As the market for fintech innovation stalls out, how can compliance officers make sure their investments in certain fintech solutions remain viable?
After several years of sustained growth, investment in the fintech marketplace declined during 2022 as the uncertain economic聽climate and fears of recession, inflation, and climbing interest rates contributed to increases in operating costs for potential investors who may now need to use their capital for other priorities.
This downturn was reported in , published by 成人VR视频 Regulatory Intelligence (TRRI). The report quoted statistics from Innovate Finance’s , which found that聽in聽the first half of聽2022聽the total capital invested in fintech worldwide reached $59 billion. This was flat year-on-year, with 3,045 deals completed; fewer than the 3,401 deals in聽the first half of 2021.
The 2023 Fintech/Regtech survey聽found further evidence of a聽financial downturn in the sector, reporting that enthusiasm聽for fintech was waning, with a fall in the number of people feeling extremely positive about the sector. Overall, this year’s survey reported that 15% of respondents were extremely positive about fintech, compared with 31% last year.
Economic uncertainty
The聽profile of the fintech marketplace appears to be changing as smaller operators are more likely to fail, leaving larger firms with聽a greater market share. Fintech firms are making employees redundant, losing聽vital skills and experience, as the economic situation remains unstable.
Further, prices of fintech solutions may well increase as the number of fintech firms聽declines and the capability to innovate diminishes.聽Such developments聽will be unpalatable to potential investors and buyers alike.
In the last few years, TRRI鈥檚 fintech surveys have highlighted the popularity of applications in many disciplines. This year’s survey showed the top uses include credit risk analysis, information and data security, and customer relationship management.
Demand聽to automate operations has not dissipated, but the challenges聽to implementation聽have grown. The economic environment has made it harder for firms to deploy fintech applications in a cost-efficient way, and fintech firms聽have become less able to innovate, reducing聽the choice of available applications.
Other reasons why fintech has diminished
Susceptibility to fraud is another of the main reasons why fintech has become less attractive. Fintech applications’ exposure to fraud has increased聽in recent years;聽and this, coupled with a rise聽in the number of cyber-security breaches, has placed pressure on fintech firms to consider security and control elements. Fraud victims lost 拢1.3聽billion in 2021 alone amid a surge in online fraud, with a nearly 40% rise in authorized push payment scams, according to UK Finance.
Fintech applications can聽be聽powerful tools聽which help reinforce money laundering controls, although fraudsters also see fintech applications as conduits for聽laundering activities. The聽greater number of transactions that fintech applications can promote, coupled with the continuous flow of money, especially across borders, and the potential for anonymous account-holding, are all characteristics聽which hold huge appeal聽for money launderers.
Financial services regulators have placed聽the onus on firms聽to have effective anti-money laundering (AML) controls in place, including for聽many of the disciplines that fintech applications purport to address, such as customer due diligence, know-your-customer checks, and transaction-monitoring arrangements. In fact, regulators have fined several financial services firms for failures in these areas. Regulators are also concerned that fintech applications聽may increase the risk of harm to customers and investors or reduce firms’聽operational resilience or systemic financial stability.
Crypto-assets, cloud computing, and payment systems have all been identified as needing to be brought inside the regulatory perimeter. These areas are now subject to regulations or are in the process of being regulated. This imposes another level of complexity on fintech applications.
Finally, the availability, or otherwise, of skilled staff and indeed firms’ ability聽to afford staff with the relevant聽knowledge may also be acting as a brake聽on聽the聽development of new fintech solutions or the purchase of聽existing applications.
The 2023 Fintech/Regtech survey聽identified a dearth of skills as one of the greatest challenges to the growth of fintech, with half of corporate boards聽surveyed reporting that they had had聽to widen their firms’ skill sets to accommodate developments in innovation and digital disruption. The need for additional skilled resource was聽balanced by the fact that some fintech firms were laying off workers, however.
Challenges for risk & compliance officers
For compliance officers, there is different perspective on the risks to which聽firms are exposed,聽highlighting the need to develop聽comprehensive聽yet flexible governance arrangements. This places greater focus on firms’ risk management frameworks,聽of course, making it more important to get third-party on-boarding processes right. Risk & compliance officers need to ensure that the risk of a fintech failing is fully explored when on-boarding a supplier.
The on-boarding process should also assess the skills and resources available to the fintech firm, and its聽plans to recruit聽or develop the necessary skills. Further, compliance officers need to ensure that, where there is a regulatory reason for engaging with a fintech application, all the relevant rules are covered and that the output from fintech solutions can be used to demonstrate compliance both internally to senior management, and externally to regulators.
Also, the adequacy of business continuity arrangements and exit strategies needs to be fully聽evaluated to ensure that, should the fintech no longer be unavailable, the detriment to customers, shareholders, and the wider financial services sector is聽offset.
Firms that have solid risk and governance frameworks聽that provide for the regular review and updating of risks may already have managed the risks associated with a changing fintech marketplace. It would, however, be prudent for firms to reassess their relationships to聽prevent the market downturn聽from聽disrupting the supply of services and placing the firm at greater risk of financial loss, customer detriment, and regulatory scrutiny.
