For years, fintech solutions have been filling gaps in the traditional banking sector and addressing the need for more flexible payment systems. On the one hand, fintech is becoming more connected to traditional financial services; the majority of banking services and insurance organisations expect to partner with fintech companies, for instance. On the other hand, banks are actively investing in technological innovations, creating greater competition in fintech.
Both factors are driving rapid growth in the global fintech market, which is estimated to reach more than $300 billion by 2023.
If you’re thinking about creating a new fintech app, learning about the regulatory landscape should be a key priority. Since financial technology deals with sensitive data, it's crucial that products are built in compliance with laws and in accordance with the best security practices.
In this post, we’ll overview the major fintech compliance regulations and the most common challenges.
Fintech solutions are more vulnerable than digital solutions in other sectors because they store personal and financial data and perform money transfers. Regulations vary depending on the type of business, the amount and type of data collected, and the service location, so there’s no universal set of rules that apply to all fintechs globally.
Plus, the regulatory landscape is fragmented and control over fintech compliance is distributed among many organisations — so it’s important to have qualified assistance in regards to applicable laws, requirement updates, and possible penalties.
First, let’s see what types of risks associated with fintech lead to mandatory protection measures.
Besides the strategic and operational risks any fintech startup faces, there are many data security and regulatory compliance risks that fintech shares with traditional banks:
Most regulations are location-specific, but there are some globally recognised authorities. For instance, the Financial Action Task Force (FATF) issues fintech standards for preventing money laundering, terrorist financing, and other illegal financial operations. FATF is actively observing fintech’s scope of development to adjust to the changing landscape with adequate regulations. In 2017, FATF held the first roundtable dedicated to fintech and regtech to discuss AML measures and the increasing vulnerabilities in new payment services.
Below is an outline of regulatory authorities and documents applicable to the fintech industry in the US, Australia, and Europe.
Two major institutions are responsible for safe and compliant financial services in the US: the Financial Crimes Enforcement Network (FinCEN) and the Office of the Comptroller of the Currency (OCC). FinCEN collects information on transactions to identify and prevent financial crimes, and the Comptroller of the Currency supervises businesses to ensure they comply with fintech laws and regulations.
Key regulatory agencies also include the Consumer Financial Protection Bureau (CFPB) and the Securities Exchange Commission (SEC). Regulating all companies engaged in the sale of securities, the SEC provides guidance on how to report fintech cyber risks and incidents, as well as imposing fines: a single act of omission can cost up to $775,000 per company).
What are financial technology regulations exactly? Since fintech is intertwined with and somewhat dependent on banks, many key banking regulations are relevant in fintech as well:
This list is not exhaustive, and you need to do research related to your business’ specific niche and service locations. Furthermore, there are additional laws for particular security practices, for example, how biometric recognition technologies are regulated vary from one state to another. Additional regulations also apply if fintechs integrate health data (HIPAA) or if they interact with childrens’ information in any way.
Currently, the federal system still lacks a dedicated controlling agency for fintech businesses, but steps are being made in this direction. The FINTECH Act introduced by NACHA in 2019 implies the establishment of a dedicated fintech council within the Department of the Treasury, creating innovation offices with fintech advisory services, and controlling conflicting regulations that affect the sector.
The Australian Transactions Reports and Analysis Center (AUSTRAC) regulates fintechs and transactions taking place in the digital space. For example, AUSTRAC limits the anonymity of virtual currencies by requiring currency exchange platforms to report customer identifiers.
The Australian Securities and Investments Commission (ASIC) is a national regulator that protects customers and investors. ASIC not only enforces laws but also provides assistance programmes to fintech startups to help them navigate the regulatory system.
The Australian Prudential Regulation Authority (APRA) also regulates banking and insurance institutions to protect the financial well-being of Australian customers. Recognising the value and popularity of fintech and regtech solutions, APRA proposed a new regulatory framework in 2020 to reduce the complexity of rules and distribute supervision according to service type.
The potential role of regulators as proposed by APRA. Source: APRA
Digital banking regulatory compliance measures in European countries include:
In 2017, the European Banking Authority (EBA) published a discussion paper on fintech to describe the sector in general and address state-specific regulatory differences. Of the 1,500 fintech businesses identified, 31 per cent were not subject to any particular regulatory regime, which means financial organisations and their customers might suffer because of legislative loopholes.
Some legislations practice regulatory sandboxes that control emerging financial technologies in a safer testing environment. For instance, since 2014 the Financial Conduct Authority in the UK has supported a regulatory sandbox regime for fintechs. However, it’s debatable whether any company dealing with sensitive information is treated differently within a strictly controlled environment.
Now that we know there’s a plethora of regulations, let’s summate the payment security and data privacy measures fintechs should take.
Besides that, any fintech product should be developed with the best security standards. At MadAppGang, we developed a banking app named WebMoney and strong security measures represented both our biggest challenge and achievement. We implemented:
Certain practices and tools help fintechs stay on top of legislative changes and provide robust security:
Fintechs have similar responsibilities as banks and, therefore, are heavily regulated, with new regulations raising the compliance bar over time. The fintech sector’s strongest suit is its innovative use of technologies and ease of use, while compliance and security issues remain its toughest challenge.
Companies can lose a lot of their capital, as well as their customers and reputations, because of data breaches, thefts, and regulatory laws violations. It’s crucial to know the regulations your business needs to be aware of, and ensure that transactions and data usage within your product are secured and compliant.
At MadAppGang, we opt for sustainable security practices and a solid risk management approach. If you’re launching a fintech startup and need an app, or if you’re considering the development of an app related to finances, contact us and we’ll discuss the scope of work and all the regulatory challenges.
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