Fintechs encounter distinct challenges in relation to AML. Their often nimble and lean teams, focus on streamlined customer experiences, and their ability to adapt more rapidly to changing market trends is a great aid to their business success. However, this can also pose specific challenges.
Understanding modern challenges
Evolving regulatory landscape
In a rapidly changing global environment, fintech companies must stay abreast of an intricate web of challenges. Geopolitical unrest, economic instability, bank industry failures, sustainability issues, and concerns over innovative technologies like crypto-assets all contribute to an increasingly complex regulatory landscape. The 2023 Thomson Reuters ‘cost of compliance’ report underscores this complexity, highlighting expectations for an increase in regulatory changes, challenges in managing costs, a growing reliance on outsourced compliance functionality, and the essential role of retaining skilled resources. Meanwhile, emerging conduct risks and limited resources further amplify these challenges.
For fintechs, this means navigating a labyrinth of regulations that require not only expertise in compliance but also an ability to adapt quickly to new regulatory developments. They must balance innovation with risk management, ensuring that their strategies align with both current regulations and anticipated changes. Ultimately, success in this dynamic environment will depend on a combination of agility, collaboration, and a deep understanding of both the current regulatory environment and the broader factors that shape it.
Expertise and skilled personnel shortages
Maximising output on limited budget
While fintechs can leverage their lean business models to offer competitive pricing, this advantage often poses challenges for firms, particularly in allocating adequate resources to all areas of their operations, including compliance. In such cases, the substantial expenses associated with compliance can prove to be a significant burden, potentially leading to deficiencies in reporting or procedures and heightened business risks.
This issue is not unique to fintechs. Smaller and regional banks have faced similar challenges in meeting the increasing regulatory demands placed upon them. The Customer Owned Banking Association (COBA) noted earlier this year that mutual banks and credit unions have incurred significant costs in maintaining compliance, which has in turn affected their ability to compete effectively.
“The relatively small size of these individual organisations compared to their ASX-listed counterparts means that existing risk and compliance resources are stretched, leading to a disproportionate burden through the increased costs of regulation.
This makes it harder to keep up with the tsunami of regulatory change we are seeing in the financial services sector, in turn impacting their ability to compete,” according to Mark Nguyen, Director of Policy at COBA.
Despite their potential advantages, therefore, fintechs and MSBs must navigate a challenging and costly regulatory environment.
Collaboration and technology: a holistic opportunity
Fintechs are positioned at the intersection of technology and collaboration, harnessing their inherent agility and innovation to navigate the evolving terrain on AML/CTF regulations. The introduction and use of regtech is key to success in this journey, enabling the detection of unusual patterns, automating compliance tasks, streamlining reporting procesess, and managing risk.
This integration allows fintechs to adhere to stringent compliance obligations while also widening the opportunities for growth and innovation within the business.
Technology is not sufficient alone. The success also relies on broad collaboration across public and private sectors. By creating consortiums and sharing best practices, fintechs can develop more economical and relevant solutions. James Rickett, Global Lead – Anti Money Laundering, International Compliance Association, noted this succinctly, stating: “We have all these years of watching the financial industries making mistakes and developing. So, we have all these opportunities to learn, individuals who are ready to use their knowledge, plus all the tools are out there to harvest this information.”
The Thomson Reuters ‘Cost of Compliance’ report also offers an insightful reflection of the broader landscape that fintechs are contending with. Highlighting a growing complexity in regulatory requirements that is affecting businesses negatively, the report also underlines a pivotal opportunity. The report found that compliance teams spent 15% less time on tracking and analysing regulatory developments in 2023, compared to the previous year. The widespread use of regtech also increased, signalling a correlation between the use of technology and improved outcomes.
By combining adaptive technological solutions, like regtech, with relevant strategies, fintechs can take advantage of compliance, not as a cumbersome obligation, rather as a catalyst and tool for growth.
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