Banks have witnessed a marked decrease in branch usage as digital banking tools and fintechs have increasingly become the norm. The drive to adopting more and more sophisticated digital technologies is moving from ‘nice to have’ to ‘must have.’
Fintechs are tasked with ensuring the security of the digital products and subscription services they offer so that they are not plagued by fraud and other malicious behavior. And mainstream businesses are more comfortable with adding financial products to their catalog.
To adjust to this new reality, organizations must continue to adapt, and adapt quickly. They must also identify and manage the risks they face in their digital transformation journey.
What does digital transformation entail?
In simple terms, digital transformation involves adapting with the times. This typically means adopting new technology, either as a replacement for manual services or for older tech that might now be outdated.
In the fintech space, an API-first approach is critical. This is where fintech platforms come in.
Fintechs play a key role in the democratizing access to financial products.
The end-to-end platform for financial products is ideal for modern and agile digital businesses that want to offer more to their customers, and remove banks as intermediaries. Fintechs can make access possible, penetrating more customer segments helping these groups become more confident digital users.
At the core, fintechs are API-first. Built for integrations into existing infrastructures, offering services via APIs. But it's more than just connecting a bunch of systems and functions. Any time there's money movement, there's risk.
With eyes wide open, here are the risks — and how to mitigate them.
Which fintech risks are most prevalent?
Many IT departments struggle to find a sense of balance as they adopt emerging tech. How can companies — many new to fintech — deploy new digital tools quickly and with confidence?
The first step is to identify the main risks they face. This article examines three types of risks organizations might prioritize when adding more digital solutions: Compliance risks, financial risks, and security risks.
Risk: Compliance
Compliance risk consists of the legal and financial penalties that may come from failing to abide by relevant legislature and other internal or external ordinances. Here are some common examples of compliance risk:
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- Regulatory uncertainty
In a rapidly changing environment with evolving laws and regulations, organizations might not fully grasp the compliance risks they face. - Data protection
Driven by data theft and breaches, consumers and lawmakers are increasingly wary, and new privacy guidelines and safeguards change, or are introduced, frequently. - Quality issues
All the company’s products and services must abide by a specific set of industry and other applicable standards. Failure to comply with these standards may result in penalties.
- Regulatory uncertainty
Just as brokers and bankers must refrain from acting in their own best interest, organizations must do their due diligence in making sure their employees abide by applicable rules and regulations. This includes access to customer data and authorization controls.
Who owns compliance?
An increase in compliance ownership is paramount to addressing the above compliance risks — but what should this entail?
Initiating a compliance function and oversight is not a small task, but critical when handling other people's funds. The most effective compliance teams focus on risk management and ongoing monitoring. This means an active role in the design, implementation, and launch of financial products via embedded finance. This includes overseeing control processes.Being on the front line, applying specific processes and tools to ensure compliance, is vital. In addition, compliance departments translate various laws, rules, and regulations across all aspects of their business aiding in the application of those rules to the organization and across all teams.
It's not a one-and-done exercise. To ensure compliance, enterprises need to assess their compliance programs on a regular basis. In addition, the company in question must consistently evaluate its strengths and shortcomings to understand its overall risk culture.
Risk: Financial
The financial risks fintech organizations and ecommerce companies face are largely associated with compliance issues. By ensuring compliance with applicable rules and regulations, organizations can significantly reduce the threat of financial penalties.
This is especially critical for ecommerce businesses that have to deal with ever-growing fraud, as well as navigate sales tax and regulatory requirements across a range of states and territories. Noncompliance can lead to deficiencies that might not only result in penalties, but in other consequences that can severely impact operations and cash flow.
Finding the right embedded finance partner can alleviate the financial risk. Fintech on its own is an enabling technology, however, the program itself requires oversight and diligence. A robust fintech platform, offered by a regulated entity with compliance expertise will properly mitigate compliance, fraud, and security issues.
Risk: Security
Every time you collect consumer information or collect cardholder data to accept online payments, you face increased security risks.
With less face-to-face interaction in the financial services industry, hackers have increasingly begun turning to synthetic identity fraud and even account takeovers. Organizations can mitigate these risks by maintaining a strong internal control environment.
As the OCC reveals,
“Technological innovations are helping banks comply with the complex regulatory framework and enhance cybersecurity to more effectively protect bank and consumer data and privacy.” — Office of the Comptroller of the Currency (OCC), Dept of the Treasury
Fintech platforms are one such technological innovation. And also where digitizing internal processes may come in. Yielding more data, and using artificial intelligence (AI) to monitor user behavior to quickly identify potential fraud can help increase security in today’s digital landscape.
By managing the compliance, financial, and security risks you face, your organization can better oversee its digital transformation. Next, we’ll summarize how the right provider can help.
How the right embedded finance provider can mitigate the risks
Using embedded finance to mitigate the digital risks you face will protect your organization from compliance and security deficiencies. It also brings peace-of-mind to your customers, partners, and employees.
An API-driven solution allows companies to integrate financial services into their own brand experience. An embedded finance provider that has regulatory and compliance risk covered removes the risk, allowing the provider to leverage their licenses, compliance teams and experience to put you in a position of success.
Your #1 priority can become your biggest asset.
Alviere is a fully licensed, regulated financial entity.
Alviere provides comprehensive compliance, risk management, and security. This means full compliance and support for FDIC-insured bank accounts and strict Know Your Business (KYB) and Anti-Money Laundering (AML) standards and processes. Additionally, Alviere assures robust fraud and identity management protocols and PCI & SOC 2 certifications to safeguard your business, allowing your customers to operate with confidence and peace of mind.
Please contact us with questions or for more information on we can help in your journey to offering trusted financial products.
