Does the FinTech industry have a compliance problem?

A recent blogpost by Sigma Ratings has detailed how the FinTech industry is facing heightened scrutiny from regulators as issues around compliance comes to the forefront.

Sigma referenced the recent case of N26 – a German digital bank and the country’s highest valued startup – who were fined $5m by German regulators for falling short of improving its anti-money laundering (AML) controls. The company had previously been warned by regulators in 2019 of deficiencies in its AML stance.

Hamad Alhelal – director of financial crime intelligence at Sigma – detailed that ‘trust plays an extremely important role in the use of digital banking services’ especially for FinTechs, who acknowledge that building test is at the core of their business model.

He added, “A model, which merged financial services and technology, and birthed the FinTech industry as one of the fastest growing sectors in recent years, is not immune from market forces beyond regulatory scrutiny.”

Alhelal also referenced recent research that found customers of the largest US banks have higher than average levels of digital trust with their banks compared to FinTechs and digital only companies. The research also found customers were more satisfied and engaged with their banks compared to FinTechs.

The less than positive research doesn’t stop there, however. A study released last month found that FinTech companies were almost five times more likely than traditional lenders to be involved with suspicious loans issued through the US government’s Paycheck Protection Program – with FinTechs being nine out of the ten lenders with the highest rates of suspicious loans.

Alhelal remarked, “As the fintech sector continues to boom, with the pandemic having dramatically accelerated the shift towards e-commerce and online payment models, the future will inevitably bring not only growth that will see the industry reach new heights but the heightened scrutiny that comes with it.”

In other signs of greater regulatory pressure, the Biden Administration’s nominee for the Office of the Comptroller of the Currency (OCC) of the Treasury was seen as a signal that the OCC will seek to impose tougher regulations on FinTech and Cryptocurrency, according to Alhelal, as the nominee had previously expressed concerns regarding the risks of the two areas pose to the banking system.

Alhelal concluded, “With the coming scrutiny, as FinTechs learn to pivot and adjust to the pandemic, the time may have come to recalibrate their strategic priorities and view compliance as a strategic function that will allow it to prosper and thrive in a post-pandemic world.”

Find the full blogpost here.

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