Thanks to technology, Fintech startups have established themselves in many parts of the world, providing more effective services than those offered by banks. The businesses have been successful at democratising finance, increasing the range of payment both for clients as well as clients and facilitating access to funding. Despite the rapid growth, Fintech firms are facing several regulatory challenges that need to be acknowledged. Failure to solve those problems could mean damaging the firm’s reputation or incurring fines. In a worst case scenario, Fintech regulatory challenges can lead to closure of the company.
The following are two main regulatory challenges facing the fintech industry and how they can be solved:
- Non-compliance problem
The financial industry has been among the most regulated industries. Recently, its foundation has been shaken by the coming of new technologies. Some people believe that strong regulation is behind the fintech boom because it prevents banks from responding to new financial innovation in the market
According to a survey that was carried out by Silicon Valley Bank, Fintech firms expected regulatory issues to be the greatest impediments to their success. Nearly half of the survey respondents said regulatory problems were their biggest impediment.
First, some Fintech firms do not know exactly which law, rulings or regulation require their compliance. Others are ignorant of the regulatory agencies governing them. In US, such agencies include: the Federal Reserve, the Consumer Financial Protection Bureau, Securities and Exchange Commission, and the Financial Industry Regulatory Authority. Lastly, many startups have the problem of understanding a complex regulatory compliance model. Banks have many employees that are committed to compliance issues. On the other hand, Fintech firms have small team, of two or three people, who cannot define regulatory terms exhaustively.
How to solve the problem
It would be highly recommended for Fintech businesses to employ a compliance officer. The officer’s task includes guiding the business in legislative matters and assisting in establishing procedures to reduce the risk of breaching regulations.
- Infringement of a customer’s right to privacy
Fintech firms collect, store and manage a large amount of financial information and personal data related to clients. Collection of a vast amount of data and information is important because it allows the companies to use powerful tools for data analysis that provide a thorough understanding of customers. Consequently, the companies are able to offer financial services according to customers’ needs.
For companies that give loans, understanding customers through financial analysis enables them to set interest rates, better adjust risk profiles and anticipate customer’s future financial requirements,
However, it is important to note that using customers information may lead to abuse of their right to privacy. On March 2, 2016, the Consumer Financial Protection Bureau hit Dwolla Inc., an online peer-to-peer payment system provider, with penalties. The CFPB alleged that Dwolla Inc. was not protecting customers’ data. Currently, the agency is investigating RushCard, a prepaid debit card provider, over a breakdown in services that occurred last year.
How to solve the problem
To ensure that your company does not violate customer’s privacy rights, make and implement data security policies and procedures appropriate for the company; ensure that anybody that has access to customer data receives adequate training about privacy rights; and properly protect all sensitive consumer information.
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