Creating a new fintech from scratch is an incredibly complex process. Founders need to define the concept, build the product, grow the team, attain approval from a bank partner, and get customers to try it out. From the founders’ perspective, all of these steps are necessary and require attention, but some could argue that compliance and regulation are some of the main factors founders need to address.
Matt Van Buskirk is Co-CEO at Hummingbird, a modern regtech platform for anti-money laundering. Matt is a regulatory futurist and an advocate for the development of open-source and interoperable software solutions for the regulatory space. Here he shares his thoughts as to why modern regtech is the key to a successful fintech.
Compliance is often viewed as frustratingly arcane table stakes, necessary to launch. Many fintechs go through the motions of putting a basic program in place to pass their bank partner’s diligence process but mainly view it as a check-the-box exercise.
This is certainly understandable. The compliance function won’t need to exist if the company can’t get off the ground, so some founders view investment beyond the bare minimum as a nice thing to do “someday.”
Historically, compliance has been a “people and paper” exercise that scaled through hiring, and going above and beyond only added intangible benefits such as avoiding regulatory issues down the road.
The advent of modern Regtech is changing this equation.
What is different now?
For the most part, the rules and regulations in place today were written 40+ years ago, before computers were commercially available. They are built on the assumption that all of the work would be done manually, requiring detailed policy and procedure documentation to (hopefully) achieve the desired result. Human error was unavoidable since everything was done by hand. Inefficiency was guaranteed.
In the intervening period, most technology development in the compliance space focused on implementing paper-based processes in software. This led to incremental improvements, but the fundamental problems persisted. No one took a step back to ask whether compliance programs could be redesigned, leveraging a tech-centric approach that is scalable, repeatable, and achieves the results regulators need to see. The mindset behind it should be very familiar to technologists – find a problem, take it back to first principles, and build a solution. Modern Regtech is the result of asking those questions.
Why should you care about Regtech?
The first and most obvious answer is that regulatory problems can kill a startup. Compliance is considered to be table-stakes for a reason – if a regulator takes issue with some aspect of your business, your bank partner is more likely to cut ties than go to bat for you. If you start to grow rapidly, your compliance function can scale either through technology or through people. Any fintech founder knows how difficult it can be to find compliance experts who can operate effectively in a startup environment. People will always be the bottleneck without better technology.
Regtech presents a means of meeting compliance obligations with more efficiency and accuracy, but that is just the surface result. For a fintech, the most significant benefit can be found in the title of a speech a friend of ours named Andrew Burt gave at SXSW: “Software Is Eating The Law: Regulating the Future – SXSW 2017 by SXSW.” We call it “compliance by design.” In simple terms, it enables you to embed regulatory requirements directly in your products and tools in the form of modular software components.
Traditional compliance functions assume that financial products will be delivered by people and that compliance teams will face a steady queue of quality control work to address the manual errors that will crop up. That need becomes redundant if the design of your product inherently produces compliant results. The compliance team’s role shifts from low value-add, repetitive tasks dealing with issues (after they have cropped up), to proactive design thinking aimed at baking requirements into the product – so the problems don’t manifest in the first place.
Compliance groups empowered by Regtech are a much more natural fit in agile technology companies – they start to view compliance requirements as engineering problems, a view with which technologists can identify.
Moving compliance from “expense” to “competitive advantage”
Compliance done the old way doesn’t allow for proactive thinking. There is too much to do daily to keep on top of things and avoid getting into regulatory trouble. On the AML front, this manifests in a focus on keeping the bad guys out of your platform – a never-ending game of whack-a-mole as criminals evolve constantly.
Investments in Regtech open the door to a new way of thinking about things – it isn’t about keeping the bad guys out; it is about identifying who your best customers are, learning their behavioural characteristics, and optimising the best possible experience for them. Once you understand what to expect from your good customers, it is much easier to look for weird and unexplainable patterns and focus on those.
What does this mean in practice? Founders focused on user growth worry that their compliance team limits user adoption by adding complexity to the onboarding process. Companies using Regtech effectively have often reduced “false-positives” by over 90 per cent. That is a lot of good customers who otherwise may have given up.
Implementing an efficient compliance function
For the fintech space, the advent of modern Regtech is transformative, allowing companies to scale quickly and safely without explosive compliance headcount growth. One only needs to look to the path the world’s largest fintechs have followed to see what is possible. The best of them have taken an engineering approach to compliance that incorporates modular components from multiple Regtech providers’ compliance tech stack for several years now. We strongly believe that the future of compliance functions across the industry will not look like the biggest banks today. Look to the Stripes and Squares of the world for a glimpse of what is to come.
