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Transact with trust: How to build a better FinTech ecosystem (9 useful tips for startups)

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From navigating regulatory complexities to coming up against fierce competition with limited financial resources, early-stage fintechs face an array of challenges. And yet, despite these hurdles, startups play a crucial role in improving the fintech ecosystem with their disruptive ideas and pioneering technologies that help improve customer experiences. 

In an interview with banking platform Curve’s VP of Business and Fincrime Operations, Russ Barenboym, several common challenges experienced by early-stage fintechs were discussed. Based on his conversation with Paul Huston, VP of Product at ComplyAdvantage, this article explores the top nine actions compliance leaders can take to scale their businesses effectively while helping to build a better fintech ecosystem.

How early-stage firms can help build a better FinTech ecosystem (9 useful tips)

1. Ensure compliance solutions are calibrated to detect and connect a range of related financial crimes 

The potential misuse of financial instruments or platforms for criminal purposes is an underlying threat that fincrime professionals across the board will relate to. These concerns encompass illicit activities such as modern slavery, child trafficking, drug trafficking, and terrorist financing – known as predicate offenses. What sets these concerns apart is the realization that they are interconnected. While fraud losses may be perceived as an acceptable cost of doing business, it becomes apparent that fraud is closely linked to money laundering, which becomes entangled with various other illicit activities. 

To address these apprehensions effectively from the outset, the savviest of fintechs adopt a mindset that prioritizes the development of solutions with robust defenses against a diverse range of risks. Rather than focusing solely on optimization strategies or costs, the emphasis should be on establishing high-quality defenses. By adopting this approach, firms can mitigate the risks posed by financial crime and contribute to a more secure and resilient financial ecosystem.

2. Partner with vendors that can provide context on the regulatory landscape

One ongoing challenge faced by early-stage and established firms alike is keeping up with the evolving regulatory landscape. With an increasing emphasis on customer authentication and know-your-customer (KYC) requirements, companies are faced with the daunting task of staying compliant while driving growth and innovation.

For successful entrepreneurs and organizations, choosing partners who possess a deep understanding of the regulatory environment is crucial. Such partners can provide valuable assistance in navigating compliance hurdles, ensuring the customers brought onto the platform are genuine and trustworthy, and allowing the company itself to concentrate on its core competencies and strategic growth.

The journey of building a thriving business involves continuously evaluating risk strategies and delivering growth while ensuring regulatory compliance. It’s essential to remain agile and adapt to changing circumstances.

A key takeaway from successful ventures like Curve is to seek partners who are not only reliable allies in compliance but also capable of scaling together with the business. From startups with small teams to large organizations with extensive reach, having partners that grow alongside a business can be a game-changer.

“While the regulatory landscape may pose challenges, with the right partners by your side, these challenges can be transformed into opportunities for success. Embrace the power of collaboration and find partners who are as invested in your success as you are. By doing so, you can confidently navigate the regulatory maze and carve a path toward sustained growth and prosperity.”

– Russ Barenboym, VP of Business and Fincrime Operations at Curve

3. Define the fintech’s risk strategy from the outset, but be flexible

In the early stages of a fintech venture, establishing a risk strategy is vital. Striking the right balance between regulatory compliance and fostering growth requires a measured and thoughtful approach. Rather than adopting an excessively stringent strategy that hinders customer acquisition, successful fintechs often opt for a risk-based approach with built-in flexibility.

From the very beginning, these savvy entrepreneurs recognize that rigid risk strategies can impede progress, and poorly defined risk controls create existential threats for the business. By embracing a flexible approach to risk, they create room for growth and innovation without compromising on regulatory obligations. They acknowledge that taking measured risks is essential for steering the company in the right direction.

As the fintech matures and gains experience, the risk strategy evolves, guided by real-world outcomes and insights. Instead of merely embracing risks for the sake of it, successful fintechs refine their approach, focusing on risks that offer substantial upside potential while managing and mitigating downsides. This pragmatic mindset ensures the company stays agile and adaptable in an ever-evolving landscape. 

4. Consider the “build vs buy” approach to compliance solutions

Whether firms decide to develop compliance solutions in-house or to outsource them to third-party providers depends on a variety of factors such as scale, growth plans, and core competencies.

Russ explained that Curve took the view third-party providers will usually excel in the areas they specialize in, leading to better-developed and supported solutions. As such, Curve tends to outsource risk mitigation solutions while focusing on building in-house capabilities that set them apart from competitors and retain customer loyalty.

Throughout the customer lifecycle, Curve relies on third-party solutions for identity verification, KYC checks, politically exposed persons (PEPs) and sanctions screening, document and selfie verifications, among others. These solutions enable the firm to make informed decisions efficiently, ensuring compliance without unnecessary compromises on customer experience.

However, when it comes to critical decisions that impact margins and customer relationships, firms may prefer to handle them in-house, allowing for more control and personalized judgment. 

For new entrants in the fintech industry, Russ encouraged firms to consider the buy option for compliance solutions, favoring established third-party providers over building solutions in-house. This approach allows startups to focus on their core strengths and benefit from the expertise and scalability of established solutions.

5. Be agile to the challenges that come with scaling 

An essential lesson learned in the scaling journey is that opportunities for business expansion will arise naturally. However, it is crucial to approach these opportunities mindfully, considering the complexity they may introduce to the business. 

For example, despite starting in the UK and rapidly expanding into 31 European markets, Curve found Brexit to be a significant disruptor, requiring the company to create additional legal entities and establish offices in European countries. The regulatory variations between the UK and Europe prompted the compliance team to rethink their customer onboarding process, which further added to the complexity. These new complexities had implications on their decision-making, the solutions they chose, the developments they pursued, and the expertise they sought in their team.

While rapid growth is desirable, the ability to change direction quickly when faced with new complexities is even more critical. Embracing agility allows fintech companies to adapt swiftly to evolving regulatory landscapes, market demands, and unforeseen hurdles. Rather than merely focusing on scaling quickly, being agile enables businesses to make informed decisions, pivot strategically, and maintain a competitive edge. 

This agility should also extend to the fintech’s tech stack and vendor partnerships. Suppose changes must be made to a rule to meet a new regulatory requirement, for example. In that case, firms will want to ensure their AML solutions can be promptly customized and updated to remain compliant.

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6. Eliminate single points of failure

When scaling any business, eliminating single points of failure is essential for strengthening the overall risk management strategy. Relying heavily on one partner or set of customers exposes a company to significant risks should that entity face challenges or disruptions. 

Maintaining a robust risk profile requires spreading the risk across a broader customer base. As a company grows, expanding its customer base provides a buffer against catastrophic losses and helps ensure business continuity. Additionally, implementing well-defined processes and policies, driven by regulatory requirements and prudent decision-making, will bolster risk management and protect against unforeseen circumstances.

7.Consider the benefits of AI and machine learning for fraud detection

By leveraging artificial intelligence (AI) and machine learning (ML) algorithms, businesses can process vast amounts of data at unprecedented speeds. This enables them to detect patterns and anomalies indicative of fraudulent activities in real-time. As fraudsters continually evolve their tactics, these technologies provide the agility to keep up with the changing landscape.

One of the key benefits of AI and ML is their ability to learn and adapt over time. As new fraud patterns emerge, the algorithms improve their accuracy, continuously refining their detection capabilities. This learning process enhances the effectiveness of fraud prevention measures, reducing false positives and ensuring genuine transactions are not unnecessarily flagged.

AI-driven fraud detection systems can work seamlessly in the background, offering a frictionless customer experience. By swiftly identifying potential threats without impacting legitimate transactions, businesses can maintain customer satisfaction while safeguarding their financial interests.

The predictive nature of AI and ML also allows for proactive fraud prevention. By identifying suspicious patterns before fraudulent activities occur, companies can take preventive action, mitigating potential risks and losses. Another advantage lies in the scalability of AI-based fraud detection solutions. As a business grows, these technologies can easily adapt to higher transaction volumes, making them well-suited for companies experiencing rapid expansion.

However, AI and ML offer significant benefits but are not a one-size-fits-all solution. Collaborating with domain experts and data scientists is essential to tailor the technology to specific business needs and industry challenges. Moreover, businesses must regularly monitor and fine-tune the algorithms to ensure optimal performance.

8. Stay abreast of regulations and risk operations in other jurisdictions

While an early-stage fintech may have a well-defined target audience within a specific jurisdiction, the savviest firms will maintain a global perspective on regulations and risk operations. Awareness of each market’s unique challenges can help firms develop tailored risk management approaches. 

It is also good practice for firms to analyze the success of established ecosystems and risk management practices in other regions, identifying key elements contributing to their effectiveness and considering how similar strategies could be applied internally. 

In the discussion with Curve, Russ commented on the innovative startup ecosystem in Southeast Asia. With the region’s fintech market projected to reach $300 billion by 2025, it’s one to watch. Published guidance from regulators in this region is also a good way for startup firms to stay current on the most recent industry developments. Some notable information repositories include:

9. Focus on the customer

Finally, one crucial piece of advice Russ shared is to keep the customer at the forefront of all operations. This includes focusing on the customer’s needs, desires, and pain points to build a successful and sustainable business.

One key lesson for fintech startups is prioritizing reducing customer friction, particularly in the early stages. By doing so, businesses can achieve scalability and increase their chances of survival during the critical initial years.

To thrive in the competitive fintech landscape, companies must provide exceptional customer experiences, addressing individual requirements and concerns. By centering their efforts on the customers and doing the right thing by them, fintechs can pave the way for long-term success and establish a strong presence in the industry.

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Originally published 19 September 2023, updated 09 February 2024

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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