Compliance in the financial payments system is, understandably, a huge hurdle for smaller fintech startups. Compliance is extremely important for this market as it is what protects the payment system from fraud, international threats, and from threatening the system’s efficiency (systemic risks).
If you’re starting a fintech app, you may have come across this dilemma and have been asked to hire a compliance officer. But, is this always the case?
General Compliance Concerns in Fintech
Most entrepreneurs who have an idea for a fintech company (with no experience building one) are shocked to learn the intricacies of the industry. It’s possible to start a financial app with the ability to offer high-interest checking accounts with FDIC insurance, debit cards, credit cards, smart cash transfers, eBilling, loyalty programs, and more can be done, and you don’t need to be an institutional bank to do it.
“Compliance” in fintech means that your financial product is following the necessary banking requirements and regulations. Considering the amount of sensitive data and power that comes through financial systems, there are many laws that regulate fintech. Fintech businesses are not subjected to a fintech-specific regulatory framework, but instead are subject to a complex array of federal and state regulations.
- Licensing. Most fintech businesses will have to be licensed at the state and federal levels and are subject to regulation and supervision by each regulatory body. The required licenses vary but may include consumer lending, money transmission, and virtual currency licenses. This is also the case where the fintech might need licensing and supervision across multiple states.
- The Consumer Financial Protection Bureau (CFPB). The CFPB has jurisdiction over providers of financial services to consumers. Many businesses provide products to consumers, so the CFPB has the ability to enforce consumer protection laws (such as consumer lending laws and anti-discrimination laws).
- The Commodity Future Trading Commissions (CFTC) or SEC. Depending on the activities of the product, the fintech provider may be required to register for these agencies and be subject to their enforcement.
- FinCEN, BSA, AML. It is most likely that fintech companies (or their partnering financial institution) will need to comply with Bank Secrecy Act (BSA) and anti money laundering (AML) laws and regulations, which involve collecting customer information under Know Your Customer (KYC).
- OCC. The Office of the Comptroller of the Currency, the primary federal bank regulator for national banks announced in 2018 that they would accept special purpose national bank charter applications from fintech companies who receive deposits, lend money, and pay cheques. So if you choose to apply for this, then you’ll also be subjected to the OCC regulations and supervision.
While this may seem like many confusing and overlapping jurisdictions, know that regulators over fintech apps have not shied away from enforcing actions that violate a law, so it is paramount that each fintech business takes these regulations seriously.
What Does a Compliance Offer Do?
You may need to hire a Chief Compliance Officer (CCO) before you can sign on with a bank. In doing so, your CCO will need to draft multiple policies and present them to the bank (around 15 to 20 policies), which include:
- Complaint Management Policy
- Compliance Management System
- Customer Identification Program (CIP)
- Anti Money Laundering Policy (AML)
- Information Security Policy
- Third-Party Risk Management Policy
These policies can add up to about 500 pages of operational procedures, each of which the bank (or accompanying financial institutional partner) will need to approve. Unfortunately, this process can take up to 4-6 months. And, as you’ll want an experienced Compliance Officer, then this will be expensive as well.
In addition to this, fintech firms also need to be aware of the compliance regulations needs and ongoing monitoring throughout the operation of your product.
Compliance Officer vs. Fintech Partner App
As we have identified previously, if you are starting a banking business and you think you need a compliance officer, then it is most likely that you are going the route of partnering with financial institutions or bank partners, sourcing your own middleware for the fintech app development, and hiring a Chief Compliance Officer (CCO).
This is an extremely expensive route, especially for small fintech firms, and can be avoided by choosing a comprehensive fintech partner API, like Sila, who has the bank relationships that you need, embedded compliance features, like Know Your Customer (KYC), and support for managing regulatory compliance concerns within your business.
While we cannot provide any legal recommendations on this route, know that by partnering with Sila, you are provided with a stronger financial application architecture that has compliance features top of mind.
While we by any means won’t replace a compliance officer, we do offer a range of support services for compliance, namely our KYC API.
Moving Forward With Your Banking App
When you’re doing your research to start a fintech app, many startups get stuck on the number of things that need to be done to make this endeavor successful. At Sila, though, we believe that you should move forward with your banking app.
With Sila, you have:
- A couple of months to launch, which is much faster than partnering with a bank, or with banks and middleware, both which can take more than a year to launch.
- Less than $50,000 to launch, which is dramatically cheaper than to launch with banks and bank middleware, respectively.
- Less than $50,000 annually ($24,000 plus $0.10 to 0.20 for transaction fees), which is far more affordable than to launch with banks alone or banks and middleware.
- Your investment is a lot less work on fintech because the bank relationship is built-in. This is compared to partnering with a bank, which will require your effort for coming up with the banking app technology; and the bank and middleware route, which requires your effort for compliance, bank relationship, and vendor relationships.
When we compare these three options, it seems unbelievable that Sila would offer such an advantage over alternatives available in the market.
With Sila as your partner, a bootstrapped fintech startup can still gain access to:
- Sila’s full SDK stack and a sandbox where you can develop and test your app
- White-labeling
- An ACH API
- Sila’s Fintech Marketplace
Test our API sandbox today or visit our API Demo to learn more.