Technology is having a significant impact on innovation around the world. Most industries are evolving at an amazing rate and in a few years earth as we know will be completely different. Nevertheless the story with financial services is not quite the same. Fintech innovations are more difficult to introduce because every time a startup attempts to disrupt an industry, regulation gets in the way. Juan Llanos, an experienced Fintech and Compliance Executive and Advisor, addressed the subject at the FINNOSUMMIT in Bogota last February 16th, and offered insights into how startups can cope how with regulation and not lead directly into a shipwreck.
Llanos focused on Regulatory Risk, which is the risk of not meeting with required obligations and therefore being subject to fines or other forms of punishment. He divided up his presentation into four main subtopics: risk rationale, risk identification, risk mitigation and risk strategy.
In the segment risk rationale, Llanos explained that regulation exists because it is trying to protect society from the loss of value, property, and, in the case of countries, the loss of power, as is the case with international regulations and sanctions. Policy makers are concerned with negligence, imprudence, malpractice and abuse and the rules are made to avoid the happeningof these situations. Understanding this is the basis for being able to build a product that can pass regulatory scrutiny. Financial services entities must be responsible for protecting consumers’s funds if they are to create trust. The bottom line is that regulation is inevitable for Fintech startups, yet it is valid and makes sense because there are many risks in handling money. Fintech needs to offer services in a responsible way. The question is how.
Regulations are created by governments, who study possible risks and later issues rules to prevent them. The higher the risks a company poses, the higher the obligations it will need to comply with, such as obtaining a license, before being able to launch its product. With this in mind, Fintech startups must be aware that the lean startup process doesn’t really work in financial services, so it’s no wonder there is little innovation in the industry. So in order to cope with regulation, Llanos advices building a minimum viable compliant product:
- Always understand the flow of data and money: study the regulations, and establish clearly who touches the money.
- Life-cycle management and the right mix of detective and deterrent techniques including effective training, are key: define the entire cycle of the product from beginning to end. Monitor relationships among all entities.
- Document or perish: always leave a trail, hopefully digital.
- Focus on behaviors: “What customers do speak so loudly that I cannot hear what they are saying.”
If the startup already has all of this in order, the only thing left to do is to change the mindset about regulation and try to perceive it as an advantage. The goal is to find a new and more favorable way to approach regulation, like David Sachs, CEO of Zenefits said “For us, compliance is like oxygen. Without it, we die.” The way to do it is by focusing on the underlying purpose and values of the rules, which will facilitate compliance without compromising performance and choosing to spend more money on good engineers that will know how to built a tool that will pass the regulation standards instead of hiring lawyers to find loopholes. The Fintech expert explained his strategy of the three I’s: Innovate, reinvent the world; Implement, set mandatory rules; Influence, seek to persuade the right policy makers, who have the power to change the law. The combination of the three will give as a result a Responsible Evolution. To built a new world innovators will have to negotiate with the government. Entities will probably need to trade lots of data off for up front permission from the government. It is a simple exchange of permission for transparency that will allow us to move to a more innovative future.
Llanos concluded that “regulation is inevitable yet valid, and compliance results expensive yet valuable.” Regulation is the number one obstacle to financial innovation and startups will have to cope with it. Governments will have to someday change regulation system and reinvent it to fit innovations into a new system that will equitably protect the value of users. Innovations have put paradigms into question but there is still a long way to go and there will have to be compromises from both sides of the industry. The Fintech expert ended his presentation with this important question: “If we live in a very connected world, where the internet has made us all global, why is sovereignty still the same? If we are all global citizens today, why is jurisdiction still national or municipal or even local? Jurisdiction should be redefined to fit worldwide patterns.”