Fintech regulatory compliance: Navigating the challenges with Vention

Fintech regulatory compliance refers to the adherence to all relevant laws, rules, and regulations impacting a fintech company. In practice, though, compliance requirements vary greatly between companies and can often seem like a maze of laws and protocols to navigate. 

No matter how pesky it can be, financial regulatory compliance is essential for any fintech company. It protects the business and its clients and helps avoid expensive — and potentially devastating — penalties for failing to meet regulatory standards. 

Achieving compliance in fintech involves understanding the complex web of financial laws established by both local and international regulators. Navigating this often requires a dedicated compliance expert or team to ensure complete adherence.

Over the past two decades, players in the fintech space have enjoyed a bit of a wild west environment, with some successful players operating under the radar and evading the attention of regulators and legislators. But recently, the public and government agencies have become more familiar with fintech's benefits and services — and, as a result, are cracking down on areas where the industry has often been less compliant.

Fintech regulations are designed to combat three major threats: data leaks, cyberattacks, and money laundering.

Fintechs often deal with a huge amount of personal data ranging from financial information like account numbers and security info to personal data such as names, contact info, and social security numbers.  

Without adequate protections, a single breach can lead to substantial data theft — and a severe blow to a company’s reputation. Consider 2024 stats by IBM: the global average cost of a data breach has reached $4.88 million — a 10 percent increase over last year and the highest total ever.

Cyberattacks are responsible for unauthorized access to mountains of private data every year, whether by stealing, altering, disabling, or destroying system functions and data. A cyberattack doesn’t inherently have to target data. Some cyberattacks specifically target the destruction of a system itself or restrict access to the system until a ransom is paid. In 2023, ransomware numbers surpassed a record $1 billion in payouts. 

A staggering 79 percent of financial institutions and 77 percent of investment firms cite cyberattack vulnerability as a primary concern affecting their transformation plans. Cloud intrusions alone increased by 75 percent in 2023.

The UN states that $800 billion to $2 trillion is laundered annually — equal to 2–5 percent of the global GDP. To reduce this illegal activity, countries institute anti-money laundering policies aimed at detection and prevention. The ultimate goal? To stop the flow of illicit assets before they are transformed or transferred across financial accounts.

From international to federal and state levels, US fintechs face a long list of regulatory requirements. Various acts and rules cover consumer protection, data privacy and safety, AML and KYC, financial services, and payments. 

To give you an overview, we describe the key regulations — their essence, covered entities, and geographies. Still, this info is by no means exhaustive.  Consult a professional compliance advisor to fully understand all applicable regulations and their nuances.

Regulations require effective enforcement. Here’s a look at the key agencies responsible for overseeing compliance for US-based fintechs:

The Financial Crimes Enforcement Network, or FinCEN, is a bureau of the US Department of the Treasury. It collects and assesses data relevant to criminal investigations, such as financial transactions, to identify domestic financial crime and international money laundering.

The Federal Trade Commission protects consumers and preserves a competitive business environment by weeding out what its mission statement calls “anticompetitive, deceptive, and unfair business practices.” The FTC has the authority to issue federal regulations and monitor businesses for compliance.

The Federal Deposit Insurance Corporation is charged with most bank regulations, including mobile banks. It not only insures bank deposits but determines if a bank qualifies for that insurance.

The US Securities and Exchange Commission handles compliance and regulation for all business activity related to the stock market. Its role is to protect both investors and the market itself. The SEC inspects companies for honest disclosure regarding the risk and value of the securities they’re offering. It also monitors securities brokerages to ensure fairness in their dealings with investors.

The Office of the Comptroller of the Currency, known as OCC, monitors banks for compliance with federal consumer protection laws, rules governing lending practices, and broader financial regulations that apply to most financial institutions.

The Consumer Financial Protection Bureau, or CFPB for short, oversees that consumers are treated fairly by banks, lenders, and other financial institutions.

With rising scrutiny in the fintech sector, noncompliance is a costly risk: fines ranging from thousands to millions of dollars, reputational damage, increased oversight, or even the suspension of operations. The cost of noncompliance, both literal and figurative, is simply too high.

Binance, the world’s largest cryptocurrency exchange, has to pay over $4 billion in fines and penalties due to the lapses in its AML programs.  In response, the company boosted year-over-year spending on compliance from $158 million to $213 million, purchasing new software to block and report suspicious transactions.  

Deutsche Bank and its US affiliates were fined $186 million for failing to fully address the earlier reported shortcomings in AML controls, sanctions compliance, and transaction monitoring.  

Overall, crypto and digital payments companies paid $5.8 billion in fines in 2023 for shortcomings in customer checks and anti-money laundering controls and for failing to uphold sanctions.

• Businesses must skillfully navigate the multi-layered and ever-changing compliance landscape, covering all the applicable regulations.  

• Cross-border operations can mean extra vigilance, as fintechs fall under the jurisdiction of several countries, and the chances are high they may become subject to several national regulations. 

• Proactivity pays off. Investing in compliance upfront is far less costly than addressing the fallout of noncompliance. 

• Pro forma compliance is hardly the best practice. Choosing robust, comprehensive measures over the bare minimum is key to avoiding issues and safeguarding long-term success.

There’s no universal template for fintech compliance. With so much diversity among fintech businesses, each company has its own path to compliance. However, some strategies can set you up for success no matter what corner of the fintech world your business occupies.

While compliance regulations are generally fixed, the specific requirements for a business vary by size, scope, and target audience. Whether your focus is payment processing, online banking, or another tech-based financial service, aligning your compliance efforts with your unique business needs is essential. 

This way, you ensure you meet all relevant regulations without wasting resources on unnecessary compliance.

You’ve looked at your business, you have an idea of your budget and your structure, and you’re ready to start building your custom compliance framework. Now what? 

The two most popular choices for fintechs are hiring an in-house compliance expert or outsourcing your compliance needs.  

• Hiring a designated compliance expert. Adding a compliance expert to your in-house team allows for the development of a comprehensive understanding of how your company maintains compliance. It also puts you on track to institutionalized archiving of those processes and the ability to course correct. You gain a go-to expert, advice, and implementation tailored to your business. 

• Outsource your compliance solution. Engaging an external compliance firm can be a cost-effective way to cover compliance needs, especially for smaller businesses or those with limited compliance expertise in-house.

Technology has revolutionized modern compliance, with advanced software streamlining and, in some cases, automating compliance processes.

Are there any fintechs that can be considered role models compliance-wise, you ask? Absolutely. Just look at the smart things Coinbase does to prevent illicit activities in crypto:  

• Embedded compliance processes: Coinbase integrates KYC checks during customer onboarding and throughout the lifecycle. 

• Dedicated compliance staff: It has a dedicated team of 400 employees (including senior personnel with the background of servicing US government national security and law enforcement agencies) and fosters strong law enforcement partnerships. 

• Advanced technology: Coinbase uses a sanctions screening tool and blockchain analytics to stay compliant and secure.

Advanced technology like artificial intelligence, machine learning, and blockchain is reshaping compliance in fintech by making operations faster, smarter, and more efficient.

AI and machine learning bring real-time analysis and automation to compliance tasks, making them indispensable tools for fintechs. Here’s how they deliver value: 

• Recognize usual and suspicious activities in real time by analyzing massive amounts of data across millions of users 

• Digitize the KYC process and verify users’ identities with precision and speed 

• Automate AML checks: verify submitted documents and check identities against the restricted list (i.e., sanctioned individuals, high-risk customers, and fraudulent users)  

According to the survey by Alloy, a panel of 200 professionals holding compliance-related roles in fintechs, 84 percent of the respondents are using or exploring AI or ML to help meet compliance requirements.

All blockchain’s key differentiators (decentralized storage, records immutability, and increased operations transparency) make it a natural fit for compliance: 

• Integrated smart contracts safeguard adherence to mandatory steps and conditions like obligatory identity checks and transaction limits 

• Secure, tamper-proof blockchain-based payments and transactions form a reliable and transparent record of user activities, available for the company and regulators 

• Strong data privacy, with encrypted personal data and access granted by the owner on a need-to-know basis

• Automated reporting to the regulatory systems (in case the relevant integrations are in place)

If you’re ready to elevate your compliance strategy with advanced technology, Vention is the partner to bank on. 

With experience across fintech sectors like payments and lending, Vention has integrated robust compliance solutions — ranging from KYC automation to AML monitoring — by harnessing AI, machine learning, and blockchain. These solutions don’t just mitigate costly risks; they also build user trust through secure platforms designed for long-term success.

Starting with the fundamentals, our consultants and fintech engineers build or enhance custom fintech solutions — both customer-focused products and user-focused enterprise apps — while helping ensure full compliance with relevant regulatory requirements.

Well-versed in advanced techs such as AI and blockchain, our engineers deliver any solution you need, from smart contracts to fraud detection or digital KYC tools.

We provide end-to-end cybersecurity services, from consulting and risk management to designing and delivering a robust security framework and tools. Our team is also available for a security audit of your standalone apps or entire IT infrastructures to identify vulnerabilities and compliance gaps and advise on remediation and improvement.

The industry focus is currently on understanding the state of the global fintech industry. 

Case in point: The World Economic Forum and the Cambridge Centre for Alternative Finance (CCAF) recently conducted profound research featuring a panel of 227 fintechs across five domains — digital lending, digital capital raising, digital payments, digital banking and savings, and insurtech — and six regions (Asia-Pacific, Europe, Latin America and the Caribbean, Middle East and North Africa, the US and Canada, and Sub-Saharan Africa). 

The study explored critical factors shaping the fintech landscape, including macroeconomic conditions, funding availability, and regulatory dynamics. While 63 percent of the surveyed fintechs reflect favorably on their regulatory environment, compliance still ranks third among the challenges fintechs face. Notably, fintech firms specializing in digital payments expressed even greater concerns about compliance. 

Forty-seven percent of the surveyed fintechs consider unfavorable regulatory environment as the second-largest factor (after macroeconomic factors) that can hinder a fintech’s growth. 

Another research reveals the following top compliance concerns: financial cost of compliance, economic loss from fraud, tracking and adjusting to regulatory changes, the appropriate number of full-time workers with necessary skills, and the ability to meet requirements. 

Ninety-three percent of the respondents believed that meeting compliance requirements was somewhat or very challenging. Eighty-six percent said their organization paid more than $50,000 in compliance fines last year; more than 37 percent spent more than $500,000.

The rapid evolution of the regulatory landscape over the past decade signals a future where tech innovation and regulatory oversight are increasingly aligned. So, one thing is clear: Fintechs can expect intensified efforts to integrate compliance more deeply with tech advancements. 

Two-thirds of fintech leaders surveyed by KPMG say they will invest in ‘secure by design’ principles over the next couple of years — embedding risk management, compliance, and operational excellence in product design rather than retrofitting after development. 

The reality is that fintechs relentlessly work to deliver new products and services and enter new markets. This means that not only their technological advancements but also their aspirations to go global should be considered. 

One key challenge — and opportunity — is the lack of universally adopted regulations.  Most laws remain nationally focused, so cross-border operations introduce additional complexity for fintechs as they must navigate and comply with multiple regulatory systems. 

This fragmented landscape not only complicates compliance, but also limits transparency for regulatory authorities. Addressing these gaps with more harmonized international standards could be the next frontier in fintech regulation. 

Disclaimer: The content on the Vention website is intended for general informational purposes only and should not be considered legal, financial, or professional advice. To the extent allowed by law, Vention disclaims all liability for any actions or inactions based on the material available on this website.

You can have a closer look at the regulations: 

Gramm-Leach-Bliley ActGramm-Leach-Bliley Act  

Payment Card Industry Data Security Standard  

Sarbanes-Oxley Act  

California Consumer Privacy Act  

Health Insurance Portability and Accountability Act

The New York Department of Financial Services

The US Securities and Exchange Commission