As their customers look for solutions to make managing their finances easier and more convenient, banks are relying more on financial technology, also known as FinTech, to keep up with demand. Innovation can be great for businesses and customers, however, it can also bring unintended risk, especially for financial firms. It’s essential for banks to consider how their compliance risk management processes ensure FinTech doesn’t become a tool for fraud, money laundering, or to fund criminal organizations. Whether traditional or technology-enabled banking, financial firms are held to the same regulatory standards. Failing to comply with regulators puts banks at risk of paying hefty fees or legal penalties. So, the question is, how can banks keep up with current FinTech regulations and prepare for the future as technology evolves.
What is FinTech?
FinTech encompasses a broad range of technology software used to provide financial services. This includes applications used to accept mobile payments, crowd funders like Kickstarter, cryptocurrencies, algorithms used for trading and investing advice, and applications used by consumers to track their spending habits and take control of their personal finances.
Banks have been using technology for decades to make their financial services easier and more convenient for their customers. Long gone are the days where customers have to walk through the doors of a brick and mortar bank to deposit a check. Thanks to online banking and mobile applications, as well as prominent accessibility to smartphones, customers can now easily manage daily financial tasks with just the click of a button.
The Rise of FinTech
While the concept of using technology to make managing finances easier for customers is not new, there has been an increase in interest around FinTech. There are several reasons why FinTech has become a hot topic in the last several years. First, there is a high customer demand for technology-enabled financial solutions. Technology in smartphones has allowed customers to manage a vast number of daily tasks on the go, why should they manage their finances any different? Today, customers expect their banks to offer services, such as mobile apps, that make managing their finances easy and simple.
Secondly, FinTech allows customers to get more for less. Technology often allows businesses to provide better services at a lower cost, and FinTech is no exception. Robo-advisor platforms, such as Wealthfront and Betterment, allow customers to trade and invest at a lower cost with more efficient algorithms. This opens up opportunities for a new group of customers who previously couldn’t afford the cost or risk.
Lastly, the rise of FinTech and the changes it will have on the financial service industry is more imminent today than ever before. The changing landscape leaves banks wondering – how do we keep up with FinTech regulations and meet customer demand? Along with these pressing questions, it’s important that firms consider the risk of unregulated FinTech and potential solutions to keep up with regulatory compliance.
FinTech Evolution Risks
While advancement in FinTech opens up potential for innovation, it also increases exposure to unintended risk. One thing banks need to be highly aware of is how FinTech exposes them to regulatory and compliance risk. Failing to comply with regulations puts banks at risk of paying enormous fees and penalties. Even individuals who are noncompliant can be held personally liable for failing to follow legal standards. Since the 2008 financial crisis, Know Your Customer (KYC), Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) laws continue to be modified and revised. It’s an enormous challenge for banks to stay current on all the changes and ensure they’re adhering to all the regulations in place.
One of the objectives of new financial regulations is to combat the criminal activity FinTech may provide the opportunity for. As technology evolves, so do those looking to cheat the system. KYC and AML laws aim to identify and prevent criminal activity such as money laundering, fraud, and funding of terrorist groups. It’s up to banks to digitize new regulations in order to reduce illegally obtained income as well as verify the identity of their clients to prevent fraud and keep money from being used to fund criminal organizations. Additionally, banks are relying more on third-party software technology to keep up with demand, exposing greater risk to the privacy of their customer data and cyberattacks. It’s vital that banks do their due diligence to research their third-party partnerships and invest in robust systems to safeguard their customer information.
How Can Banks Keep Up with FinTech Regulations?
The first thing any bank can do to keep up with FinTech regulation is to foster a culture of compliance. Making sure chief compliance officers have sufficient oversight of operations, as well as the power to make decisions, can impact the significance of their authority. It’s up to the chief compliance officer to ensure employees feel safe reporting misconduct. Also, remember to consider the fact that financial firms receive better audit reviews from regulators when there are well-defined compliance procedures. It shows regulators that firms are making honest efforts to operate with transparency and comply with regulations.
Another thing banks can do is embrace regulatory technology, also referred to as RegTech. According to Tony Reid, CTO for financial services, EMEA at Hitachi Data Systems, “RegTech helps financial service institutions to enact compliance in a regular and accurate way while freeing up resources to focus on their core business and servicing customers”. Investing in RegTech can automate data analysis, optimize efficiencies, as well as accuracy, and help reduce operating costs.
Future Financial Landscape
FinTech holds enormous potential to revolutionize the way financial services operate. We can expect continued growth as technology advances and customer demand for convenient financial solutions remains strong. It’s important for firms to consider the changing financial landscape so they’re not caught unprepared. By being aware of risk, fostering a culture of compliance, and investing in regulatory technology, banks can prepare for the future with the tools and technology needed to keep up with FinTech regulation.