In the fast-paced world of financial technology (fintech), businesses are faced with challenges left and right. Defining product roadmaps, developing a go-to-market strategy, staying ahead of competitors, securing funding, and building up a customer base are all typical challenges faced. Having difficulty getting a bank account, however, is not usually on the list.
A survey conducted by the World Bank found that 28 percent of money transfer companies and 45 percent of their agents had lost access to banking services. This high level of financial exclusion for these businesses was the result of the practice known as de-risking, through which banks close the accounts of clients considered as high-risk, even if there is no history of non-compliance with regulations.
The money services business (MSB) industry, which includes money transfer, remittance, foreign exchange, and other related businesses, has been heavily impacted by de-risking, as banks have closed accounts en masse. In fact, de-risking has become a concern that is drawing the attention of regulators. In a speech given in 2014, Jennifer Shasky Calvery, then director of the U.S. Financial Crimes Enforcement Network (FinCEN), had strong words about this issue.
[tweet_dis excerpt="Regulators discouraging banks from widespread #derisking of #fintech firms via @trulioo"]“FinCEN does not support the wholesale termination of MSB accounts without regard to the risks presented or the bank’s ability to manage the risk,”[/tweet_dis] said Shasky Calvery. “As noted, MSBs present varying degrees of risk, and not all money services businesses are high-risk.”
Reducing De-Risking with RegTech
Fortunately for fintech, help may be available thanks to its offshoot, regulatory technology (RegTech). Already, RegTech has gained the full attention of both the UK and Australian governments, beginning with UK’s Summer Budget in 2015 followed by a June 2016 speech by the Australian treasurer. During his speech, Treasurer Scott Morrison said that for Australia, RegTech will help create “a regulatory system which is technologically advanced”.
By leveraging the advantages offered by RegTech solutions, fintech companies can decisively address concerns that banks might have about risk in the sector. Companies that adopt RegTech make a strong statement by showing their commitment to high standards of regulatory compliance.
Sharing the Compliance Burden
While RegTech can certainly provide relief for fintech firms dealing with their regulatory burdens, there is still the question of data, also referred to as ‘the oil that lubricates the wheels of the industry’. RegTech solutions need secure access to reliable data so that they can be the most effective. Major banks have access to vast amounts of customer data that has been accumulated over years, but fintech startups typically do not.
One way to handle this challenge is for fintechs to look at building strategic partnerships with other organizations. For example, online identity verification solutions can provide access to a wide array of trusted and independent data sources, such as government records, utilities, and credit files.
“De-risking has limited the ability of fintech companies to remain sustainable,” said Jon Jones, President at Trulioo. “RegTech offers these firms the opportunity to reduce their perceived level of risk and establish a high level of trust with financial institutions.”