Fintech is a hot topic in financial services. Given that the innovation currently adds more than £7bn p.a. to the UK economy
, employing over 60,000 people and attracting over £1.8bn of new investment into the UK in 2017 alone, its popularity is not surprising. While we can all agree it’s an exciting technology for the financial services sector, far less has been said about what this fintech revolution will do for compliance.
While fintech is still at a relatively early stage in terms of industry take-up, we can already see that its impact on financial services will be profound. Retail consumers have begun to see the disaggregation of the value chain in banking, with many seeking alternatives to their banks for foreign exchange or borrowing services.
Specialisation has led to new credit models, such as peer-to-peer lenders like Ratesetter, Zopa, and Funding Circle and SME-focused banks including Tide. Solutions are being offered to address customers’ poorly served needs through lowered cost of credit via links to employers. These solutions are implemented by Neyber and Salary Finance and SME finance, as offered by Iwoka.
Robo-advisors such as Nutmeg and Money Farm are threatening traditional wealth management. Neo-banks such as Starling and Atom are also offering lower cost, fast models for banking and increasing numbers of fintech solutions are looking to re-engineer banking back offices. We have seen blockchain solutions used to streamline transactions and machine-learning-based approaches to credit, risk and more.
Fintech isn’t just a challenger, and as such, many banks and large financial services institutions now view fintech as part of their future and have dedicated teams looking to partner fintechs or grow their own fintech solutions. This is both desirable and necessary. A core tenet of UK Financial Services regulation is to use fintech as a lever for change, as illustrated by recent Open Banking regulations. To do this, financial services institutions need to own and drive the use of fintech – and many are now actively doing so.
So, how will this fintech revolution change the role of compliance?
1. Assessing and managing risk
Compliance teams are already familiar with looking at business models and identifying risk. Within conduct, digital conduct risks can be quite different from the risks of face-to-face or telephone models, as consumer risk appetite differs between the two. Artificial intelligence (AI) presents new challenges entirely, with the machine learning approach making managing the compliance audit trail tricky. New business models also raise their own challenges from their prudential stability in a downturn to the robustness of the underlying risk analysis.
2. Streamlining key processes through automation
The growing ‘reg tech’ movement is changing the compliance landscape. The majority of compliance involves checking – whether for, money laundering, fraud or customer due diligence. Fintech is already revolutionising many of these processes by not just automating them, but radically improving effectiveness and reducing false positives. Deep analytics enable more data sources to be gathered including geospatial information and biometrics. Transaction monitoring, real-time transaction data, machine learning and natural language processing have significant potential to reduce fraud and conduct issues on the spot.
3. Complex supply chain management
As financial services value chains become more separate and new fintech partners are secured across all parts of a business, compliance issues will become more complex. It is understood that in many parts of business, a firm is only as good as its weakest link. Still, many small fintechs don’t understand the need for or have the resources to build a strong compliance framework. The current approach many institutions take of requesting lengthy legal agreements only protect an institution if the fintech understands what it is agreeing to, and many don’t. The big challenge for fintech teams, inside and outside of banking, is to work at pace since the legal and procurement processes are often cited as one of the biggest barriers to progress.
4. Real-time compliance monitoring
Looking at some of the costliest financial remediation scandals, the value of real-time monitoring becomes clear. Identifying a trader who is having an inappropriate conversation or the sales call which shifts from persuasion to an assumptive session allows action to be taken before a major issue arises. On the data side, real-time monitoring of transaction data also offers the ability to identify and act on risks promptly. All of this could allow managers on the ground to act quickly to take remedial customer action, coach staff or stop fraud.
The fintech revolution is arriving eminently for compliance teams but should be viewed as an opportunity as opposed to a threat. Fintech offers compliance more tools with which to add value and a more strategic role than ever before. But it will require change within compliance functions from more strategic risk identification to becoming a partner in sourcing technology and a real-time business partner. All of this offers compliance the opportunity to add more value in a world of increasing complexity.
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