The FinTech market is booming with startups disrupting the way we bank, invest and borrow money.
This new digital revolution is leveling the playing field for scores of people but it's also putting these financial technology companies on the radar of regulators.
Consider what happened when RobinHood, the mobile trading app attempted to launched a high-interest savings account at the end of last year. Boasting an interest rate of 3% it was among the highest in the industry. Robinhood touted the full protection of the Securities Investor Protection Corporation, or SIPC, standing out as an innovator that was blowing past traditional banks. But it was all short lived. It was forced to remove the products shortly after launching because it ran afoul of regulations. An embarrassing lesson for one of today’s leading FinTech companies.
But understanding the rules is only part of the battle. FinTech companies have to contend with the costs associated with creating and maintaining compliance programs.
Depending on the size of a particular FinTech company and the market it’s serving the expenses can be in the millions each year. For some of the world’s largest banks, staying in compliance with regulations can reach into the billions annually. The difference: big firms have the resources and cash to meet all the requirements. For many others it's often an uphill battle. They have less money and employees to dedicate to the effort. Add any international business to the mix, and it can be nearly impossible for a FinTech company to successfully navigate all the regulations it faces. Without clear rules geared specifically for FinTech, the challenges aren't expected to go away any time soon.
But it's not just the startups that face the compliance risks. Traditional banks that are branching into digital services either by building it from scratch or partnering and purchasing financial technology have to be aware of any additional regulatory requirements that could impact their new products and services. To protect themselves they need to engage in a deep dive of the FinTech company they want to partner with. It's up to the financial services company to look at every aspect of the startup’s business including the vendors it does business with.
“Many banks have created their innovation platforms where they invite vendors to curate their product and service offerings,” wrote FinTech advisory firm Protiviti in a recent article. “Driving responsible innovation into the research and development process requires effectively integrating FinTech companies into the bank’s existing VRM program, while maintaining a balance of sound risk management and agility.” To achieve that Protiviti advocates a collaborative approach in which due diligence increases as the partnerships move from discovery to product implementation.
On top of due diligence, traditional financial companies have to think of the technological changes the partnership would bring. It could mean integrating products or overhauling legacy systems. Banks have to consider the costs associated with that as well as the impact it will have on the business. It also falls on staffers to keep executives in the loop about the risks associated with collaborating with a financial technology. “A partnership with a FinTech tends to be a new venture for a company, which means the stakeholders advocating for it should find a way to quantify the risk impact,” wrote Protiviti.