Fintech Regulation: Legal Issues and Regulatory Compliance - Our CTO's article on Forbes

Nazariy H.

2022-07-25

The fintech market has been booming lately, with more tech companies clambering to bring the financial sector into 2022. This is an exciting time not only for finance but for fintech companies, developers, and investors that are driving the sector forward.

Working in fintech has never been more dynamic and exciting, but it does come with a significant barrier. Namely, the financial regulations and the associated financial and legal issues that come with the territory.

As it turns out, people take money seriously!

Of course, working within finance comes with regulatory standards. For the tech community, staying compliant with these regulations is a tight-rope act. That's what our CTO Nazariy Hazdun reflects on in his new article on Forbes.

The Main Fintech Regulatory Issues

As an aspiring fintech company, investor, or developer, fintech regulations are not exactly the most exciting challenge you’ll face. Fintech software development is a rapidly developing space, with plenty of excitement to go around. It’s essential to understand the core fintech legal issues to reap the rewards fintech offers. The three key areas are:

Data privacy. Consumer protection is a core component of fintech regulation. Regulatory bodies concerned with data privacy can sanction companies for not following proper risk assessments and meeting standards around customer data.
Money laundering. Governments take money laundering seriously. They recognize that fintech technology could be used to avoid duties. As such, each territory has its own anti-money laundering (AML) laws.
Cyberattacks. Traditional banks and fintech startups are big targets for hackers and other cybercriminals. There are financial laws designed to combat this, some of which we will discuss below.

FinTech Regulation

Regulatory Framework for Fintech Businesses

You may have already picked up on one of the complexities around fintech laws and regulations. Namely, there is not strictly a single overriding body of laws and regulations. Each major territory has laws specific to it that make the standard that needs to be met different, depending on where the parties are located. There is a lot of crossover in the different agencies and regulations, but at first glance, it might feel like a tangled web of bureaucracy!

To help you get a grip on the landscape, we have given a run down of the major regulatory bodies in the key territories.

Fintech Regulations in the US

The Conference of State Bank Supervisors (CSBS). The CSBS has been around since 1902. However, it is only in recent years that it has become involved in an attempt to standardize some of the licensing for fintech. This is a problem unique to the US, where different regulatory compliance standards exist in different states.

The CSBS started the Vision 2020 initiative to bring some unity to licensing and has had major success, lowering the barrier for entry for financial companies offering new technologies in the US.

The Consumer Financial Protection Bureau (CFPB). The CFPB is the overarching government agency concerned with ensuring consumers are treated fairly by financial companies. The bureau covers all financial firms, including fintech firms, national banks, and other financial institutions.
The Commodity Futures Trading Commission (CFTC). This body regulated the derivatives market. So if you are, for example, building an application related to trading in commodity futures, options, swaps, or over-the-counter in the US, then you will need to abide by the CFTC regulations.
The US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). In the US, FinCEN is a regulatory authority chiefly concerned with money laundering and intelligence collection and analysis. They cover various financial services, including banks, credit unions, money services businesses, insurance, casinos, and the like.
The Office of the Comptroller of the Currency (OCC). The OCC is an independent bureau that is ultimately part of the US Department of the Treasury. It looks over federal savings associations, national banks, and agencies of foreign banks. So, if you want to set up an online banking app, you will have a dialogue with the OCC!

In the US, there are also specific laws that control financial areas:

The Bank Secrecy Act (BSA). This refers to a specific set of laws designed to stop money laundering. One of the main practical outcomes for financial institutions is that they are required to keep detailed records of transactions.
Anti-money laundering (AML). AML does not refer to a single institution but rather a collection of financial laws and regulations designed to minimize and deter money laundering in the US.

Fintech Regulations in the UK

Financial Conduct Authority. In the UK, the FCA is the core regulator for all financial services and markets. Unlike the US, the UK does not have difficulty with state-level laws. The FCA protects consumers, deters money laundering, and attempts to ensure fair competition between providers.
Prudential Regulation Authority. The PRA was established after the financial crisis to ensure that businesses like banks trade responsibly. The PRA, which is part of the Bank of England, is generally concerned with banks and insurers, so a lot of fintech organizations may never come across them.
Payment Systems Regulator. The PSR is focused solely on the means of making payments in the UK. They ensure systems work well, promote healthy competition, and are fair to the consumer.

Do you know?

FinTech And RegTech In A Nutshell: What’s The Difference?

All the difference in one article, simply take it. Proven information by our CTO

Let's see

Fintech Regulation in Western Europe

The General Data Protection Regulation. GDPR refers to the European laws around data privacy and security. This is not just important for fintech but any organization holding personal data in Europe.
The European Union Directives and Financial Action. This is a European Union agency dedicated to fighting cyber-crime, including, but not limited to, money laundering.
The New Payment Service Directive. This is important for fintech companies seeking to operate in Europe, particularly if they want to offer a payment service. Not only does it seek to make payments more secure, but it was also designed to lower barriers to fintech companies by making more allowances for APIs and new financial technology, which were struggling to operate optimally under the former directive.

Okay, that’s a lot to take in already. Luckily, in most cases, you will only need an awareness of these different governing bodies, laws, and standards. It is unusual for a fintech startup to operate in all these territories and come up against all regulations.

Licensing Categories for FinTech Projects

Before we look at some specific licensing examples, let’s take a moment to delineate some of the core areas of fintech.

Digital banking. This is a movement driven by changing consumer expectations. The dusty old banking institutions and traditions (think queuing, checkbooks, and meetings with the manager) are no longer practical. Mobile banking applications, virtual banks, and the like are springing up all over the place, whether they are the result of national banks playing catch up or new, more agile banking services.
Payment. For fintech, the growth in this area is propelled by e-commerce. The speed, security, and ease of payments are high on the agenda for consumers and, therefore, for fintech and financial firms in general!
Trading and crypto. Fintech services are making the world of stock and crypto trading more accessible all of the time. What was once the domain of the wealthy and financially or tech-savvy is now available to laypeople without needing a lot of money or knowledge.
Insurance. Insurtech is the recently coined term for tech companies and applications working in the insurance space. There is huge scope for growth here, as consumers are ever more motivated by choice, flexibility, and convenience.
Lending. Credit scores, microlending, and budgeting platforms all fall under this category. They make up hundreds of applications currently on the market that are digitizing and simplifying borrowing.
Capital raising. The impact of fintech can be seen clearly in the world of capital raising. This activity has recently transformed as startups can seek capital via dozens of crowdfunding platforms.

Banking License

We are going to run into the same problem here that fintech companies have in general when it comes to regulations. Namely, the rules change from place to place!

For example, in the US, state bank supervisors are a factor. However, there are some universally applicable truths.

Only a company with a banking license can call itself a bank, and a bank has certain rights that a normal company does not.
Like a bank, you can hold a person’s funds, invest them on your behalf, and extend additional financial services.
The types and levels of banking license can be complex, but as a fintech company with a banking license, you have the potential to disrupt traditional financial institutions, which are scrambling to adapt to modern times.

Even conservative banks are undergoing digital transformations, but smaller, newer banks are being developed or already in operation that are luring customers away due to the benefits that come from their digital nativeness.

Payment Systems

As we have seen, there is a lot of movement in the available tech-based payment systems. In the UK and Europe, there are dedicated organizations that can guide you around payment system licensing. In the US, this is covered, ultimately, by the CSBS.

So you will need to jump through some licensing hoops if you want to expand consumers’ ability to shop from the comfort of their homes, pay their bills on smartphones, and the like. But the rewards can be substantial, as this is a popular area of development; you just need to follow consumer protection laws.

A few tips

How To Choose An Online Payment System That Will Fit Your Project For Years

Choose the best payment system once and forever. Here are a piece of advice from leading FinTech software developer in Eastern Europe

Let's see

Licensing of Stablecoins

As stablecoin is often pegged to a commodity or currency, it is more likely to require some regulatory compliance for new fintech. Blockchain, in general, continues to be a rich ground for development. The Stablecoin Trust Act was created by the government to regulate what commodities can be tied to crypto.

Are You Building a Neobank or Trying to Implement the Right Payment System?—Geniusee Can Assist!

Neobank

Geniusee Financial Software Development Services are designed to give any prospective fintech company the technical capabilities to realize its potential. This isn’t just about code; this is about bringing together a diverse yet highly connected set of skills and experiences to deliver a peerless and compliant end result. These services include:

Financial data management
Data-driven management decisions
Fraud detection
Financial platforms
Predictive analytics
Digital banking (wallet)

With Geniusee at your back, you’ll have the technical clout to deliver your vision with confidence.

Summary

More organizations are looking to fintech as a fertile ground for technical development. This is totally appropriate, as consumer expectation, blockchain technology, and globalization create a need for the digital transformation of legacy institutes and for new, agile fintech companies to change the landscape.

However, for startups or companies that have had success in application development in the past, fintech offers a unique challenge. The regulations are complex, and the bodies that enforce them are far from toothless. These aren’t guidelines; they’re laws!

We have seen how fintech laws and regulations change depending on the country and the nature of the operation. In practice, most fintech companies will need to become experts in the specific regulatory practices of their chosen area⁠—or else risk failure.

It is easy to get carried away with the big idea and overlook the (admittedly) tedious minutiae of financial regulatory compliance. However, apart from the mere need for compliance, these laws and regulations are ultimately a force for good, allowing companies to compete fairly, facilitating tax compliance, and mitigating the risk of money laundering. All help ensure financial stability, which is essential for the success of fintech.

If you need help or would like to learn more about building a neobank or implementing a payment system, contact Geniusee today.