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Financial technology companies continue to grab a larger share of the overall financial services industry year after year. More consumers are moving away from traditional brick-and-mortar financial institutions and toward online retail banking, lending services, and investment management, as well as diversifying into non-fiat currencies.  

Because of this, there has been a boom in the number of fintech startups that have emerged onto the financial services scene. Startups already face enough challenges when it comes to first getting up and running. From facing incredible amounts of competition and unrealistic expectations from investors to managing financial stability and cyber security, it may be hard for a new business to add compliance into the mix.  

Also, a startup that is already running a bare-bone operation may find it difficult to allocate the time and resources necessary to confront the issue of compliance. Keep in mind, this is not simply a momentous task for a fintech startup, however, compliance is a challenge that all fintech businesses struggle with.  

So, what do these compliance challenges look like and how do we address them? Let us go over some of the key compliance challenges that both fintech startups and fintech companies may face in 2023. 

1. Confronting compliance while in development. 

When a new fintech application or product is in development, many companies may be tempted to place compliance on the back burner due to a lack of resources. However, it is important to note that a lack of investment in compliance in the early stages of development can end up costing the company much more in the end. Fines for being in violation of regulations can be expensive.  

The main regulatory body for a fintech company to be concerned with is the Federal Trade Commission. If they plan to conduct business in the EU, then the General Data Protection Regulation is vital to understand and comply with as well.  

On top of these two main compliance concerns, there are the Anti Money Laundering Regulations and the Electronic Fund Transfer Act, and depending on the nature of the financial services, there are even more regulations to comply with including the Fair Credit Reporting Act and the FDIC.  

For any fintech startup, keeping track of all of the different current and future regulations that their product and services may need to be in compliance with can be overwhelming. However, if investment in compliance is made early by creating a financial compliance legal team in-house or hiring the services of a consulting firm, many expenses and headaches can be spared further down the road. 

2. Covering the high costs of maintaining compliance. 

There is no denying that compliance is expensive. There are many rules and regulations that companies need to follow for each individual type of product or service they offer. From lawyers and compliance staff to reporting and monitoring, a lot of resources are needed to keep up to date on any and all new developments that pertain to the products and services of a company.  

Additionally, as fintech has been undergoing a recent dramatic boom in the financial services industry, more governments are beginning to catch up and create additional regulations. The compliance landscape in the fintech industry is constantly evolving. Staying up to date on the latest developments is not only vital, but it is also cost-effective. It is estimated that fines for non-compliance can be more than two and a half times more costly. That is why although the high cost of maintaining compliance is a major challenge for fintech companies, the cost of prevention far outweighs the cost of the cure.   

Related article: Dealing with the Rising Costs of Compliance and How to Optimize Efforts.

3. Meeting different compliance requirements for different products. 

Each time a fintech company creates a new app or offers a new product or service, new regulations come into play that may not have been previously realized. Even adding a single feature to one specific application can change what regulations they need to follow. This can be a major challenge for any company, let alone a young and severely stretched-thin startup.  

4. Preventing fraud and instilling trust.

Preventing fraud is critical for a fintech company. This could include fraud conducted by bad actors pretending to be specific users to access their personal and financial information and embezzle funds, or it could be individuals and organizations looking to launder money.  

There are several investments that can be made to help prevent fraud. Fraud prevention starts at the customer onboarding phase. Secure customer onboarding is the first and most critical step of the Know Your Customer processes that a company’s risk and compliance team should consider implementing. Investing in a thorough and completely digital customer onboarding process can not only be effective in preventing fraud, but it can also leave customers feeling secure and trusting of a company’s product or service.  

Once a user has been securely onboarded, a fintech company can use AI and machine learning to automate transaction monitoring and keep track of a customer’s financial behavioral patterns. These patterns can be used as parameters to identify when potentially fraudulent activity is occurring. An automated notification can then be sent to the user who can then verify the financial activity.  

5. Maintaining data security in a fast-paced industry.

Last but most important is data security. Data security is a major challenge for any business heading into 2023, especially for fintech companies that maintain extremely sensitive data. User personal and financial information, including credit card numbers and bank account information, is sometimes stored in several places throughout a fintech company’s digital infrastructure. Protecting that data at all costs is a major challenge.  

Investing in a robust cybersecurity infrastructure is a must for any fintech company. From the Chief Information Security Officer down, investments in cybersecurity personnel are a critical first step. fintech companies should also deploy any and every tactic at their disposal to protect consumer data.  

A company may want to consider conducting regular cybersecurity audits, developing a cybersecurity protocol, backing up all information daily to the cloud and internally, knowing who has access to what information and why, and encrypting all forms of communication. Any kind of data breach could potentially crush a fintech company’s reputation and come with an entire arsenal of fines and added expenses that can be extremely costly.  

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