Joe Camberato is the CEO and founder of National Business Capitala leading fintech marketplace offering streamlined loans to small businesses.
In the United States, fintech companies are regulated by several state and federal agencies. Navigating the regulatory landscape is challenging. In fact, Alloy’s 2023 State of Compliance Report reveals that 93% of fintech companies struggle to meet compliance standards, and 60% of companies surveyed paid more than $250,000 in compliance fines over the past year.
I think part of this may be because fintech companies are built on the promise of a seamless customer experience. The process is intended to be simple and intuitive, so the customer journey often takes precedence over compliance.
However, if you want to avoid fines, penalties and legal challenges, you need to find a way to balance the two. As the new year approaches, here are the top five regulatory issues facing fintech companies and strategies to stay compliant.
1. Data Privacy
Fintech companies process a lot of sensitive information, including customer names, dates of birth, social security numbers, and banking information. They therefore have to deal with various state, federal and international data privacy laws.
For example, they must comply with the California Privacy Rights Act, which regulates how companies collect, store and share customer information. After California passed this legislation, other states adopted it. their own national data privacy laws.
Businesses must also comply with the General Data Protection Regulation, an EU law. Canada also has its own data privacy law, called the Personal Information Protection and Electronic Documents Act, which applies to businesses across all sectors.
The first step to staying compliant with these regulations is knowing what they are. Identify all relevant data privacy laws your business is subject to and monitor any emerging laws. From there, you can develop clear policies regarding how your business collects and transfers customer data.
2. Know your customer
KYC is a process used by financial companies to verify the identity of their customers and prevent money laundering. KYC is essential for banks, insurance companies and fintech companies. Here are the three main requirements you need to know:
• Customer identification program: Financial firms need four types of identification for each customer: their name, date of birth, address and identification number. The identification number can be either a social security number or an employer identification number.
• Due diligence towards the client: During this process, companies must collect that customer’s information, verify their identity, and assess their risk level.
• Enhanced due diligence: If you have clients who pose a higher risk of terrorism or money laundering, enhanced due diligence is required. For example, foreign clients living in countries with a high risk of money laundering require enhanced due diligence.
To remain KYC compliant, it is important to make the customer onboarding process simple and easy to follow. Let your customers know what information you need and why.
It is also important that you have a process to verify the data you receive. Without the right authentication measures In place, fintech companies can easily be fooled by stolen documents. Since criminals can easily adapt and find ways to exploit KYC checks, you should monitor and adjust these processes over time.
3. Anti-money laundering regulations
The United States has continued to strengthen its AML regulations and recently made changes in 2021 by adopting the Anti-money laundering law. This law enacted new whistleblower protections for individuals employed by financial services companies.
AML regulations protect the integrity of the financial system, prevent terrorist financing, and maintain public trust. The following are required for fintech companies to remain compliant:
• Have a compliance manager in place.
• Provide ongoing training on AML legislation updates.
• Monitor all transactions over $10,000.
• Be wary of suspicious transactions.
• Screen customers to ensure they are not on the sanctions list.
• Submit a suspicious activity report within 30 days of detecting suspicious activity.
You can improve your company’s AML compliance by using software to automate this process and eliminate any manual verification. Artificial intelligence can also help your business improve its ability to identify and measure risks.
4. Consumer protection laws
The Consumer Financial Protection Bureau was established in 2011 and is responsible for overseeing consumer protection laws. The CFPB collects and investigates consumer complaints and regularly prosecutes financial companies that engage in unfair practices. For example, a fintech company was fined 6 million dollars after the CFPB said it violated consumer lending laws.
To avoid these types of fines, inform customers in a timely manner and make loan terms transparent. You also need fair and objective criteria to evaluate loan applicants. All credit scoring models must be transparent and cannot discriminate based on race or gender.
5. Changes to compliance standards
Not only is the fintech industry highly regulated, but the rules and regulations are constantly changing. As new threats emerge, governments introduce new compliance standards to address these risks. Fintech companies must be able to adapt to regulatory changes to avoid fines and penalties.
The best way to do this is to work with regulators to stay on top of these changes as they occur. Using compliance management software can also help you stay on top of emerging financial trends.
The information provided here does not constitute legal, investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.
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