This briefing on FinTech and its implications for compliance includes original analysis by ACFCS and a Q&A with Mariano Belinky, Santander InnoVentures.
Virtual currency businesses and financial technology start-ups are flourishing within the financial services market. With the advent of these nascent online exchanges, e-wallets and peer-to-peer lending services has also come concerns regarding the financial crime risks and vulnerabilities of these businesses.
The financial technology, or “FinTech,” sector has taken full advantage of advances in technology to provide users with services that fit a convenience-driven, online culture– but where does financial crime compliance fit in with innovation?
While some may be quick to say that small entrepreneurial start-ups offering financial services outside of the traditional banking market are subject to more financial crime risks, there may be an opportunity to learn from the growth of this field. The lessons in compliance, innovation, customer satisfaction and financial gains could be, and are already immense.
A paper written by Santader InnoVentures, Oliver Wyman and Anthemis Group called FinTech 2.0: Rebooting Financial Services addresses this hot opportunity for both the old and new financial worlds. The paper highlights the benefits of a collaborative endeavor with banks and FinTechs working together as partners. As banks learn from young firms providing customer-friendly services, start-ups can learn how to implement cost-effective financial crime compliance strategies.
Essentially, FinTech firms can learn the ropes from banks on the compliance end, while banks can adopt technologies their clients need and want in a digital age.
What is FinTech and why are banks paying attention?
The FinTech sector already offers a plethora of services that are not limited to the wealthy or elite. The democratization of financial services through technology is helping the sector permeate different societies and build an important demographic of users. Among the services these firms can provide, lending, transactions, financial advising, money transmitting, many were monopolized by the banking sector not even a decade ago.
With $23.5 billion of venture capital investment in 2013-2014, according to the FinTech 2.0 paper, the sector is just at the beginning of its exponential growth. Computerworld UK reported at the end of 2014 there are currently more than 3,000 FinTech start-ups. By taking advantage of advances in digital technology to develop banking products, they are attempting to overtake banks and traditional MSBs by developing faster and more cost-effective ways to deliver similar services.
FinTech firms are usually focused on providing single-purpose solutions to help customers achieve one important task, whether its sending money to their family, keeping track of a budget, or trading virtual currencies. BillGuard, one company started as a service to alert users to hidden gees charged by their bank and credit card issuers. Since then it expanded to become a comprehensive fraud monitor and spending tracker. Another company, Planwise, pivoted from being a general financial decision-making tool to becoming a listing platform for brokers. Stripe, a company founded by college students, supports mobile and e-commerce payments for giants like Twitter and Alibaba. The list of start-ups with star potential goes on.
Despite the success of these models, FinTechs are unlikely to replace traditional banks altogether, but their potential to disrupt the industry is considerable. Banks realize the competition may come in a very different disguise, as a small entrepreneurial firm, and they are taking notice. Banks like Santander, Citigroup, Barclay’s, and UBS, just to name a few, are investing in incubators and accelerators that provide funds to tech firms as a way to both learn from the ventures and to make sure the competition is under a close watch.
Apart from providing access to funds, banks can also give FinTech firms access to compliance strategies that have taken decades to perfect. Compliance in this sector is at once a great opportunity and a big obstacle.
So while some FinTech firms may still be under the radar of the regulators, many are taking the chance to team up with traditional banks to understand how to prevent and detect financial crime risks, avoid regulatory penalties, and protect their clients.
New regulations combined with a changing uncharted territory make compliance risky and difficult. Fintech is an international, cross-border concept. Domestic regulations and jurisdictions may not apply the same way they do for banks. Still, money laundering, tax evasion, data privacy, systemic risks are equally area of concern for the FinTech sector.
What does compliance look like for a FinTech business?
According to Taylor Wessing lawyer Jonathan Rogers, this might include:
- Ensuring the management team has the intention to comply with regulation, supported by appropriate training and systems and controls.
- Understanding how your services may cause unfair outcomes for consumers even if you do not have direct consumer interaction
- Designing an approach to sales and marketing activities which includes processes to review client communications for compliance with financial promotions requirements and to minimize mis-selling risks.
- Ensuring terms and conditions are fair and can be easily understood.
- Setting a reward and incentives structure that does not encourage excessive risk.
- Regularly reviewing your systems and controls processes (e.g. to address risks from bribery and money laundering).
This list may seem quite familiar to those in the traditional banking sector – that’s because compliance in both markets is pointed at the same goals, although the processes may differ at the outset.
A change is coming, collaboration is vital for banks and FinTech firms
Professionals on both sides of the traditional/high-tech financial services field may think this is a battle between old and new, and that each will have to safe keep its trade secrets to remain relevant.
However, the emergence of new technologies and the high demand for customer-friendly products and services is increasingly looking like a high-speed train with no brakes. Both sectors are adapting to these changes, as well as the pressure to cut costs in banking, and the policy shift towards open data.
As FinTech expands to include middle and back office processes to provide solutions to these new standards, many banks will strive to be part of this “disruptive trend” by actually supporting innovation and the launching of FinTech firms.
Interview with Mariano Belinky, Santander InnoVentures and Co-Author of FinTech 2.0
Mariano Belinky, who joined Santader InnoVentures last year after advising global banks and asset managers at McKinsey and Co, talked to ACFCS about this next step for FinTech. He runs Santander’s venture fund to lead a financial services tech revolution. The venture has objectives in financial gain and innovation.
What does FinTech mean?
Innovation of financial technologies. There has been innovation for more than a hundred years. We just decided to put a label on it now. Dealing with the effects of the financial crisis, we decided to recapture that generation of users that decides how to consume our financial services.
How can FinTech firms support innovation and growth while also mitigating risk? How can they work together with the traditional financial system to do this, as partners rather than just competitors?
Some (FinTech) companies have decided to ignore regulation until they get slapped on the wrist. Others understand the needs of the regulatory compliance functions very early on. On our side, we do a total due diligence assessment for the companies we work with to ensure that the companies we invest in are within our compliance focuses.
The focus of this paper is that banks cannot do it alone and companies can’t do it alone, so it has to be a collaborative effort where we create the right environment for these companies to create things and develop things while we learn in the area.
Traditional financial systems can produce scale and access to clients and access to expertise on compliance and resources to help FinTech companies connect to the rails of the financial system. We as banks take that for granted.
The burden of regulatory compliance is less on FinTech firms, which makes them frictionless customer experiences. What are the fundamental ways to graft financial crime prevention into this peer-to-peer process that isn’t yet heavily encumbered by compliance programs?
While we are getting away with less regulation or regulation hasn’t caught up, we have to take advantage of the learning experience and the customer experience side of things to create security and financial crime prevention. We need to find better ways to onboard and authenticate and to monitor transactions without intruding.
How will the interconnectedness of networks and devices help, or harm, the fight against financial crime in a tech-driven financial industry?
I think that technology poses a new set of challenges to secure information and have a successful compliance program. Still, it is just as secure as any other channel. The Internet of Things is the idea that you have devices that are able to produce certain data or have a very specific interaction with the world and report back. Assets can be connected to this and produce information.
How does it help cost and efficiency? Imagine that I have a fleet of cars that I’m leasing, I can have each car in that fleet provide me with real-time information about the status of the car and the condition of the car and it helps me to better understand my collateral and prevent fraud. That applies across any type of collateral. If I have a large auto-lending business and I want to decide that I want to keep better track of the cars I can incentivize this type of client with a better deal on the loan.
How have some FinTech firms leveraged data from different sources to understand patterns that may constitute fraudulent behavior?
The use of smart data – moving away from the idea of big data and moving towards solving specific problems with a subset data – is particularly important for financial crime prevention. To identify fraud and atypical behavior is very relevant from an operational standpoint.