Vinod Sivagnanam is a senior product manager for a multinational software firm with over 10 years of experience in customer experience strategy and digital transformation in e-commerce and financial sectors. Vinod holds an MBA from Cornell University and a Master of Information Systems from the University of Arkansas. Connect with Vinod on LinkedIn.
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Launching a fintech product presents unique challenges, requiring a careful balance among innovation, compliance, and customer trust. Regulatory hurdles such as data privacy laws, anti-money laundering (AML) requirements, and financial licensing can increase operational complexity.
Navigating these regulations demands close collaboration with legal teams, regulators, and financial institutions to ensure adherence while maintaining a seamless user experience. Additionally, varying regulations across jurisdictions make scaling fintech products globally even more challenging. Overcoming these challenges requires a proactive approach, leveraging regulatory technology (RegTech), strong partnerships, and agile development strategies to adapt to evolving compliance standards while delivering innovative financial solutions.
Common regulatory challenges
A major financial regulatory category involves ensuring that the wrong people aren’t being paid. These requirements include AML and combating the financing of terrorism (AML/CFT) regulations and denied party screening. Lack of compliance can come with a hefty price tag—several fintechs and global banks were fined millions of dollars last year for failing to meet AML regulations.
In emerging markets, governments may have regulations regarding foreign exchange reserves to maintain currency stability, which impacts how money is moved in and out of the country. In commerce, retailers may bear the burden of sharing documentation with regulators to demonstrate that the currency value and the value of the goods either leaving or entering the country match.
Managing customer friction
A smooth customer experience can be a key differentiator between competitors, especially in the finance industry. Each point of friction makes a product more frustrating to use and can increase attrition. Using creative thinking to eliminate even a small hurdle while meeting regulatory requirements is a huge win. To meet regulatory requirements, some friction with the customer’s experience is often unavoidable, especially regarding AML/CFT.
To minimize the impact on customer experience, fintechs can make disclosures easy to understand, explain the purpose of documentation requirements, and leverage unavoidable obstacles to their advantage by prompting customers to slow down at important moments. For example, the United States requires any amount over $10,000 to be declared—a checkbox to confirm or deny a declaration will cause customers to pause and pay more attention to the regulation. Inescapable friction can guide customer behavior when implemented thoughtfully and designed with purpose.
Avoiding and mitigating risk
Ambiguous regulations pose significant challenges and unforeseen risks for fintechs. Regulations simply do not cover all the use cases a company will encounter, especially when entering smaller, emerging markets. Despite a company’s best efforts, there is a risk that a misunderstanding of the regulations will result in a non-compliant product or that regulators will find the company non-compliant and impose hefty fines. The associated negative press can also damage the company’s reputation, which can have long-term consequences in the finance industry.
One of the best ways to mitigate this risk is to connect with subject matter experts who have worked and/or lived in the jurisdiction. These professionals could be someone attached to a financial institution who has held a high-level regulatory position or provides consulting services. Engaging with these experts can ensure that regulations are understood on a surface level and that the intent is considered.
Another risk is frozen funds. This occurs when a third-party partner fails, or a regulatory issue arises, and authorities suspend a company’s operation. The former occurred last year when a banking-as-a-service middleman for several fintechs filed for bankruptcy, leaving customer-facing partners with $200 million in frozen customer funds. Synapse, a banking-as-a-service middleman for several fintechs, filed for bankruptcy, leaving customer-facing partners with $200 million in frozen customer funds.
Whether through operational suspension or partner failure, trapped funds leave companies poised to lose significant customer trust and business. While organizations never wish to find themselves in this situation, it’s best to be prepared. By reserving sufficient liquidity, customer transactions can be reversed if necessary, allowing customers to at least reclaim their money. This approach goes a long way to maintaining customer trust and could help companies avoid the worst of the disaster.
Finally, it’s critical for fintechs to communicate with regulators, even if application approval is received. If approval was given with an incomplete or incorrect understanding of what the product does, this could pose a problem in the future. Proactive engagement is essential, since most regulators are willing to discuss how a product functions. Walking regulators through the technology, especially if it’s a complex product, can mitigate problems.
Leveraging partnerships to avoid pain
Today, it’s not uncommon for fintechs to partner with established financial institutions. As a recent article for the World Economic Forum (WEF) stated, “the banks-versus-fintech narrative is outdated.” Instead, the article mentions “a strategic blend of selective competition and essential collaboration.” In most jurisdictions, the onus of regulatory compliance falls on institutions rather than consumers.
Banks are deeply familiar with compliance expectations and are accountable to governments, making them strong resources for navigating regulatory challenges. Fintechs, on the other hand, “are nimbler, often better suited to solving hyper-specific problems quickly,” making the two entities excellent partners.
RegTech is another tool fintechs can leverage to navigate compliance. Acting as intermediaries between fintech products and the governments, they can help verify customer identification and confirm that regulations were met. Utilizing RegTech helps fintechs improve operational efficiency, streamline the regulation process, and reduce customer friction. Additionally, because a licensed third-party approves the fintech’s compliance, there is a reduced need for audits since the government audits the RegTech.
Protecting customer data
Security breaches are not a matter of if but when. It’s imperative for fintechs to be prepared to address threats quickly and decisively. Trust is the currency of digital finance, and once it is lost, it is nearly impossible to recover. Significant investment in data protection, robust encryption, and high protection standards are a must, especially when transferring sensitive information. Depending on their resources, fintechs can either solve security problems themselves or rely on third-party intermediary companies.
Today, it’s not just about meeting industry security standards. It’s also about getting creative and going above and beyond. Regulations will continue to become more restrictive across all jurisdictions, so being proactive and staying ahead can make companies competitive. Often, banks are willing to work with fintechs to meet higher security standards, but if they are unwilling, it’s more advantageous to find another partner or build the security solution in-house. Losing customer trust is very hard to reverse, especially in finance.
The core challenge for emerging fintech products is that regulations vary across jurisdictions. Most of the finance happens in major currencies like the U.S. dollar, the British pound, the Japanese yen, or the euro, but the strategies adopted for these currencies may not translate to emerging markets. Conversely, strategies developed for emerging markets likely don’t make sense for developed markets.
There’s significant complexity within the fintech industry, especially when comparing markets. Balancing compliance, security, and customers’ needs is critical for success. Companies that thrive will focus on providing better customer experiences while embracing the creativity and flexibility necessary to navigate an increasingly regulated financial landscape.
