Modernizing Fintech Compliance in a Post-COVID Economy

The COVID-19 pandemic has changed life as we know it. People have switched traditional retail stores for online delivery, students at schools and universities have had to switch from in-person classes to online learning, travel has been suspended almost entirely, offices have been closed and workers sent home to work remotely - if they haven’t been laid off, that is - and, for many small-to-medium enterprise, or SME, owners, their only option has been to struggle and persist to keep their heads above water until life can return to somewhat normal and they can get back to business. 

Because of the sustained disruption to their businesses, a significant portion of the aforementioned SMEs are seeking financing to enable some assurance of security through to the end of the pandemic. As such, many alternative lenders, like fintech platforms, are seeing a sharp uptick in businesses applying for loans of all kinds. This has been evidenced across a number of fintechs including Funding Circle, Kabbage, and even my own platform, Crowdz, which has experienced an unprecedented 5000 percent growth since the pandemic began. 

This preference towards selecting fintech platforms over traditional banking institutions doesn’t appear to be going anywhere fast, with a survey by The Harris Poll finding that the same group who have switched to fintech platforms due to the pandemic - 73 percent - have no intention of going back to traditional financial institutions.

While this is fantastic for fintechs and business customers alike, the massive surge in popularity highlights a gaping hole when it comes to fintech: compliance. As it stands, the majority of compliance rules and guidelines outlined by the Consumer Financial Protection Bureau that cover all financial institutions don’t quite account for the advancements in fintech, and for the guidelines that do, they’re not binding. As such, it’s important for fintechs to ensure they develop their own appropriate framework for compliance.   

Why is this important? It’s quite simple: clear rules enable both investors and borrowers to feel confident and safe in doing business with a fintech platform. Additionally, and because of this, they’re also vital for the fintech industries long-term growth - if investors and customers can’t feel safe in partnering with fintech, it’s likely they will stick with what they know. 

As such, many fintechs are now stepping up to the plate, developing their own compliance frameworks and partnering with outside platforms to add layers of protection - along with accurate risk assessment - for both investors and consumers alike. The issue with this, however, is that many are simply looking at the frameworks and regulations developed for traditional finance in an attempt to apply them to their own businesses. This is a mistake due to the rapidly evolving and variable nature of fintech platforms, where the old rules simply don’t apply.   

This sentiment is echoed by Rhodri James, CRO at NorthRow, a platform Crowdz recently partnered with to enhance our due diligence capacity, who stated “compliance is a complex but integral part of the fintech industries’ present and future. After all, we are buying and selling risk, and it just doesn’t make sense to try and ‘improve’ on the traditional way of approaching compliance in the finance industry. Instead, we need to totally revolutionize and invent new compliance measures and technologies, tailor-made for the unique challenges and circumstances that many fintechs face.” 

So where should a fintech business start in developing their own compliance guidelines? The most obvious aspect is customer experience, the main reason why many investors and customers opt for a fintech platform over a traditional institution in the first place. While some may think that compliance and customer experience aren’t connected, they are integral to one another, as a well-executed compliance strategy will give your customer the best experience possible. If done right, this should result in higher confidence, repeat business, and a lowered chance of pitfalls in the future. 

While compliance in fintech is highly variable depending on the type of fintech business, there are a number of other vital functions a well-developed compliance strategy should cover. These functions are mainly centered around risk assessment, and as a guideline, should include: 

• Probability of Default

• Probability of Payment

• Probability of Supply

• Environmental, Social, and Governance, or ESG, Reputational Risk

• Remote Identification, Identity Verification, and Proof of Life capabilities

• Anti-Fraud and Due Diligence measures, like Invoice Checking to mitigate double-financing and other types of invoice fraud

Although the world is currently in a state of chaos leaving many small and medium businesses scrambling to survive to the end of the pandemic, the plethora of fintech platforms ready and willing to assist should soften the blow. While there are currently many customers to be captured, the only way for fintechs to truly capitalize on this upswing in business is to implement well-considered compliance frameworks now so customers and investors alike have positive experiences that make them opt for fintechs over traditional financial institutions even in a post-COVID world.