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by InnReg

Fintech Ventures Profit from Outsourced Compliance Expertise

Fintech entrepreneurs will need different types of expertise during different phases of their business lifecycle: beta test products and services, launch program, scale growth, expand into new geographic markets, extend the product line, upgrade technology, optimize operational processes, explore long-term growth opportunities.

And they’ll need to make a number of Build vs. Buy decisions as they evaluate their changing requirements vis-à-vis their in-house skill set.  

Fragmented Business Environment Drives Specialization

Today’s business environment is highly fragmented and highly specialized, especially when it comes to financial services. In my experience fintech innovators are at their best and brightest when they’re developing groundbreaking, disruptive new product ideas. Implementation details tend to be less interesting, and often downright draining.

This phenomenon explains why many innovative startups build a core team of creative thinkers, and then tap into outsourced expertise for specialized skills like legal, digital advertising and regulatory compliance. It’s an effective approach, because it delivers a higher level of expertise at a lower cost when compared to maintaining these departments in-house. 

Outsourcing Has Become a Business Basic    

Outsourcing has become a basic component of today’s business model for many SMEs (small to mid-size enterprises). It’s a great way to leverage someone else’s time and expertise, so that a core executive team can stay focused on more creative processes and long-term growth initiatives that will directly impact their bottom line.

An outsourced regulatory compliance deliverable can range from an ad hoc consultation, like a system audit with strategic and tactical recommendations, all the way up to a fully managed compliance department complete with CCO (chief compliance officer).

Larger fintech organizations sometimes opt for a hybrid approach where they maintain an internal compliance department with general expertise, and then leverage an outsourced regulatory consulting group as a complement to their in-house compliance executive. Another option that’s emerged over the past few years is referred to as on-demand fractional c-suite support. This solution allows a CEO to leverage an outsourced CCO on an ongoing basis without the expense of a full-time compliance department head.  

The financial services executive who takes a DIY approach to regulatory compliance could be taking quite a risk for two reasons. First, the rules and regulatory enforcement approaches are constantly changing. Compliance specialists invest a substantial percentage of their time reviewing newly published rules and guidelines in order to determine the impact on their business. And second, government agencies are fighting a losing battle against cybercrime and money laundering. They’re pushing responsibility for prevention as well as accountability for breaches onto the private sector. So it pays to have state-of-the-state compliance expertise on your side.

Outsourcing Increases Expertise

The rationale for outsourcing is simple – more expertise, less cost, more hours in your day.

An outsourced compliance solution is not for everyone, but the right relationship delivers both tangible and intangible benefits. There are very few small to mid-size financial services companies, especially fintech startups, who have the in-house expertise to plan and deploy an effective regulatory compliance program that stands strong during a regulatory agency examination or enforcement action.

An outsourced compliance partner will take ownership and contribute to their client’s success in three different ways:

  • Deeper regulatory expertise than the typical in-house resource
  • More real world implementation experience
  • More up-to-date knowledge as new rules, guidelines and best practices emerge in the regulatory landscape.

Another strong benefit is the time element. When an executive reduces the number of hours spent on regulatory compliance issues, they increase the number of hours invested in launching, growing, and improving profitability for their business.  

Outsourcing Reduces Costs

As the CEO of a regulatory compliance consultancy I’m acutely aware of each client’s need to quantify, and justify, their investment in outsourced services. The Annual Salary Guide – Accounting And Finance Professionals published each year by Robert Half International is an excellent source of raw data for this type of ROI analysis.

The 2018 Guide estimates the average salary for a CCO in a financial services firm in San Francisco at $335,790*, and the same CCO salary in Miami at $255,440**. This is one salary without overhead, bonuses or other executive incentives.

These figures provide a good starting point to estimate the fully loaded cost to maintain an in-house regulatory compliance department. The typical fintech enterprise will find they can outsource their entire compliance function for less than the cost of a department head.  

An outsourced solution will deliver two intangible benefits in addition to cost savings. First, most career CCOs are strong generalists who are good at identifying obstacles. An outsourced regulatory consultant provides specialized fintech compliance expertise. Plus they thrive when digging into a new problem, and formulating a sound solution that overcomes obstacles without undue risk. Second, an ounce of prevention is worth a pound of cure. A good regulatory consultant does the right things, right, the first time. They keep their eye on your long-term strategic direction. Talk to a fintech startup that ran into regulatory issues 18 months after launch, and they’ll tell you the value of choosing the optimal business model, product design, and compliance stack. As well as the high cost in both time and money to correct their mistakes.    

* According to the Robert Half International 2018 Salary Guide for Accounting and Finance, the fully loaded salary for a CCO at a financial services company based in San Francisco will be $335,790:

  • National median base salary (50th percentile on page 20): $195,000
  • Local variance for San Francisco is +40% (page 23): $273,000
  • Fully loaded cost to employer is 123% of salary: $335,790
  • Bonuses, incentives and other forms of compensation are not included in this calculation.

** According to the Robert Half International 2018 Salary Guide for Accounting and Finance, the fully loaded salary for a CCO at a financial services company based in Miami/Fort Lauderdale will be $255,440:

  • National median base salary (50th percentile on page 20): $195,000
  • Local variance for Miami/Fort Lauderdale is +6.5% (page 23): $207,675
  • Fully loaded cost to employer is 123% of salary: $255,440
  • Bonuses, incentives and other forms of compensation are not included in this calculation.

Choosing the Right Outsourced Solution

It’s important to team up with a service provider who is solution-oriented and relationship-oriented. Someone who acts as a true partner, delivering bespoke compliance solutions designed to meet your unique business needs. They’ll start by auditing the entire business ecosystem to identify compliance gaps. Then they’ll develop actionable advice with a detailed implementation plan. If you choose to outsource your complete compliance function, then they’ll take ownership and full accountability.

When you meet with a potential outsourced compliance firm it’s important to ask a series of questions to gauge the fit:

  • Do they have specific industry expertise that matches your business needs, or complements your in-house compliance skill set?
  • Do they have case studies to show prior success?
  • What was their strategic process for getting these results? With a solid process they can duplicate results over and over again.   
  • Who are their clients? Can they provide client references in addition to online testimonials?   
  • How many accounts do they currently manage? Do they have the bandwidth to manage your business?
  • How are they compensated?
  • Was there a good interpersonal communications rapport during your meetings? How are their listening skills? Did they answer each question to your satisfaction? Do they exhibit a problem-solution mindset?   

Review the service agreement carefully, including addendums with task level deliverables. This is the only way to make sure everyone is clear on which tasks are included in the pricing, and which tasks are optional add-ons at an additional cost.

Clear Goals, Open Communications Ensure Success

According to Gartner, Inc., “…one in four outsourced contracts will be renegotiated or cancelled within 3 years.”  

It’s not a good track record, but there’s good news. The problems are predictable, and consistently arise from the same four issues:

  • Lack of upfront buy-in
  • Lack of clear strategic objectives
  • Lack of a detailed tactical implementation plan
  • Lack of open communication.  

Armed with this knowledge the recipe for a productive and profitable outsourced relationship becomes obvious. It consists of four key counter measures:

  1. Include the entire team at the start of the process, and be sure to gain executive and departmental buy-in.  
  2. Work with your outsourced consulting partner to establish clear, strategic objectives (both short-term and long-term).
  3. Develop a comprehensive list of tactical deliverables with timeline and budget. The schedule should include regular status meetings to ensure program deployment is on-time and on-budget with no surprises.
  4. Maintain open communications, using formal and informal channels.

Regulatory Compliance Is a Complex, Moving Target

Successful fintech entrepreneurs work hard. And they work smart. One of the best ways to increase productivity and profitability is to focus on innovation and growth, while tapping someone else’s expertise for infrastructure or support functions like legal, digital advertising and regulatory compliance.

Reach out to the team at InnReg for a Complimentary Consultation. We’ll review your business needs, and work with you to deliver significant value and savings compared to any available alternative with the same level of experience, specialization and results.