Top Fintech Challenges: Regulatory Risk and Fundraising

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In the early days, Fintech startups were proud to disrupt the financial services sector, unconstrained by regulatory requirements, stating, “We are tech companies, not financial institutions”, with funding in bountiful supply.

Fast forward to 2023, and the picture is now very different, where managing regulatory risk and obtaining funding are the two biggest challenges facing Fintechs.

This blog explores the regulatory risk facing Fintechs and how a part-time (or fractional) Fintech CFO can help early-stage companies build financial, operational and regulatory resilience, scale more efficiently, and support fundraising.

With contribution from Clemens Stromeyer, Part-time Fintech CFO

What are the regulations all Fintech companies must comply with?

First, let’s establish that whilst no Fintech-specific regulatory framework exists in the UK, Fintech businesses are governed by the following legislation and regulations:

KYC (Know Your Customer) and AML (Anti-Money Laundering)

KYC and AML (Know Your Customer and Anti-Money Laundering) guidelines are requirements for financial institutions to verify clients’ identity, suitability, and risks while addressing anti-money laundering concerns. These guidelines aim to prevent financial crimes by ensuring transparency, due diligence, and compliance with regulations.

The KYC framework comprises three components:

CIP (Customer Identification Program) involves collecting and verifying customer information to establish their legitimacy.
CDD (Customer Due Diligence) assesses customer risks by analysing financial activities, funding sources, and exposure to money laundering or terrorist financing (CTF)
EDD (Enhanced Due Diligence) applies to higher-risk customers, requiring more extensive investigations and ongoing monitoring to ensure compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations

Additionally, financial institutions must comply with regulations such as the EU’s 5th Money Laundering Directive (MDL5) and the Financial Conduct Authority’s (FCA) Crypto AML rules, which specifically address anti-money laundering measures in cryptocurrency transactions and services.

KYC and AML, along with the emerging focus on KYB (Know Your Business) and KYTP (Know Your Third Party), are increasingly important due to evolving financial crimes and heightened regulatory scrutiny. Adhering to these guidelines and regulations helps CFOs and Fintechs mitigate risks, prevent financial crimes and CTF activities, and maintain compliance in a changing landscape.

PDS2 (Payment Services Directive Two)

PDS2 is an EU directive implemented in January 2016 that mandates payment systems providers to enhance customer authentication processes. It applies to all payment operations within the European Union (EU). In the UK, compliance with PDS2 is enforced through the Payment Services Regulations (PSR), which ensure adherence to the directive’s requirements.

Payment Institutions (PIs) and Electronic Money Institutions (EMIs) in the UK are bound by the PSR to comply with the directive’s customer authentication standards. They must implement robust authentication measures for payment transactions and access to sensitive customer data, with a particular emphasis on strong customer authentication (SCA) involving multi-factor authentication. Non-compliance with the PSR can lead to penalties, reputational damage, and potential restrictions on business operations.

GDPR (General Data Protection Regulation)

This set of laws (adopted by the UK following Brexit) governs the storage and use of customer data. It establishes strict regulations to protect the privacy and rights of individuals when their personal data is collected and processed by businesses. The core principles of GDPR include transparency, accountability, and the lawful processing of personal data. It imposes obligations on businesses to secure and dispose of customer data no longer in use, implementing measures such as encryption and regular security assessments while also requiring the reporting of data breaches within 72 hours.

How can a Part-time CFO mitigate regulatory risk and manage compliance?

A CFO can contribute to mitigating regulatory risk and managing compliance by leveraging their experience and network of advisors. Here are some ways the CFO can play a pivotal role:

Regulatory Expertise: Drawing upon their experience, they can identify potential regulatory risks and proactively address them. Staying up-to-date with evolving regulations and best practices within the Fintech sector is crucial for effective risk management.

Establishing Compliance Frameworks: Collaborating closely with stakeholders, including legal and compliance teams, the CFO can help develop and implement robust compliance frameworks aligned with relevant regulations. These frameworks should encompass data protection, anti-money laundering (AML), know your customer (KYC), consumer protection, and information security.

Regulatory Permissions: Their network of advisors becomes a valuable resource in navigating the process of obtaining regulatory permissions. This network can be used for guidance, insights, and connections that expedite the application process, such as securing licenses from regulatory bodies like the UK’s Financial Conduct Authority (FCA).

Compliance Processes: They can actively contribute to streamlining compliance processes to ensure adherence to regulations while minimising operational burden. By collaborating with internal teams, they can establish efficient procedures and explore opportunities for automation.

External Relationships: Building and maintaining strong relationships with legal and compliance advisors, regulatory bodies, and other stakeholders is crucial. Participation in industry forums and conferences enables the CFO to stay informed about emerging trends, regulatory developments, and compliance best practices.

Through their experience and network, the CFO can guide the Fintech startup in navigating regulatory complexities, establishing robust compliance processes, and earning a reputation for trust and reliability within the industry.

What does the 2023 investment landscape look like for the Fintech sector?

According to The Fintech Times, after reaching a record $238.9 billion in 2021, total global Fintech investment fell to $164.1 billion in 2022. They further claim that 2023 will likely remain subdued for Fintech investment as investors make safer investments.

There is, however, optimism that this will improve as the year progresses. The UK is at the forefront of global financial technology, with London ranked as the most Fintech-friendly city in the world, so it is an attractive market for investment. While it is difficult to obtain investment, it is not impossible with the right type of support.

How can a Part-time Fintech CFO reassure investors that their money is safe?

A Fintech CFO is crucial in reassuring investors that their money is in safe hands. Here are some ways they can provide this assurance:

Transparent Financial Management: The CFO ensures transparent and responsible financial management practices within the organisation. This includes maintaining accurate financial records and implementing robust controls. A commitment to financial integrity instils confidence in investors regarding the safety and security of their funds.
Compliance and Regulatory Adherence: The CFO prioritises compliance with relevant regulations. They establish and maintain robust compliance frameworks, monitor regulation changes, and ensure the organisation consistently meets its obligations. A proactive approach to compliance shows investors that the company operates within the boundaries of the law and mitigates the risk of potential regulatory issues.
Financial Reporting and Investor Communication: The CFO ensures timely and accurate financial reporting to investors. Providing clear and comprehensive financial statements, along with regular updates on the company’s financial performance and key metrics, demonstrates transparency and allows investors to make informed decisions. Regular communication with investors, addressing their concerns, and providing opportunities for dialogue can also help build trust and reassure them of the company’s financial stability.

Why is a Part-time CFO a must-have for an early-stage Fintech company?

Few early-stage companies can justify the additional cost of a full-time CFO, with most making do with just a finance resource.

But CFOs bring a deeper and more strategic financial perspective and a wealth of practical know-how.
They bring a network of connections within the Fintech industry, including advisors and investors.
A part-time CFO brings agility and adaptability, helping a startup to quickly adjust its financial strategies and respond to market changes, keeping the company nimble and competitive.
They will build financial, operational and regulatory resilience to scale the business more efficiently.
A part-time CFO can provide valuable guidance on capital management, optimising cash flow, and identifying new fundraising opportunities.
They offer all the benefits of a full-time resource but at a fraction of the cost.
A part-time CFO with Fintech-specific experience brings knowledge of the industry’s unique challenges, regulations, and trends, enabling them to provide targeted support.

Author’s Biography

Written by Clemens Stromeyer, Part-time Fintech CFO an accomplished CFO/CEO with extensive financial, operational, M&A and regulatory experience. He possesses a 20-year background in driving growth and achieving business goals for startups and SMEs in diverse industries, including technology, fintech, retail, e-commerce and services.

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