Balancing build with buy: how to approach compliance
Will Staples, Money Laundering Reporting Officer at Currencycloud
A strong and robust compliance process is one area that scaling fintechs need to get right from day one. Founders, however, can find approaching compliance daunting. While many will have had past experiences with it, the chances are that relatively few will be from a compliance background and have been dealing with it on a day-to-day basis. This is compounded by the fact that the potential fallout from getting it wrong can be catastrophic for a fledgling business: the Financial Conduct Authority (FCA) handed out almost £568 million in fines in 2021.
But it’s not just fines. VCs will want to know you have strong compliance processes in place – without it, funding opportunities will dry up. Similarly, banking partners won’t approve you.
All in all, of all the things to absolutely get right from the start, compliance is it!
There are three key considerations that founders need to keep front of mind when it comes to building a function that is fit to deal with the challenges of modern fintech: people, product, and providers.
People are the cornerstone of compliance, and must be the number one factor in determining a company’s approach to it. Having an in-house compliance team is non-negotiable; it is a must for all fintechs. The size of the compliance team and the extent to which the company uses in-house development teams to build it, versus how much they are able to outsource, is dependent on the complexity of the business and its longer term goals, but be in no doubt – an internal compliance team will go a long way in helping to avoid the potential of fines from the FCA, or other financial regulator.
There is, however, scope for variation in the size and scale of a fintech’s compliance team, and a key factor fintech leaders need to consider when working out their approach is the human resources at their disposal.
While many fintechs will have the right blend of staff to build a compliance offering from the ground up – namely a mix of compliance, product, and engineering professionals – the question is whether they want them to be consumed by this timely task.
There is an opportunity cost when it comes to pushing people into working on compliance from other areas of responsibility, for example dragging engineers away from product development to focus on compliance, and many leaders would rather avoid this if possible. The same question occurs when maintaining your compliance system, too, and is a vitally important consideration when thinking about how a compliance function will operate on a day-to-day basis.
Well-resourced fintechs with complex compliance needs might opt for a hybrid approach that brings third party providers in while also keeping core staff very close to the build. For example, some of their engineering or product leaders might have elements of the build as a specific responsibility in addition to their other duties. Similarly, a compliance lead might be responsible for project managing the build and looking after its integration into the overall compliance process.
Once you understand the scale and skill of your human resources, product is the next item you need to consider. One of the starting points for a fintech looking at its compliance build should be to think about its core product offering and the sector it is operating in. For example, some businesses like neo-banks have extremely complex needs when it comes to regulation. Businesses like this who deal with multiple products and layers of regulation often think about building their own solutions from the ground up, bringing in a dedicated full-time team focusing on design, development and subsequent maintenance and management of the compliance stack. However, for fledgling organisations with limited funding this is not always feasible.
On the other hand, some early-stage fintechs are focused on building momentum in one product category in one market, which reduces the regulatory burden significantly. In instances like these, it might make sense for an organisation to lean more heavily on external providers to build and maintain their compliance proposition. In this circumstance bringing in dedicated resource for a build can take valuable funding and resources away from other areas that might be more deserving.
Once a fintech has assessed its personnel and product and decided upon the extent to which it will build and the extent to which it will buy, the next step is to think about who the third-party providers that it wants to bring in are. The reality is that, in most cases, creating a compliance function will involve multiple providers – the product rarely comes as a complete off-the-shelf service.
However, the number of providers that an organisation opts for is highly variable and dependent on a company’s specific needs. As mentioned, for smaller organisations with more straightforward compliance needs, bringing in one principal provider rather than working with a small number of sub-providers might be a simple and cost-effective solution.
On the other hand, a multi-product fintech with extensive compliance needs might need to look at bringing in a broader range of providers to build a more sophisticated offering. Those in this position should look at each area of their compliance needs and try to find the provider that is most suited to meeting them. There are a huge number of third parties who have excellent track records in specialised areas like KYC and monitoring, and by bringing these providers together an organisation with complex needs can create a truly bespoke solution.
Getting it right
Whichever compliance option fintechs pursue, it is vital that they put their business’ needs front and centre and think their options through comprehensively. They should go for an option which will both grow with the business and help create a platform for further commercial growth and success. This encompasses not only commercial performance, but also how teams might change and evolve. There’s no single correct answer but doing nothing in an age of increasing complex risks is not an option.
How to identify the signs that your IT department need restructuring
Eric Lefebvre, Chief Technology Officer at Sovos
For firms to execute transformations and meet their overall vision, it is crucial that their CIOs are able to recognise the signs that their department is in need of some internal change. In the current economic climate, CIOs working to fulfil their organisation’s priorities and meet business goals might hesitate to acknowledge that their IT department needs restructuring, never mind be able to identify the signs.
However, these problems rarely fix themselves and organisational restructuring requires conviction and determination from leadership for it to occur successfully. So, what are some of the key signs that CIOs should look out for?
Struggling to keep up with industry demands
CIOs unsurprisingly are working in an extremely demanding environment at the moment. Meeting these evolving demands is crucial for companies. When demands are not met and not handled properly, this can have a lasting impact on organisational goals and objectives, and even impact the way in which transformations are put into effect.
Depending on the organisation’s structure, the way in which being unable to keep up with demands manifests itself can differ. Despite double digit reductions across the industry, the search for talent across the tech world continues, project costs continue to rise as the cost of labour has increased and schedules have been disrupted by significant attrition. Many companies will also find business costs, such as that of third-party software, are higher than planned and technology debt continues to pile up faster than it can be sunset.
Whilst leadership teams might dedicate their department’s attention on the factors discussed above, they may find that their team will fall short when it comes to timely deliverables and helping maintain your organisation’s tech stack and guide its business transformations. Looking beyond the immediate problems of high costs and considering an internal reshuffle may be the solution for many IT departments.
Internal conflict within the team
Organisational designs with underlying issues can cause constant friction, especially when they go unacknowledged. An IT department that lives in conflict will certainly be reflected in results and less than successful tech transformations. CIOs will find that by adopting an organisational design which works through staffing issues, will better innovate, especially if they can all work together.
Department leads should have a strong understanding of their team’s work environment and guide them through any long-term or potential problems. When an individual is working in a demanding or complex industry, working well with your team shouldn’t be the main impediment to innovation. By acting quickly to eliminate internal conflict, CIOs can better lead and ensure their team’s focus is entirely on producing more optimal outcomes.
Delays are commonplace
When a large amount of your team’s time is spent setting objectives, budgets and timelines for the projects they are working on, it is vital that they are met. When delays are coming from the IT department, they will inevitably hinder the development of any business transformation, especially if it prompts teams to spend excessive amounts of time rearranging budgets and timelines and therefore hindering innovation.
IT departments are a crucial aspect in many different parts of a company’s transformations, so remaining on track when it comes to timelines and innovation is critical to operational plans. If delays have become commonplace in an IT team, and external factors are impacting projects, CIOs should look at restructuring an IT department to solve these issues.
The strongest team relationships do not happen by accident and are the result of good planning, strong leadership and a motivated team. CIOs can ensure this by providing vision and long-term strategy with clear goals and objectives to produce high levels of quality output.
When internal issues are noticed in an IT department, and are noticeably impacting team morale or productivity, this should indicate the need for departmental restructuring. Be that due to an inability to meet market demands, issues with productivity and meeting deadlines or internal conflict, these issues all risk a department’s functionality and an organisation’s ability to achieve its goals. In short, don’t overlook the warning signs!
Top banking trends of 2023 and global outlook of banking and fintech for the year ahead
Author: Professor Marco Mongiello, Pro Vice-Chancellor, The University of Law Business School
You’d be forgiven for assuming that the global outlook for banking and fintech will be dominated by the usual suspects:
Artificial Intelligence – AI plays an increasingly prominent role in banking and fintech by enabling personalised services, fraud detection, predictive analytics, use of chatbots and robo-advisors.
Blockchain and Cryptocurrency – the secure, decentralised and swift system for financial transactions that blockchain has brought to the fore a few years ago, is now becoming ubiquitous. An increasing number of transactions are recorded through blockchains technology, primarily in the cryptocurrency market.
Digital Banking and fintech – accelerated by COVID-19 pandemic, the adoption of digital banking is a trend that will persist as customers have become accustomed to the convenience and efficiency of digital banking. Moreover, fintech enables access to financial services for previously underserved populations in developing countries or less affluent social groups in more affluent societies. This includes mobile banking services, peer-to-peer lending platforms, and microfinance solutions.
Open Banking – another global trend is the use of open APIs (Application Programming Interfaces) that allow third-party developers to build apps to facilitate customers’ access to financial data and services from banks.
Nonetheless, the challenges posed by these rapid changes are reminders that banking, an industry that by its very nature needs to be conservative, risk averse and solid, wobbles on the unchartered grounds of fast and turbulent innovation, where entrepreneurship instead thrives. The underlying rationales of banking and fast digital innovation are not incompatible but do need solid operations and thought-through decision-making to avoid causing catastrophic collapses.
The recent examples of Silicon Valley Bank, Silvergate, FTX and Wirecard are stark reminders that digital entrepreneurship applied to banking doesn’t just bring to customers the visible transformation of valuable new services, but also dents (perhaps as an unexpected consequence) the rationale itself of the role of banks in the global economy. Moreover, the central banks’ ability to contain the effects of single banks’ defaults is no longer a certainty, as experienced just over a decade ago and more recently. The markets’ sentiments are hardly reassured by the commitments of even the most coveted players, such as the European Central Bank, the Federal Reserve, and the President of the United States himself.
Regulators are lagging behind and their attempts to catch up may cause further seismic shocks to the global banking system. For example, another trend that is emerging is one of artificial intelligence decision-centres (i.e., decentralised offices of banks which take autonomous decisions on behalf of investors) outside the most stringent regulatory environments, enabling banks to operate globally more efficiently and more competitively. And we can expect that regulators will close the gap either abruptly, as it is currently happening in China, where private banks are subject to an escalation of regulatory and monitoring restrictions, or more gradually as it is happening in Europe and in the US.
The questions we face, as individual or trade customers of our high street banks, as direct investors or clients of managed funds, are whether banking will become more user-friendly yet, for our daily use but riskier, too, or is it simply becoming more efficient, transparent and also safer.
I’m afraid that the answer is by no means an obvious one. Therefore, caution, level-headed decision- making and critical thinking have never been as important as these days. Whether you are looking after your family savings or growing your pension reserve, the imperative is that you keep updated about the providers of the financial services you rely upon as well as about the general regulations that apply to your financial transactions. This is where, for example, you need to be familiar with your rights in case of cyber fraud, as well as learning how to minimise the risk of becoming a victim thereof. Also, taking additional steps to evaluate the credibility, solidity and reliability of the online provider of that app that was recommended by a trusted friend, may prove a very good move.
Similarly, whether you are the CFO of a medium or large company, or are a sole trader wrestling with your own business’s finances, you need to reflect on what you really want from your bank in the first place. That is before you started to be swayed by the whirlpool of offers of ‘opportunities’ to multiply your financial investments. Chances are that your initial approach to your bank was dictated by either a need for financing your working capital, as per your budget and strategic plans, or to find a safe place for your temporarily idle liquidity. Perhaps you were also after some basic treasury services such as swift payments and debt collection. Maybe some other financial services closely related to your business operations, e.g. factoring. The advice is to give very careful consideration to services that are more remote from your business, because the trend for the next years is that more and more of those will be offered to you. But many new services will disappoint those who, sadly, cannot afford financial mishaps as they look to run and grow their business.
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