FinTech Compliance Is Hard, But Ignoring It Is Costly

The number of up-and-coming FinTech startups seems to have exploded in recent years, driven by advances in technology, adoption of newer forms of payment, such as cryptocurrency, and consumer demand for more personalized solutions.

These days it seems as if there’s a FinTech serving just about every niche imaginable. There are services for travelers who want to split the cost of their vacation into more manageable payments, other startups specializing in remittances, still others that handle payments in the crypto space and many more to boot.

Innovation, though, can sometimes outpace compliance, and FinTechs that don’t pay attention to the ever-changing regulatory landscape could face dire consequences, Payoneer Chief Strategy Officer Charles Rosenblatt said in an interview with PYMNTS.

“You can get fined in a big way for not following proper compliance in some countries,” he said.

The larger threat, though, is losing out on the opportunity to do business altogether. Rosenblatt pointed out that many countries take the issue very seriously indeed, and they will not just levy fines — some will even go as far as preventing violators from doing business there. That’s obviously something a startup needs to avoid, especially if it has ambitions of eventually becoming a global company.

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Erring on the side of compliance makes good sense for FinTechs in any case, even when they’re not legally required to do so. Rosenblatt cited the example of cryptocurrency exchanges, most of which insist their users adhere to know your customer (KYC) rules even if no one is actually forcing them to do so.

“The compliance element is present and necessary even before the market evolves from a regulatory perspective,” he said.

However, many FinTechs continue to put off issues around compliance. That’s partly because it’s in their nature to take risks, according to Rosenblatt, who said FinTechs generally have a much greater risk tolerance than big banks, for instance. Oftentimes, it’s also because of the nature of the business they transact. A FinTech startup that’s processing gaming transactions and purchases on adult websites is already exposing itself to a higher level of risk — something a bank wouldn’t even touch.

“The risk appetite in general gets more and more conservative as your valuation goes up and the age of your company goes up,” he said.

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The difficulty involved in getting compliant in the first place adds another layer of friction. In Payoneer’s case, Rosenblatt said, it took a lot of hard work and involved partnering with companies and organizations across the world in order to comply with regulations in every market where it operates. The company could never have done it by itself, and it couldn’t have done it with just one back end either.

Highlighting the challenges, Rosenblatt pointed to the new trend of “Compliance-as-a-Service” companies, which typically limit their services to a small handful of markets. They’re aiming at a kind of plug-and-play compliance solution for companies entering a new market. While he said that isn’t a bad idea in principle, nobody has managed to make it work at a global scale yet.

“So, if you want to do business in London, there are probably three or four players who can help you, but then when you want to go to Germany, you’re out of luck, and you’ll have to find someone else,” Rosenblatt said.

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Still, for bigger players like Payoneer that have already done the hard work, compliance can create new opportunities. Now the firm is trying to seize on one, helping marketplaces like Amazon vet third-party sellers more easily. As Rosenblatt explained, the Amazons of the world are restricted because they can only see the activity that occurs on their own marketplaces. Thanks to its status as a payment provider for multiple marketplaces, Payoneer can see a seller’s activity across multiple platforms and warn the marketplace if someone has been a bad actor on other platforms.

Rosenblatt said he believes there’s a lot of potential for such solutions. He said that as the space becomes more robust, we’ll see more and more FinTechs effectively becoming compliance software companies as well.

“That’s a healthy thing,” he said. “When push comes to shove, whether you’re in the crypto space or somewhere else, you’re only as good as you are when people trust you for what you say and what you do. And that will be absolutely critical in all compliance going forward.”