Anti-Money Laundering (AML) refers to the laws, regulations, and procedures aimed at preventing...
The Importance of Risk and Compliance in FinTech and Why Sales Should Be Aware of It
The Role of Risk and Compliance in FinTech
The Risk and Compliance function within a FinTech company ensures that the business adheres to laws, regulations, professional standards, international standards, and acceptable business practices. This function conducts regular audits, designs control systems, and advises on potential risks. Unlike traditional banks, FinTech startups initially enjoy rapid growth with less stringent regulatory oversight. However, as regulatory scrutiny increases, the importance of a robust Risk and Compliance function grows.
The First Line of Defense: Sales
In a FinTech company, the sales team serves as the first line of defence. When sales employees are knowledgeable about regulations, risks, and compliance requirements, it saves time for the entire company. Proper prescreening by sales ensures that only valid applications proceed to the next phase of onboarding, reducing waiting times for legitimate clients. Moreover, the sooner a fraudulent or fake application is detected, the less time is wasted on it. Sales play a crucial role in this early detection process. An informed sales team can also properly advise merchants, many of whom may be unaware of compliance requirements. This proactive approach helps streamline the process and enhances customer satisfaction.
Common Misconceptions
Many emerging FinTech startups struggle with their Risk and Compliance function due to misconceptions such as:
- Managing Risk and Compliance is costly and only important for larger companies.
- Risk and Compliance issues can be managed reactively.
- Non-revenue-generating functions like Risk and Compliance do not warrant significant investment.
Understanding Risk in FinTech
FinTech companies are highly reliant on technology and the internet, exposing them to various risks such as money laundering, cybersecurity threats, and data privacy issues. Additionally, a significant number of applications received by FinTech companies are fake or fraudulent, further highlighting the need for stringent risk management processes.
- Fraud Risk
- Merchant Risk
- Regulatory Risk
- Anti-money laundering and terrorist financing risks**
- Consumer Risks**
- Cybersecurity and Data Privacy Risks**
- Credit risk and operational risks**
The Role of Compliance
Compliance ensures that a FinTech adheres to relevant laws, regulations, standards, or ethics, varying by subsector and geographical location. The dynamic nature of the FinTech industry necessitates constant vigilance from the Compliance function to avoid fines or lawsuits.
Risk vs. Compliance
Risk and Compliance have distinct characteristics and management approaches:
- Risk is predictive and proactive, while Compliance is prescriptive and reactive.
- Risk adapts quickly, while Compliance adapts slowly.
- Risk involves continuous review and improvement, whereas Compliance adheres to set guidelines.
- Risk focuses on uncertainty; Compliance focuses on adherence.
- Risk is internal to the company; Compliance is external.
Managing Risk and Compliance
Despite often being one of the smallest teams, a strong Risk and Compliance function is increasingly recognized as essential due to growing scrutiny and regulations. The absence of a robust Risk and Compliance function can lead to fines and a loss of consumer trust, which is vital for the success of FinTech.
Customer Due Diligence (CDD) and Know Your Customer (KYC)
Customer Due Diligence (CDD), also known as Know Your Customer (KYC), involves knowing your customers to prevent misuse of financial institutions for purposes like fraud or money laundering. Key elements of CDD include:
- Identification and verification of customer identity
- Customer acceptance and risk assessment
- Monitoring of customers, accounts, and transactions
By implementing thorough CDD procedures, financial organizations protect their integrity and ensure compliance with regulatory requirements.
Importance of the Onboarding Procedure
The onboarding procedure in FinTech companies is crucial. The interface should be easy to use, clearly stating what is expected from the merchant in terms of uploading documents or providing additional information. Often, merchants apply for accounts with several companies simultaneously. Even with the best prices or features, a poor onboarding experience can result in losing the client. While the sales team should be knowledgeable about risk, CDD, and compliance to advise merchants properly, they should not be involved in helping merchants navigate the CDD process. Sales should focus on selling.
In conclusion, the Risk and Compliance function is essential in the FinTech industry to manage and mitigate risks, ensure regulatory adherence, and maintain consumer trust. Sales teams play a vital role in the initial stages by prescreening clients and advising on compliance, significantly enhancing the overall efficiency and effectiveness of the onboarding process. The sooner a fraudulent application is detected, the less time and resources are wasted, highlighting the importance of sales in early detection and overall risk management.
