10 Reasons Fintech Startups Should Care About Compliance

Companies in the financial technology sector, commonly known as fintech, are often seen as bold innovators that are willing to go where traditional banks fear to tread.

Unfortunately, regulatory compliance may be overlooked by fintech startups, as many do not consider themselves as financial services businesses – at least not initially. As fintech companies grow and mature, there is a crucial need for them to take a serious look at how financial regulations might apply to them.

Here are ten reasons why fintech companies should care about compliance.

1. Customer Due Diligence

The know your customer (KYC) process is one that is well known and established in the financial services industry. For fintech companies, it makes sense to also make it part of their everyday business practices. Performing this type of due diligence protects businesses from risk by confirming that their clients really are who they claim to be.

“The upfront validation and verification of customer information is foundational to managing risk throughout the relationship lifecycle, and is the first step in reducing subsequent fraud and abuse,” points out Jon Jones, President of Trulioo, a Vancouver-based fintech startup. “Equally important is the ongoing monitoring that needs to be undertaken.

“Bypassing this step and subsequently acquiring customers that you don’t have confidence in from a data quality or identity perspective is like speed dating all the way to the alter—it likely won’t end up well.”


2. Fraud Detection and Prevention


Having KYC measures in place also has the added benefit of helping fintech companies prevent and detect fraud. By verifying customers’ personal information, they can help reduce identity theft before serious damage is done.

“Quality compliance at your end can help to ensure you are onboarding the right customers, spotting fraud early when it does occur and minimizing your losses,” states Jake Tyler, Co-Founder and CEO of peer-to-peer payment startup Payso in Vancouver. “Doing it right can be an important competitive advantage.”

3. Avoid Regulatory Fines

One of the most serious consequences for non-compliance is the possibility of facing huge fines from regulators. Anti-money laundering (AML) and counter-terrorist financing (CTF) rules clearly spell out what is needed in order to maintain compliance. Failure to follow these strict rules can be extremely costly.

“The Consumer Financial Protection Board (CFPB) is one body that has focused heavily on ensuring highly accurate levels of data quality across financial service providers and information service companies exist, with consumer protection being at its heart,” Jones adds. “The fines are substantial and have totaled over $80M in collected penalties from Oct 2014 to today.”

4. Bad Publicity Does Exist

The old saying “there’s no such thing as bad PR” is certainly a myth, especially when you are dealing with compliance issues that impact a consumer’s finances. In May 2015, that’s exactly what happened to a fintech startup running a virtual currency exchange. The U.S. Financial Crimes Enforcement Network (FinCEN) levied a $700,000 fine against the company for not registering as a money services business, failing to implement an effective AML program, and failing to report suspicious financial transactions. This was the first civil enforcement of its kind and certainly not something that this company wants to be known for.

5. Build Brand Reputation

By maintaining high ethical standards and running an effective compliance program, fintech companies can build a positive brand for themselves based on integrity. Having a good reputation based on a solid track record will inevitably raise their profile and draw more business as a result of good publicity and referrals from satisfied customers.

6. Be Prepared for Audits

What two words can fill a fintech startup founder’s heart with dread? Compliance audit. This doesn’t necessarily have to be the case. If the company has a system in place that allows it to review transactions that show a consistent history of proper due diligence, founders can rest assured that they are ready for when the regulators come knocking.

7. Protect the Bottom Line

Since the 2008 global financial crisis, financial institutions have paid over $150 billion in fines. When you look at what has happened to banks, it’s clear that fines for regulatory non-compliance can be extremely costly. For a fintech company still in its early stages, a regulatory fine of any amount could be financially devastating.

8. Drive Top Line Growth

Complying with financial regulations is not only about avoiding payment for large fines. Using the right compliance tools, such as electronic identity verification, fintech companies can drive business growth by streamlining the onboarding process. Reducing the need for manual verification brings new customers and merchants on board more quickly, increases customer retention, and ultimately generates more revenue.

“Traditional identity verification processes can be very costly both in terms of time and money especially when there is a global compliance requirement where trusted data sources are both difficult to access and to interpret,” says Jones. “Using innovative online solutions provides instant and consistent results, reducing costs and overall customer friction in the process.”

9. Increase Investor Confidence

When it comes time for fintech startups to raise funding for the next round, it pays to do your compliance homework. Investors may be willing to take risks, but most prefer to deal with companies that can show that they have what it takes to operate in a regulated environment. By showing a commitment to a compliance culture, fintech companies send a clear message that they are ready for future growth and success.

“Unfortunately, most venture investors know very little about this topic other than that they should be concerned about it,” adds Tyler. “This serves to compound the need for you to have this domain expertise or to partner with people who do.”

10. Earn Customer Trust

Trust is important in any business relationship. For fintech companies dealing with financial transactions on behalf of its customers, the ability to establish trust can make or break the business. By showing customers that they are fully compliant, companies show that they are operating responsibly and with accountability.

“It’s important for consumers to know that the business they are dealing with is reliable, especially when it involves handling their own personal information or their hard-earned money,” says Jones. “When fintech companies take the necessary steps to ensure that they comply with all applicable regulations, it gives customers confidence and reassurance to continue conducting business with a trusted partner.”