Fintech: Is There Expansion at the Expense of Risk and Compliance?

On April 11, Bloomberg reported on the contrasting growth plans of traditional financial firms and fintech companies in Europe.  Even as a bevy of financial firms in Europe and North America are cutting or expecting to cut staff, Société Générale SA, fintech in the United Kingdom saw a 61 percent increase in new fintech roles last year, and “hired aggressively in the first quarter” according to Ollie Sexton, a principal at the recruiting firm Robert Walters.

While United Kingdom fintech jobs numbered only 76,500 in 2018, the City of London projects that that number to increase to 105,500 job by 2030.  Noting that many fintechs are working to make dramatic changes in the financial industry, Sexton said that a “large proportion of jobseekers and those open to taking new positions are looking to join startups experiencing hockey stick growth rather than companies making large-scale redundancies or going through an internal restructure.”  At the same time, Sexton commented that in 2019 “firms have focused on the tech side of fintech, adding developers and engineers instead of bulking up in financial functions like risk and compliance.”

Note: Financial-industry observers – including risk and compliance officers at firms doing business with fintech companies – should take note of this article.  If fintech entrepreneurs, in the United Kingdom and elsewhere, aggressively seek to expand operations and market share without providing proportional increases in staffing and funding for risk and compliance functions, they may be setting their companies up for significant compliance problems in short order.

Recent events in the fintech world bear that out.  As the Bloomberg article correctly recognized, just last month United Kingdom fintech company Revolut attracted the attention of the Financial Conduct Authority and the media because of concerns about the company’s sanctions screening process.  In addition, according to Handelsblatt, earlier this week the German financial regulator BaFin identified numerous deficiencies at smartphone bank N26 that N26 is required to address as soon as possible.  Those deficiencies reportedly included instances of external fraud against N26 customers and poor accessibility when other financial institutions sought to contact N26 about fraudulent transfers.

Consequently, financial firms that may be interested in doing business with, or even acquiring, a fintech firm should be prepared to ask detailed questions to determine the true state of the fintech firm’s compliance programs.  Every unicorn, no matter how attractive, may have a sharp horn, and passionate predictions about future growth and profitability are no substitute for facts in calculating risks.

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