The value of compliance and trust in the evolving Fintech ecosystem

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Guest comment by Troy Fine

By pushing the boundaries of innovation in a traditionally conservative industry, fintech has upended old paradigms and – in many cases – replaced legacy approaches with new ways of conducting business.

As is often the case, progress comes with inherent risks that underscore the need for implementing comprehensive compliance programs customised to address the specific challenges of the fintech ecosystem. This becomes particularly significant due to the heightened sensitivity of the financial services industry, where the importance of compliance is intensified.

Whether it’s the use of blockchain, the cloud, mobile applications, or other varying areas of expertise and focus, fintech businesses face similar exposure to the risks inherent in bringing innovation to a highly regulated industry where compliance plays a key role.

In many cases, the need for effective and robust compliance is a standard and growing requirement. Elsewhere, however, it is voluntary, but increasingly, fintech leaders recognise that it provides their customers with an added layer of protection and, crucially, a tangible competitive advantage.

Due to the growing enforcement of compliance, spurred by the introduction of new regulations, fintech companies must identify and address a range of regulatory, cybersecurity, financial and business-related risks. As well as this, the growing presence of cybersecurity threats also drives compliance strategies.

In fact, one in four malware attacks target the financial services industry, at an average cost of $18.3m. This highlights the pressing need for fintech firms to ensure their operations remain resilient and trustworthy.

Cybersecurity risks present another significant challenge. In the worst-case scenario, a single incident can present existential danger for a fledgling fintech enterprise

Take regulatory risks, for example. Fintech exists in an undeniably complex and ever-evolving regulatory landscape, with standards varying significantly across jurisdictions, each with its own set of priorities.

In reality, the situation is far more nuanced. In the US, for example, federal regulators have taken assertive measures against a spectrum of fintech companies, notably through high-profile enforcement on cryptocurrency businesses that have strayed from compliance standards.

This underscores that fintech companies are operating in a consistently evolving and intricate regulatory landscape. Much of this complexity is arising from the unprecedented speed at which fintech innovations are being developed.

This results in regulations playing catch-up to keep pace with the rapid advancements in the sector and consequently forces organisations to take a proactive approach to manage exposure to risk.

Cybersecurity risks present another significant challenge for fintech firms. Clearly, security breaches in the fintech industry can have disastrous consequences, from disrupting the operations of institutional customers to compromising the financial stability of retail consumers. In the worst-case scenario, a single incident can present existential danger for a fledgling fintech enterprise.

Even organisations with previously impeccable and unblemished records can find their reputations dragged through the mud, either by their own failings or by association when an industry rival is under the spotlight

For example, there are plenty of fintech companies that store consumer financial data and, as a result, become targets for cybercriminals. The situation has become so perilous that even unsophisticated hackers can use specialist service providers to launch highly effective attacks.

For fintech startups in particular, part of the cybersecurity challenge is that they may have less budget and expertise available for securing their networks than larger, more established counterparts.

If that wasn’t enough, fintechs are also vulnerable to the dangers associated with supply chain security breaches. Whether the problems are experienced by infrastructure service providers or within third-party or open-source code, their deep integration of technology means fintech companies must deliver a holistic compliance solution.

Financial and business risks represent another set of ongoing hurdles to overcome. Ironically, the aspects that often give a fintech company its competitive edge can also serve as the primary sources of risk. Whether it relates to operational issues, technology, consumer or investor-related risks, a comprehensive analysis must consider all stakeholders who could potentially affect the company’s ability to operate without impediment.

When any of these issues arise, every organisation must consider the reputational risks that can quickly snowball as a result. Even organisations with previously impeccable and unblemished records can find their reputations dragged through the mud, either by their own failings or by association when an industry rival is under the spotlight.

A case in point is the turbulent crypto industry, where misconduct or negligence has undoubtedly led to a widespread lack of trust in the market, harming even those organisations not directly at fault and increasing the pressure for greater levels of regulation and compliance.

So, where does this leave fintech? Given these risks’ diversity and potential impact, adopting a compliance-centric approach is crucial for the health of today’s established and emerging fintech firms. In this context, risk management should be an integral component of any business strategy and is particularly important for fintech companies, given the dynamic conditions and unique risks they encounter.

Ultimately, compliance strategies should be more than just a regulatory safeguard. They can lay the groundwork for establishing enduring relationships of trust with customers, securing the organisation’s position in this fast-changing industry. As the fintech sector continues to evolve and grow at an accelerating pace, its long-term prosperity – not to mention the organisations and people it serves – is dependent on trust-led and proactive compliance strategies into its operations at every level.

Troy Fine is  Director, Compliance Advisory Services at Drata


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