Managing Fintech Risk for Financial Institutions

The financial sector has experienced unprecedented changes in recent years due to the emergence of fintech. This has revolutionized the way customers handle financial transactions. The question is if financial institutions can benefit from this technology while minimizing regulatory risk. Fintech poses several financial risks, including data privacy and cross-border transactions. Firms in the sector must be proactive in evaluating and understanding the changing dynamics and adapt their risk management processes to handle emerging threats.

Fintech Has Grown Tremendously

Fintech has become a major threat to conventional banks in products and services covering anything from crowdfunding to e-commerce. For instance, there are more than 10,605 fintech startups in the US, making the nation a leader in financial innovation. The disruption caused by the fintech sector means that traditional banks must adapt to remain viable and profitable as smaller, tech-savvy competitors take a portion of their market share with innovative products and services.

The increased activity has given financial consumers plenty of choices. Most offer compelling benefits such as fee-free transactions and free global money transfers. Others offer low-cost but convenient payment services across multiple platforms. As the number and scope of competitors increase, banks need to find ways of providing innovative financial services without compromising on transactional integrity.

Risks 

As with any other revolution, fintech comes with a lot of inherent financial risks.

Speedy Transactions: The main selling point of fintech is that it facilitates fast transactions. However, the speed of transactions means that financial institutions must adapt their fraud detection and regulatory compliance processes to go at the same speed.

Cross-border transactions: Cross-border transactions pose new challenges as the identification process relies on the regulations in another jurisdiction. The rules on data privacy may differ by country while money laundering is also a pertinent issue.

Customer Ignorance:  Consumers need to be educated on the risks posed by fintech. Most are not conscious of the tradeoff between expediency and increased risk of privacy breaches and financial losses.

Regulatory Limitations: There is concern among industry experts that the scope of the existing regulations is not wide enough. Regulations lag behind fintech developments in some areas, while the existing laws may hamper innovation in other segments.

Fintech Bubble: Fintech could turn out to be another technology bubble. The financial industry needs to avoid being blinded by overhyped technology and be realistic in its expectations.

How Banks Can Manage Regulatory Risks

Understand technology: Financial institutions need to understand how fintech is changing the industry and take proactive steps. At the board level, firms need to evaluate how this technology affects their operations regardless of whether they own the technology or if it is the property of a customer or vendor.

Revamp Risk Management Practices: As new fintech innovations enter the market, financial institutions need to frequently review their risk management processes and make necessary adjustments. This means firms must regularly assess the implications of new technologies and implement the necessary controls for risk identification, monitoring, and mitigation.

Manage Expectations: There is a risk of bank executives getting carried away by the fintech hype and taking unnecessary risks or making unsound decisions.

Enhance Compliance: Financial institutions need to invest in fintech compliance capacity either by creating an internal talent pool or collaborating with consultancies.

Engage Policymakers: Banks need to be proactive in engaging regulators about regulatory gaps and pressing for changes necessary to protect their interests and those of customers.

Conclusion

When implemented properly, fintech has the potential to improve the quality of financial services offered by banks and enhance customer satisfaction. Ultimately, success will depend on how firms handle the risks posed by new technology.

Ensure that your organization is prepared for the fintech revolution by working with a reliable partner. Enformion helps financial institutions comply with regulations and avoid fraud. Start a free trial today.