Balancing Agility and Speed with Preparation and Stability: Importance of Governance in a Fintech Startup

In all our work with clients, my evaluation and expectations around compliance readiness come down to one point: Governance. This can mean a variety of things when it comes to a compliance program, but overall, we boil it down to the level of planning and organization built into the design of a client’s business, platform, and services. 

In many other professions and service offerings, the product and environment truly lend themselves to agility, speed to market, priority of marketing strategy, and the “fail fast” mentality; do and then learn. However, the financial products and services sector is a different world. Many clients and their founders – brilliant, talented leaders with great ideas, but who have spent little to no time in financial services and entered the space for the first time – find very quickly that moving, directing the movement, or sometimes even the mere visibility to end-user funds passing through their platforms has thrust them into the world of significant regulatory, legal, and industry standard bank partner and other third-party expectations. Those expectations are most often centered on Anti-Money Laundering (AML), fraud, information security, and consumer protection (when dealing with individual end users). New entrants to the space are sometimes surprised as they begin to understand the significant lift involved in the up-front obligations, and the reasons these are so difficult for startup Fintechs, in particular, are worth exploring. Many of these elements will likely be familiar to those already on their journey to navigating these waters for the first time.

The Challenges

Implementing governance and compliance policies can be particularly challenging for startup companies due to several factors:

LIMITED RESOURCES

• Financial Limitations: Startups often operate with limited budgets and may struggle to allocate sufficient funds to develop and maintain comprehensive compliance programs.
• Human Capital: There may be a shortage of experienced personnel dedicated to compliance. Startups often have small teams where employees wear multiple hats, making it difficult to prioritize compliance tasks.

RAPID GROWTH

• Scaling Challenges: As startups grow quickly, their operations, customer base, and geographic reach expand. Ensuring that compliance policies keep pace with this growth can be challenging.
• Process Integration: Rapid scaling can make it difficult to integrate compliance processes seamlessly into everyday business operations, especially when trying to maintain agility and flexibility.

LACK OF EXPERTISE

• Regulatory Familiarity: Startups may lack in-depth knowledge of the complex and ever-changing regulatory landscape. Understanding and keeping up with regulations requires specialized legal and compliance expertise, which may not be readily available.
• Experience: Many startup founders and employees may be more focused on innovation and growth rather than regulatory compliance, which can lead to gaps in knowledge and execution.

COMPLEXITY OF REGULATIONS

• Diverse Requirements: Fintech startups often face regulations that vary widely by region and type of service offered. Navigating these diverse and sometimes conflicting requirements can be overwhelming.
• Frequent Changes: Regulatory environments are dynamic, with frequent updates and changes. Keeping up to date with these changes and adjusting compliance policies accordingly requires ongoing effort and vigilance.

PRIORITIZATION ISSUES

• Focus on Growth: Startups are typically focused on rapid growth and market penetration. Compliance may be seen as a secondary priority compared to developing products, acquiring customers, and securing funding.
• Short-term vs. Long-term: The pressure to achieve short-term milestones can lead to a de-prioritization of compliance, which is often seen as a long-term investment.

COST OF IMPLEMENTATION

• Initial Costs: Developing and implementing compliance policies can be expensive, involving costs for legal advice, compliance software, training, and ongoing monitoring.
• Ongoing Maintenance: Maintaining compliance requires continuous investment in monitoring, auditing, and updating policies, which can strain the financial resources of a startup.

CULTURAL RESISTANCE

• Startup Culture: Startups often thrive in a culture of innovation, speed, and flexibility, which can be at odds with the structured and sometimes rigid nature of compliance processes.
• Employee Buy-in: Getting buy-in from employees who are used to a less structured environment can be difficult. Employees may view compliance as a hindrance rather than a necessity.

Despite these challenges, founders and businesses inevitably find that implementing effective governance and compliance policies as a first priority is essential for the long-term success and sustainability of Fintech startups. Overcoming these hurdles often involves leveraging external expertise, prioritizing compliance early in the business lifecycle, and fostering a culture that values regulatory adherence.

The Opportunity for Governance

Compliance governance is critically important for a Fintech startup and provides a stronger foundation on which to build. The strength of that foundation will be built on a number of core principles. 

REGULATORY ADHERENCE

• Avoiding Legal Issues: Fintech startups operate in highly regulated environments. Compliance governance ensures that the company adheres to relevant laws and regulations, avoiding legal penalties, fines, and sanctions that could severely impact the business.
• Navigating Complex Regulations: The financial industry is subject to complex regulations that vary by region and the types of services offered. Effective compliance governance helps navigate these complexities, ensuring the startup prepares and meets all necessary requirements.

BUILDING TRUST AND CREDIBILITY

• Customer Confidence: Compliance with regulations instills confidence in customers and partners that the startup operates ethically and transparently. This is especially critical in financial services where trust is paramount. Clients who implement a legitimate governance strategy often find it to be one of the most significant marketing points and a source of strength in their discussions with partners and investors.
• Investor Confidence: Investors are more likely to fund startups that demonstrate robust compliance practices, as it indicates a lower risk of regulatory issues and potential financial penalties.

RISK MANAGEMENT

• Operational Risks: Effective compliance governance helps identify and mitigate operational risks associated with financial transactions, data security, and customer interactions.
• Financial Risks: It reduces the risk of financial losses due to non-compliance penalties and potential lawsuits.

DATA SECURITY AND PRIVACY

• Protecting Customer Data: Fintech startups handle sensitive financial and personal information. Compliance with data protection regulations (like GDPR or CCPA) is essential to safeguard this data and avoid breaches.
• Reputation Management: Data breaches or misuse of personal information can severely damage a Fintech startup’s reputation. Compliance governance ensures proper data handling and protection mechanisms are in place.

MARKET ACCESS AND EXPANSION

• Entering New Markets: Compliance with international regulations is often required to enter new markets. A strong governance framework makes it easier to comply with diverse regulatory requirements across different regions.
• Competitive Advantage: Demonstrating strong compliance can be a competitive differentiator, positioning the startup as a trustworthy and reliable entity in the eyes of customers and partners.

LONG-TERM SUSTAINABILITY

• Ethical Operations: Compliance governance promotes ethical business practices, which are essential for long-term sustainability and success.
• Adaptability: A robust compliance framework helps a Fintech startup adapt to changing regulatory landscapes quickly, ensuring ongoing compliance and reducing the risk of disruption.

Compliance governance is crucial for a Fintech startup to ensure legal adherence, build trust, manage risks, protect data, enable market expansion, and sustain long-term success.

Ankura understands that prioritizing these principles can often mean trying to strike what feels like a very delicate balance. However, the good news is that we are here with the background and expertise to help our clients walk the tightrope. Our Outsourced Compliance and Advisory Service was born from the experience of building the documentation to support compliance programs and then filling the needs to enable a business in implementing and running those programs on a day-to-day basis. Committing to policy obligations on paper is just the first step in a long journey, assuming our clients’ goals are the same as ours, tremendous success and growth for their business.

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^{© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.}