Fintech Firms Launch Operations without Understanding Complex Regulatory Requirements, and Fail to Meet Compliance Standards, Industry Exec Explains

Matthew Unger, CEO at Vancouver, Canada-based iComply Investor Services Inc, a global compliance platform for digital finance, reveals that updated regulations for strong client authentication and transaction monitoring now require Fintech companies to manage many complex tools.

He points out in an Op-Ed on Finance Magnates that many new Fintech firms launch their platforms without realizing that digital onboarding is not just simple KYC. Their failure to understand the complex nature of regulatory requirements creates various challenges including not being able to pass compliance reviews.

As a result, these early-stage businesses end up losing important banking relationships, and then might begin looking to establish operations in other jurisdictions with lower standards or requirements, but these places usually have much smaller markets.

Unger recommends that Fintech firms can ensure compliance by enabling proper biometric authentication, while using the latest anti-fraud, KYC, and AML tools. By using the most updated technologies, these companies can ensure that they’re complying with appropriate regulatory requirements during the entire product life cycle.

Unger also mentioned that the digitization of reporting systems for online payments, securities, KYC/AML has led to instant processing of transactions that previously took weeks or even months.

Regulators including the Monetary Authority of Singapore and British Columbia’s Securities Commission have reportedly been targeting businesses that provide digital financial services, without holding the appropriate license or following relevant reporting requirements.

Regulators are now expanding their capabilities beyond simple digital reporting, Unger revealed.

Innovative technologies like natural language processing (NLP), Big Data, and machine learning are now able to effectively monitor capital markets, at scale, Unger noted.

Early-stage Fintech firms usually end up underestimating the cost of regulatory compliance, which can be quite expensive. Typical requirements may include filing securities registration or exemption forms, documenting and reporting potentially fraudulent activities, managing KYC checks, and ensuring compliance with relevant cybersecurity laws.

Canada’s FinTRAC has introduced improved digital reporting processes that aim to support REST APIs and batch reporting. The nation’s government and others throughout the world realize that physical or paper documents and face to face meetings can now be a health risk (due to COVID-19), which is why they’re exploring other ways to get the job done.

In 2019, the FATF introduced new guidelines for digital assets and virtual asset service providers (VASPs). According to Ungen, VASPs that adhere to these new requirements could potentially generate signficant revenue.

He pointed out that Binance has been earning billions of dollars each quarter, and that traditional financial service providers may be able to join the nascent digital asset sector after they’ve adopted appropriate virtual asset regulations.

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