There’s no denying it, FinTech is hot! It seems everyone is trying to build the next FinTech solution whether they’re focused on P2P Lending, Processing, Cyber Security, Block Chain, Bitcoin, Payments or any number of other pain points that are ripe for disruption.
Companies tend to forget that Financial Technology is made up of two distinct words. Many times, you will see amazing startup ideas who end up focusing on the Technology side by creating amazing UI/UX and pay little attention to what I consider the most important aspect of the Financial side: Compliance. This is a risky approach, from my experience either you address compliance head on from the onset or pay the consequences later.
I recall a FinTech Money Services Business (MSB) startup team that approached me regarding their business. They had a pretty good business idea, they were very passionate about it, and they found a niche market segment that they had expertise in. Fantastic! My first question to them was, “do you have a bank account setup?” This sounds like a trivial question to the uninitiated, but for those in the MSB space, it’s an incredibly important concern. In their case they did not. A banking relationship can make or break your business and is mission critical for any chance of success.
My next question was, “Do you have an AML (Anti-Money Laundering) Policy?” Again, they did not. At this point, they had a very slim chance of getting a banking relationship established, and without a bank account, they would not be able to operate their business.
Another team I spoke with was building a Bitcoin FinTech company that was also working on an amazing platform. The line of questioning was very similar. “Do you have a bank account setup?” They did! We were off to a great start. “Does your bank know what you are doing?”
They responded that their account manager was aware and they know people at the branch and everything is good. I was very skeptical with that response; if only it was that easy.
I reminded them that compliance must be managed at the corporate level and not at the branch level, and as soon as there is any noticeable volume going through their account, it may be flagged for Enhanced Due Diligence. Once the bank got a whiff of the bitcoin activity, the account will be terminated. They reassured me that everything was good and they had things under control.
Three months later, their bank accounts were all terminated.
These examples highlight the issues that FinTech MSBs need to worry about from the start.
Your idea may be outstanding, maybe you’ve built that next generation platform or the next killer app, but if you don’t build compliance into the platform from Day 0, you’re going to get crushed. Banks don’t have time for companies who are not operating at a compliant level, and that means to a level that satisfies the banks, not your own personal risk appetite. It’s not worth their time or effort and definitely not worth the risk.
A good business will focus on compliance as a core building block to their platform instead of building it ad hoc when the time comes that they absolutely need it. Right from the beginning they will address the areas that need to be dealt with and be fully “switched-on” to the areas they need to be aware of. Unfortunately, many FinTech startups are built around incredible ideas however management is naïve to the realities regarding the regulations that may affect them. Some may run into it early on and work around it without much trouble. Others may only face these issues much later and at that point they represent a critical roadblock. At best, companies that fall into the latter group would require a significant pivot, at worst, these issues will shut down their business entirely.
The most successful Fintech companies address compliance early in the lifecycle and place just as much importance on it as they would on building a robust, scalable, and secure platform. Fortunately, there has been a recent trend for many accelerators and incubators to incorporate FinTech support as part of their offerings. Help and guidance is out there; FinTechs can continue to innovate and disrupt without letting compliance be their downfall.
Compliance can be a distinctive value proposition if addressed correctly and creatively when it’s time to engage banks and partners. Letting these partners know you have a robust compliance plan in place may not seal the deal, but it will help you get past the front door.
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