Fintech has become a hot topic in financial services. Given that it now adds over £7bn p.a. to the UK economy, employs over 60,000 people and attracted over £1.8bn new investment into the UK in 2017, that’s not surprising. But far less has been written about what this fintech revolution will do for compliance.
The fintech movement is still at a relatively early stage, but we can already see that its impact on financial services will be profound. Retail consumers have seen the start of disaggregation of the value chain in banking, with increasing numbers using alternatives to their banks for foreign exchange or borrowing.
Specialisation has led to new credit models, including peer-to-peer lenders like Zopa, Ratesetter or Funding Circle, and SME focused banks such as Tide. Solutions are being offered to address poorly served needs, whether through lowering the cost of credit via links to employers, as in the cases of Neyber and Salary Finance, or through SME finance, as offered by Iwoka.
Traditional wealth management has competition from robo-advisors, including Nutmeg and Money Farm. Neo-banks such as Starling and Atom are offering faster and lower cost models for banking. In addition, increasing numbers of fintech solutions are looking to re-engineer banking back offices. We have seen blockchain solutions used to streamline transactions, machine-learning based approaches to credit and risk, and more.
It is a mistake to think of fintech as just a challenger. Most banks and large financial services institutions now see fintech as part of their future, with dedicated teams seeking to partner fintechs or to grow their own fintech solutions. This is both desirable and a necessity. A core tenet of UK Financial Services regulation is to use fintech as a lever for change, as illustrated by recent Open Banking regulations. If this is the future, FS institutions need to own it and drive it – and many are now actively doing so.
So, how will this fintech revolution change the role of compliance?
1. Assessing and managing the risk of new fintech models
The most obvious compliance challenge is assessing and managing the risk of new fintech models. Compliance teams are already used to looking at business models and identifying risk. On the conduct side, digital conduct risks can be rather different from the risks of face-to-face or telephone models, with evidence to show that consumer risk appetite online is different from face to face. Artificial intelligence (AI) presents new challenges - how do you manage the compliance audit trail when a credit risk decision is made by a ‘black box’ machine learning approach? New business models also raise their own challenges, from their prudential stability in a downturn, to the robustness of the underlying risk analysis.
2. Automation and streamlining of key processes.
The growing ‘reg tech’ movement is changing the way compliance works. A lot of compliance involves checking – whether for fraud, money laundering, customer due diligence, etc. Fintech is already revolutionising many of these checking processes - not just automating existing processes, but radically improving effectiveness and reducing false positives. Deep analytics enable far more data sources to be gathered – including geospacial information and biometrics. Transaction monitoring, looking at transaction data in real time using data analytics, machine learning and natural language processing (NLP), have huge potential to reduce fraud and conduct issues on the spot.
3. Complex supply chain management
As financial services value chains become more disaggregated, and new fintech partners secured across all parts of a business, compliance issues become ever more complex. It has long been understood that in many parts of business, a firm is only as good as its weakest link. Still, many small fintechs don’t understand the strength of compliance required nor do they have the resources to build a strong compliance framework. The current approach many institutions take of requiring long, lengthy legal agreements only protect an institution if the fintech understands what it is agreeing to. Many don’t. And the challenge for fintech teams, inside and outside of banking, is to work at pace, with the legal and procurement processes often cited as one of the biggest barriers to progress.
4. Increasingly real-time compliance monitoring
Looking back at some of the costliest financial remediation scandals, from LIBOR trading through to PPI mis-selling, the value of real time monitoring becomes clear. Identifying that trader who is having an inappropriate conversation, or the sales call which shifts from persuasion to an assumptive session, allows action to be taken before a major issue arises. On the data side, real-time monitoring of transaction data also offers huge potential to identify and act on risks quickly. All of this could allow managers on the ground to act fast to take remedial customer action, coach staff, or stop a fraud.
The fintech revolution is definitely coming for compliance teams. This should be seen as an opportunity, not a threat. Fintech potentially offers compliance far more tools with which to add value, and a more strategic role than ever before. But it will require change within compliance functions, from more strategic risk identification, becoming a partner in sourcing technology, and a real time business partner. All of this will offer the potential for compliance to add ever more value in a world of increasingly complexity.