With increasing regulation of the financial sector, compliance is proving to be expensive for tight-budgeted start-ups. Incumbent wealth managers should be ready and equipped to help fintech firms when partnering with them.
One of the main challenges fintech companies are struggling with at inception is compliance, as the financial industry happens to be one of the most regulated sectors. In the early stages of development startups are trying to reduce operational costs and focus their expenses on winning new business, and so compliance can easily become low-priority.
The major issue fintech companies often face is a lack of clarity in regulation. As new entrants are aiming to disrupt the industry, their products and ideas do not always fit nicely into existing frameworks. It is also challenging to navigate across different legal specialties – some of which are incompatible – especially when it comes to operating internationally. On a more positive note, there is now a greater tendency for countries to create common regulations (such as the UK’s “Fintech Bridge” scheme) and sandboxes within which fintech start-ups can test their technological solutions. Some countries, like Switzerland or Singapore, have recently launched specific “fintech licenses” to encourage innovation.
Nonetheless, often regulators find it difficult to follow the pace of new developments in technology and what may be considered compliant today, may not be as such tomorrow. The future of financial regulation remains cast with uncertainty, especially for fintech companies.
And non-compliance can be costly. In 2015, Ripple Labs, a fintech start-up, received a $700,000 fine for not complying with US regulation. Although no risk means no business, non-compliance can easily force challengers out of the market. Maintaining their reputations is essential to growing business and building the trust of consumers and stakeholders, crucial for long-term business sustainability.
Financial services incumbents, particularly in the wealth management space, know well that compliance can be a challenge, not only for the immense costs it entails, but also for the long-term damage non-compliance can cause to a company’s image. However, these bad experiences should translate into good advice for challengers. As we are seeing an increasing number of robo-advisors partner with traditional providers to grow business, they can benefit from the knowledge, expertise, and experience of incumbents’ committed legal teams.
Without incumbents’ help, start-ups will have to seriously invest in compliance from the start of a project, bringing in expertise, in order to avoid the risk of the investment being burnt away with legal disputes. However, for robo-advisors it can mean higher operational costs and higher fees for clients, undermining one of the key advantages they have over traditional competitors: pricing. This is just another reason for robo-incumbent partnerships – using existing and developed legal frameworks, challengers can focus on what they are best at: innovation.
By Silvana Amparbeng, Wealth Management Analyst