Threading the Needle Between Growth and Compliance

PayPal recently announced that it closed 4.5 million fraudulent accounts. These bogus accounts were the direct consequence of an aggressive customer acquisition strategy weighted towards employee incentives and rewards programs. However, bot farms exploited these programs, generating new customer accounts and collecting on those rewards. In tandem with shutting down these fake accounts, Paypal also scrapped its employee incentives and rewards programs, which slowed its customer growth. Consequently, PayPal reported lower profits in its latest earnings report and ditched its ambitious goal of reaching 750 million active accounts by 2025, resulting in a precipitous 25% drop in the PayPal stock price. 

It’s an unexpected turn of events considering that the high-flying payments firm was recently firing on all cylinders. PayPal shares surged more than 250% between March 2020 and July 2021, with 126 million of its 426 million active accounts acquired in just the last two years. While some of PayPal’s problems can be attributed to lost business, missed targets and crypto crashes, its fraudulent-account fiasco starkly exposes a risky dynamic in financial technology. 

Fintechs have historically prioritized growth over compliance, burning themselves in the process. Take Robinhood. In the GameStop frenzy of early 2021, Robinhood customers suffered huge losses that might have been mitigated had Robinhood instituted stronger regulatory and compliance guardrails. Fraud is such a rampant problem in fintech that some hotels and car rental agencies have banned card payments from providers like Chime, Venmo, PayPal and Square’s Cash App. What good is growth on the one hand if you sacrifice compliance on the other?

PayPal’s travails are a cautionary tale. Growth and compliance are not mutually exclusive—and leaders within the fintech space must recalibrate the balance between both pillars. 

We can start by changing the way we think about compliance. Fintech companies need to move away from compliance as a “checking the box” obstacle to compliance as a strategic and functional imperative. Robust compliance and regulatory practices should be integral to how companies are built, organized and managed—to prevent and deter the criminal or negligent elements that slow, or even reverse, company growth. 

There are compliance measures that firms can implement, such as incorporating a fraud rate into their customer acquisition costs, or applying quality controls during the client onboarding process. Financial technology providers can also design metrics to track how they perform on compliance issues like fraud. By moving risk management and compliance to the center of corporate governance decision-making, our industry can foster a compliance-first culture.

That culture cannot exist without a strong, collaborative and transparent relationship with regulators. Most startups see regulators as roadblocks rather than partners. We need to recognize that this is a uniquely challenging period for financial services regulation, particularly considering how rapidly the fintech space is evolving. If we can collectively cultivate meaningful relationships with regulators and share with them what we’re learning and how we’re developing in this fast-changing space, we will inevitably speed up the regulators’ learning cycles. Fintechs that choose to work with—and not against—regulators will find that they are also better equipped to address compliance issues when they arise.

Growth is critically important for any startup. While Finalis is no exception, we operate on the basis that high growth need not come at the expense of compliance. We do this by maintaining a close relationship with our regulators, meeting with them regularly to ensure we meet our regulatory obligations. We vet all prospective clients by conducting rigorous background checks and requiring compliance team approval prior to signing on new clients. 

Our compliance-first approach has slowed our growth; we’ve rejected multiple prospective clients that haven’t met our standards. We’ve done so because we desire growth that is sustainable and built on compliance rails that will not yield to fraud or expose Finalis and its clients to regulatory risk. The way we see it, failure to apply a compliance-first approach would result in long-term setbacks that far outweigh near-term growth. 

Fintech innovation demands far greater sensitivity around compliance. Startups can lead the way by demonstrating that a strong relationship with the regulator, robust compliance controls and a corporate culture that threads the needle between growth and compliance will unlock–and not hinder–extraordinary growth opportunities in the years to come.