommodate the complexity of the ATS business model. One of the most essential elements of these enhanced processes was the focus on scalability to accommodate high volumes of users and transactions in the ATS.
Adopting a fully managed, outsourced regulatory solution, including having a licensed professional serve as the Chief Compliance Officer of the broker-dealer and ATS, has resulted in two strategic benefits.
First, it allowed the client, with InnReg’s support, to demonstrate the efficacy of the new processes to three separate regulatory agencies. Second, it has helped the company become one of the largest such platforms in the U.S. by volume of transactions, and laid the foundation for the company’s expansion into foreign markets.
In these and many other cases, InnReg tailors its fintech compliance consulting approach to help each client do much more than avoid risk or satisfy regulators. The goal was to allow clients to offer a better product than their competitors and have more options for capitalizing on future user and revenue growth.
These cases debunk the idea that being compliant imposes limitations. When done correctly with a technology-driven financial innovator's specific needs, the strategic advantage of compliance becomes clear.