FinTech Risk Management Framework & Regulation

Financial technology companies, more commonly referred to as FinTechs, are now facing potential disruption risk from industry regulators. The key to preventing disruption in business, and keeping your day-to-day operations online, is to create and implement a FinTech risk management framework. This way, not if, but when standards organizations and regulatory committees ultimately enforce regulations, you’ll be ready.

Need Help With Your Cybersecurity Program?

Accurately measure risk & automate compliance with Rivial Security.

The 5 Principles Of Effective Fintech Risk Management

FinTechs lacking a risk management program, and those that have programs in place that are subpar should implement the following principles:

1. Start at the Top

The executive management and board of directors of FinTechs have to understand mitigation plans, internal controls, and critical processes. It’s imperative that they take initiative to create a culture and organizational structure of eradicating risks and keeping strict protocols in place for everything from investment management to security and privacy.

2. Focus On Risk-Based Actions

A formal risk assessment program for FinTechs can identify the potential operational and regulatory risks by defining and documenting a risk framework. After establishing the framework, you should perform periodic testing for control mitigation and risk identification.

3. Effective Incentives

It’s a good idea to empower employees at all levels to speak up if they are aware of or feel concerned about risks. Lower, middle, and upper management should be open to communicating about risks with employees because they are seeing different things at their varying levels within the company. They should be encouraged to bring their concerns forward so they can properly be investigated.

4. New Product Risk Prevention

At some point FinTechs may be developing new products and/or services within their organizations. With every new offering, risk management must be a consideration. By thinking about potential risks ahead of time, you can prevent many of the issues that might otherwise come up

5. Accountability

All stakeholders in the organization, including both non-revenue producing and revenue-producing support staff, must be accountable for complying with established risk tolerances.

Need Help With Your Cybersecurity Program?

Accurately measure risk & automate compliance with Rivial Security.

What Are The Risks For Fintechs?

You might be wondering, what’s at risk, and why a FinTech risk management framework is so critical in the first place. Here’s what’s at risk when blindly doing business without consideration for potential regulations that could come down the pike at any moment:

1. Market Growth

Thanks to the evolution of smartphones and reliable internet, customers have become empowered to demand easier, faster, and more direct access to financial services. Fintechs offered innovative products that combine technology and a spirit of entrepreneurship in response. Companies who aren’t keeping risk management top of mind, will ultimately be left in the dust while their competitors thrive.

2. The Evolution of Technology

As technology evolves, creative approaches, new delivery channels, and business models evolve as well for companies to attract, interact with, and gain customer loyalty. With emerging technology comes greater risks related to financial account security, data privacy, the potential for money laundering, and more.

3. Collaborations

FinTechs are offering more growth opportunities than ever due to the recent rise in acquisitions, alliances and partnerships, and joint ventures. While this is helping institutions expand their conventional operations, growth yields more risk for security breaches, privacy concerns, financial account integrations, etc...

4. Regulatory Scrutiny

Most FinTechs are not banks, but because they are offering products that could be defined as “bank-like,” standards and regulatory associations are looking at imposing many of the same restrictions on them that financial institutions regularly incur. 

The U.S. General Accountability Office (GAO) for example, has analyzed four critical areas of FinTechs: distributed ledger technology, financial advice and wealth management, lending, and payments to assess the following:

1. Regulatory steps to encourage financial innovation in and outside of the United States
2. Regulatory challenges
3. Regulatory oversights
4. Protection, risks, and benefits for users

As a result of this analysis, the GAO has recommended that federal agencies evaluate the feasibility of adopting regulation practices that would directly impact FinTechs and subject them to fines and other penalties for noncompliance with standards and regulations agreed upon. Again, this is just one organization considering implementing standards of practice for FinTechs. Like the credit card industry, we suspect more organizations will start creating and enforcing regulations to do business.

Be Ready for Regulations to Hit FinTechs

If your business is not already actively working on a FinTech risk management framework, you could be looking at some serious setbacks in the event regulations are set and enforced. It’s better to start thinking about the risks in your company now before regulations become a reality. Depending on the nature of your unique company, you may already be facing standards and regulations that require compliance to avoid penalties. 

For those that have skirted the line, it’s time to get serious about your FinTech risk management. When you’re ready, bring in the professionals to help you with your risk assessment. 

Need Help With Your Cybersecurity Program?

Accurately measure risk & automate compliance with Rivial Security.