Regulatory compliance of the Fintech industry

Fintech refers to “financial technology” and is the technology used for the improvement and automation of financial services. Fintech entities include challenger banks, electronic money institutions, crypto service providers and other entities that take advantage of technology to provide financial services to their clients.

The growth of the fintech industry is projected to reach $698.48 billion by 2030. Customers are continuously looking for faster, cost-efficient methods to transact and make payments, and this resulted to the popularity of the sector.

Regulation of the sector

Fintech firms need to ensure that they have all applicable policies and procedures in place to ensure compliance with these regulations, in addition to the security standards that they need to implement.

The main European regulations that Fintechs are required to comply according to their type of license are:

  • Payments Service Directive 2 (PSD2) 
  • European Banking Authority (EBA) guidelines (i.e. on security, incident reporting etc)
  • Anti-money laundering (AML) directive and regulations
  • General Data Protection Regulation (GDPR)
  • MiCA in the case of crypto asset service providers

Best practices

Fintech firms need to employ specialized tools to ensure compliance with regulatory requirements. Some of the best practices are:

  • Use of regulatory technology (Reg tech solutions) that help regulated entities to comply with their legal obligations.
  • Implement a risk-based approach and ensure regular risk assessments to prevent financial crime, including money laundering and fraud.
  • New technologies like artificial intelligence (AI), machine learning and other innovative technologies that are designed to be more precise and can eliminate errors.

The challenge

The biggest challenge for Fintech entities is that, although usually they are smaller in size and have fewer resources, they need to comply with the same high security and regulatory standards with banks.

Violations of the regulations can result to penalties, loss of capital and can cause reputational damage. Understanding how different regulations affect Fintech companies is essential to ensure security and compliance.

Artboard 1

Related Articles