Category: Fintech

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The Complete Guide to Balance & Audit Confirmations

what are Balance & Audit Confirmations

Balance & Audit confirmations are highly misunderstood when it comes to auditing. For businesses to boast about financial accuracy, balance & audit confirmations are absolutely necessary.

In this guide, we’ll break down everything you need to know about balance audit confirmations.

What Are Balance & Audit Confirmations?

At their core, balance and audit confirmations are a way for auditors to double-check financial information. They’re the fact-checking part of the process, this is where the auditors reach out to third parties (banks, customers, suppliers, and other financial parties involved) and verify details like account balances, outstanding invoices, or loan terms.

Auditors conduct double-checks to ensure that the financial information provided by the firm is accurate. 

There are a few types of confirmations:

  • Positive Confirmations: Positive confirmations require a response from the third party. Auditors may send some form of communication to a third party (bank) asking them for confirmation whether the bank accounts have the same balance as stated on bank statements. 
  • Negative Confirmations: These types of audits only require a response from the third party if there’s something wrong with the data. These are less common and typically used for low-risk accounts.
  • Blank Confirmations: Bank confirmations are different from the other two options. Auditors leave all the details blank and ask the third parties to fill in relevant information. This method is rarely used but can be helpful in specific scenarios.

For businesses operating in the U.S., positive confirmations are the go-to choice, especially for high-risk accounts. 

Positive confirmations help auditors get a clear-cut picture of the entire financial financial information of a business. If there are any red flags, only then the auditors dig deeper.

Why do Bank & Audit Confirmations Matter?

Financial statements are only as good as the data. Audit confirmations are a reality check, ensuring that the numbers paint a real picture. Here’s why they’re non-negotiable:

  • Accuracy: The primary reason to use balance & audit confirmations is to ensure that the financial records are accurate. Let’s assume, brand X claims it has $1 million in the bank, a confirmation from the bank verifies that this is true.
  • Fraud Prevention: The second reason why they are important is to reduce the risk of financial fraud as much as possible. They help uncover discrepancies that might indicate fraudulent activity.
  • Compliance: For U.S. companies, they’re a must to meet PCAOB and SEC compliance. Not meeting these regulatory compliances can lead to regulatory fines and open the business to fraud risk.
  • Trust: They give investors, regulators, and stakeholders confidence that the numbers are legit. After all, no one wants to invest in a company with questionable financials.

When Are Confirmations Used?

Confirmations are not a part of a business’s regular operations. Confirmations usually happen during annual audits or when there’s a red flag in the financials. For example:

  • Verifying bank balances at year-end.
  • Confirming outstanding customer invoices.
  • Checking loan balances with lenders.

In the U.S., they’re especially critical for public companies under the watchful eye of the SEC and PCAOB. Private companies also use them, though the process might be less formal.

How do Balance & Audit Confirmations Work?

Here’s the step-by-step breakdown of how balance and audit confirmations are conducted:

  • Planning: The first step is identifying which accounts need confirmation and who to contact. This might include banks, customers, suppliers, or lenders. Auditors also decide whether to use positive, negative, or blank confirmations.
  • Preparation: Next, auditors draft the confirmation letters. These letters need to be clear and detailed, including information like account numbers, balances, and dates. In the U.S., these letters must comply with PCAOB standards.
  • Distribution: Once the letters are ready, they’re sent out to third parties. While traditional mail is still used, electronic platforms like Confirmation.com are becoming the norm because they’re faster and more secure.
  • Follow-Up: Not everyone responds on time—or at all. Auditors need to track responses and follow up with non-responders. This step can be time-consuming but is crucial for a thorough audit.
  • Documentation: Finally, auditors document every step of the process. This includes keeping records of all confirmations sent, responses received, and any discrepancies found. PCAOB standards require thorough documentation, so this step is non-negotiable.

Common Challenges in Balance & Audit Confirmations

Confirmations are tricky, without proper frameworks to support it, audit confirmations would not be able to provide the legit information. 

  • Non-Responses: Some third parties just won’t reply, no matter how many times you follow up. This can delay the audit and create headaches for everyone involved.
  • Errors: Even when they do respond, the information might be wrong. For example, a bank might confirm the wrong account balance due to a clerical error.
  • Fraud Risks: In rare cases, parties might collude to falsify information. This is why auditors need to approach confirmations with a healthy dose of skepticism.
  • Time Crunch: Audits move fast, and confirmations can slow things down. This is especially true for large companies with hundreds or thousands of accounts to confirm.

Balance & Audit Confirmation Best Practices

To avoid mistakes, reduce the risk of fraud, and ensure the audit confirmation process goes smoothly, there are a few best practices auditors can follow:

  • Start Early: Try to get a head start, confirmations take time, so start the process as soon as possible. Delays can cause panic in meeting deadlines, which leads to clerical errors. 
  • Leverage Technology: Businesses should leverage online solutions to fast-track the process. DIRO’s balance & audit confirmations can verify and fast-track your audit bank confirmations. Streamline the audit confirmation process and get access to the bank balance, transactional data, and more in real time. DIRO simplifies the audit confirmation process with original data directly from the bank source, which can save you hours of manual work. 
  • Be Clear: Auditors need to make sure that their confirmation requests are easy to understand. Ambiguity can lead to delays or incorrect responses.
  • Follow-Up: While there will be non-responses, keep following up to get a clear picture of all the information. Without persistently following up, audits may not be able to get clear information on the financial information. Following up is key to getting the information you need.
  • Stay Compliant: Keep PCAOB and SEC requirements front and center. This includes documenting every step of the process and addressing any discrepancies promptly. DIRO’s balance & audit confirmations help you stay compliant with relevant regulations to keep your business protected from fraud and instances of regulatory fines. 

Common Mistakes to Avoid During Balance & Audit Confirmations

Mistakes are a part of the process. Here are some of the most common mistakes auditors make. Keep them in mind for your next audit: 

  • Waiting Too Long: Waiting till the last moment to send confirmation is a mistake. Any delays from the third party’s end will ultimately derail your timeline. Get a head start on sending confirmations and following up. 
  • Poor Documentation: Confirmations are conducted to get a clear picture of a company’s financials. Make sure you’re documenting every step of the process in case any issues arise in the future. To meet PCAOB standards, you have to maintain thorough documentation, so don’t cut corners.
  • Ignoring Small Discrepancies: Even minor discrepancies can signal bigger issues. Always investigate and resolve them.

The Bottom Line

Balance and audit confirmations are tricky, time-taking, and challenging, but they help businesses prevent fraud and comply with regulations. They’re the backbone of financial accuracy, the safeguard against fraud, and the key to staying compliant in a heavily regulated landscape. Book a call with one of our experts to understand how DIRO’s balance & Audit confirmation solution helps your business.

FAQs

What’s the difference between positive and negative confirmations?

Positive confirmations require a response no matter what, while negative confirmations only need a reply if something’s wrong.

How do I handle non-responses?

Follow up persistently and document every attempt. If all else fails, consider alternative procedures.

Can confirmations be done electronically?

Absolutely. In fact, electronic confirmations are becoming the standard in the U.S.

What happens if we skip confirmations?

You risk inaccurate financial statements, regulatory scrutiny, and even fraud going undetected.

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How to Use Machine Learning in Financial Fraud Detection?

Financial fraud is a pervasive challenge in today’s interconnected and digital world. As technology advances, so do the techniques employed by fraudsters. Traditional methods of fraud detection are often insufficient to keep up with the evolving tactics of malicious actors. This is where machine learning (ML) plays a crucial role, offering a proactive and adaptive approach to identify and mitigate financial fraud.

In this blog post, we will explore how businesses can harness the power of machine learning for more effective and efficient financial fraud detection.

Understanding Financial Fraud

Before delving into the application of machine learning, it’s essential to comprehend the types of financial fraud that organizations face. Common examples include credit card fraud, identity theft, account takeover, and fraudulent transactions.

Traditional rule-based systems typically struggle to keep up with the dynamic nature of these fraudulent activities.

Machine Learning in Financial Fraud Detection

1. Data Pre-processing

Start with collecting and pre-processing data. Clean, relevant, and comprehensive data is crucial for the success of any machine learning model. Utilize historical transaction data, customer profiles, and other relevant information to train your model.

2. Feature Engineering

Extract meaningful features from the data that can help the model distinguish between legitimate and fraudulent transactions. Features may include transaction amount, frequency, location, device information, and user behavior patterns.

3. Supervised Learning Algorithms

Train your machine learning model using supervised learning algorithms. Commonly used algorithms include Decision Trees, Random Forests, Support Vector Machines (SVM), and Neural Networks. Train the model on labeled data, where each transaction is marked as either legitimate or fraudulent.

4. Anomaly Detection

Implement anomaly detection techniques to identify unusual patterns or outliers in the data. Unsupervised learning algorithms, such as clustering or isolation forests, can be effective in detecting deviations from normal behavior.

5. Behavioral Analysis

Leverage machine learning to analyze user behavior and detect deviations from normal patterns. This could include changes in spending habits, transaction times, or the use of unfamiliar devices.

6. Real-time Monitoring

Implement real-time monitoring systems that continuously analyze incoming transactions. Machine learning models can quickly adapt to new fraud patterns and provide instantaneous alerts, enabling swift intervention.

7. Ensemble Methods

Combine multiple machine learning models using ensemble methods to improve overall detection accuracy. Ensemble techniques, like bagging and boosting, can enhance the robustness of the fraud detection system.

8. Continuous Model Updating

Financial fraud tactics evolve over time, so it’s crucial to continuously update and retrain machine learning models. Regularly incorporate new data and adjust the model to stay ahead of emerging threats.

9. Imbalanced Data

Address the challenge of imbalanced datasets by employing techniques such as oversampling the minority class or using synthetic data generation.

10. Explainability

Ensure the interpretability of machine learning models, especially in industries with regulatory requirements. Transparent models can help in explaining the reasoning behind fraud alerts.

11. Integration with Existing Systems

Seamlessly integrate machine learning-based fraud detection systems with existing fraud prevention infrastructure, ensuring a smooth transition and coexistence with legacy systems.

Conclusion:

Machine learning offers a powerful arsenal in the fight against financial fraud. By harnessing the capabilities of advanced algorithms, businesses can enhance their fraud detection capabilities, adapt to evolving threats, and safeguard their financial ecosystems.

As the digital landscape continues to evolve, leveraging machine learning for financial fraud detection becomes not just a competitive advantage but a necessity for maintaining trust and security in the financial industry.

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Fintech Cybersecurity Best Practices

best practices for fintech cybersecurity

FinTech firms have become a favorite for fraudsters globally. According to a report, FinTech firms faced 2.5 times more attacks in Q1 2022. FinTech firms deal with sensitive customer data, so they’re a goldmine to fraudsters. The data stolen is used for financial fraud and only makes it that much harder to detect fraudulent activities.

Not only data, but a data breach also costs an organization reputational damage. Handing cybersecurity threats have become a significant challenge for businesses. FinTech businesses must be vigilant and explore every weak point that could leave them vulnerable to attack.

FinTech organizations, regardless of their scale, audience, and location face the same challenges when it comes to supercharging their cybersecurity practices.

Importance of Cybersecurity in the FinTech Industry

Fraudsters love to get their hands on financial data. FinTech firms have become a favorite target because they don’t have to adhere to as many rules as traditional banks. Thus, leaving out potential vulnerabilities in the system.

Products that are not properly protected lead to data breaches, and financial fraud.

Preventing cybersecurity risks requires businesses to develop a proactive risk prevention approach.

Understanding and amending the vulnerabilities in the system can prevent fraud before it even happens.

Cybersecurity Audit Goes a Long Way

There’s only one way to come up with a proactive approach to cyber fraud. Having a proper understanding of your systems, and knowing the vulnerabilities should be your first step.

Businesses won’t get rid of fraud just because new measures are in place. Chances are there will be vulnerabilities in your fraud prevention methods as well. Businesses need to do a complete audit of their products, and their workings to find out the weak points fraudsters could exploit.

Changes in Cybersecurity and FinTech

Cybersecurity practices in the BFSI industry have become incredibly complex. Customers globally want seamless digital banking over traditional banking methods.

Cybersecurity Tips for FinTech

To be able to prevent cyber threats, businesses need to follow a list of practices, including:

1. Build Robust Security Policies

Risk management is combining rules and regulations to come up with policies that address all the vulnerabilities in the system. To prevent cyber risks, businesses need to build security policies.

Here are some things to keep in mind while building these policies:

  • Set clear goals, objectives, and expectations. 
  • Choose security frameworks and implement them strongly. 
  • Clearly define security processes, procedures, and tools.
  • Define roles and responsibilities.
  • Set up continuous risk monitoring.
  • Build a flexible system that’s able to handle all kinds of fraud. 
  • Update policies regularly.

2. Leverage AI, ML, and Analytics

If fraudsters can rely on sophisticated tech to enhance their attacks, then so can businesses.

Relying on AI, ML, and analytics tools can help businesses spot threat trends, track suspicious activities, and more. AI, ML, and analytics tools can help businesses in identifying:

  • Financial fraud
  • Know security threats
  • Identify emerging risks
  • Unauthorized data access and usage
  • Anomalous activities

3. Implement Secure by Design Policies

As a FinTech, it should be your aim that all the products and services you release are secure. Fraudsters aim to find these vulnerabilities so they can exploit them. Make sure these policies include:

  • Integration of security into the early SDLC stages.
  • Only work with specific frameworks, libraries, and components. 
  • Continuously test and fix code during the early stages of development. 
  • Fix all vulnerabilities before the release.

4. Continuous Threat Monitoring

Attackers are relentless and they keep on trying until they get a breakthrough. BFSI is a primary industry that’s continuously under attack. It is essential for financial institutions and FinTech firms to continuously look for threats.

Relying on traditional signature-based detection techniques could result in grieving mistakes.

To be able to detect and prevent complicated threats, use the following methods:

  • Global threat intelligence
  • Contextual awareness
  • Custom rules

Centralized visibility is an essential threat-monitoring practice. Real-time alerts and triggers help you improve cybersecurity in FinTech.

5. Manage Vulnerabilities Proactively

As we’ve mentioned above, more than anything fraudsters love to exploit vulnerabilities. Vulnerabilities of any kind can be an entry point for attackers.

FinTech firms need to identify, assess, and prioritize their vulnerabilities. The aim should be to minimize as much vulnerable entry points as possible. Uncover vulnerabilities and fix them before an attacker can exploit them.

6. Implement Zero Trust Policy

Did you know that 60% of instances of fraud happen from within the organization? This is why no one must have unverified access to your company’s assets. Enforcing zero trust policy can help to prevent:

  • Insider threats
  • Brute force attacks
  • Privilege escalation
  • Data theft

It is advised to strictly enforce role-based, least-privilege access to stakeholders. Moreover, businesses should implement strict password and MFA policies. Encrypt sensitive data with passwords.

7. Manage Third-Party Risks Effectively

Businesses in the BFSI industry rely on third-party components, services, and APIs. With third-party attacks growing more and more every day, handling third-party risks is a major challenge.

Third-party vendors are one of the biggest fraud risks for FinTech businesses. Securely verifying third-party vendors is one of the best ways to prevent fraud. DIRO vendor verification technology is built especially to help financial firms and other businesses prevent vendor fraud. This technology can help businesses verify vendors before onboarding them.

8. Don’t Ignore Robust API Security

Managing API risks is a big part of managing cyber fraud risks. With the growing use of APIs in the BFSI industry, businesses must know how to manage API risks.

9. Build a Culture of Cybersecurity

The banking and FinTech industry suffers from Phishing fraud attacks more than any other industry. To reduce phishing attacks, businesses should aim to teach their customers how to spot phishing emails.

Creating a robust cybersecurity culture within your organization can be done by:

  • Continuously teaching your employees how to spot fraud.
  • Employees and customers must know what to click and what not to.
  • Implement a clear chain of command. Employees should know who to report to when something is suspicious.

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FinTech Compliance: Are Sponsor Banks Responsible?

fintech compliance

While FinTechs are now offering transactions as part of their service, they aren’t exactly banks and maybe that’s the reason they don’t have as big of a user base as they should. To grow themselves, they partner with a sponsor bank that moves the money between parties. This strategy allows FinTechs to focus on providing better services without them having to jump through hoops and become an official bank.

The sponsor bank is responsible for complying with anti-money laundering regulations and takes on the risks for customers and transactions under the FinTechs. The sponsor bank has to ensure that the FinTech they sponsor has a strong compliance program set in place. There must also be a seamless process for FinTechs to report any suspicious activities. The bank’s own compliance department can investigate and file suspicious activity reports (SAR). 

In January 2021, the OCC (Office of the Comptroller of the Currency) filed a complaint against “M.Y. Safra Bank” located in New York. The OCC found that they didn’t have an adequate compliance program in place, and when they became a sponsor bank for a FinTech, they failed to give proper consideration to the Bank Secrecy Act (BSA). Specifically, it failed to implement controls to keep up with the increased level of risk, while the bank wasn’t fined, they were ordered to cease and desist.

General Considerations While Building FinTech – Bank Compliance

Different financial services are subject to various laws and regulations, and a FinTech looking for successful bank partnerships needs to make some considerations.

1. Developing a Business Plan

The first step in offering financial services is the development of a business plan that covers the operational, legal, and regulatory guidelines. It is important to remember that even under a bank partnership model, certain states may require loan brokers, lead generators, loan services, and more to be licensed. 

2. Developing and Implementing a Compliance Management System

FinTechs will need to develop and implement a compliance management system, and a comprehensive and integrated compliance program containing written documents, functions, processes, and tools. These can help FinTech comply with legal requirements and reduce consumer harm resulting from violations of law. 

These types of policies are needed will depend on the nature of services offered by FinTechs.

3. Preparing to Partner

Once FinTechs develop business plans, a FinTech seeking to partner with banks needs to define the partnership goals. What does your business want from the partnership? Does FinTech want to own the customer relationship process or data? Does FinTech expect to diversify its business to include additional products moving forward? Not only should FinTech perform diligence on the potential bank partner, but it should also prepare for the bank to perform significant diligence. All of this allows FinTechs to have more control over the direction of the partnerships.

4. Finding the Ideal Partner

The key to finding success in any partnership is for both partners to find the right partners. When it comes to FinTech-bank partnerships, that means finding a bank that has ideal resources, knowledge, and flexibility. 

Similarly, a FinTech active in the small business credit industry may want to work with a bank partner with existing commercial credit programs. Once FinTechs find the right experience has been identified, it’s important to assess the bank’s pricing and ability to scale and help businesses grow.

5. Negotiating Service Provider Agreements

In many cases, a FinTech will need to work with other service providers to its bank partner to provide its proposed financial services. This can include executing contracts with service providers for AML screening, collection services, and call center support. These relationships must be established within the framework of the bank partnership model.

Conclusion – FinTech Compliance

If a bank wants to be in a partnership with FinTechs, they have to ensure that those businesses have strong compliance programs. The internal policies must include transaction monitoring and customer due diligence programs. FinTechs should also have ways to detect and report suspicious activities. This allows the banks to keep up with their regulatory obligations. 

FinTechs aren’t regulated and the sponsor bank is the regulated entity to take care of the risks. By using technological solutions such as DIRO online document verification software, FinTechs can achieve industry-wide KYC and AML compliance.

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FinTech 2022 – A Brief Insight into Global KYC Regulations

kyc regulatory

Financial services globally are heavily regulated by regulated bodies. The number one concern of the government about FinTech companies is the growing rate of fraud. Over the years, FinTechs have achieved incredible growth and flexibility. They can launch new services quickly, focus on scalability, and adapt fast. Although, the rapid growth of FinTechs doesn’t come without its challenges. As technology is added to the finance sector, regulatory bodies have implemented stricter regulations. Let’s take a look at what these regulatory challenges are for the present state of FinTechs.

Major KYC/AML Regulations for FinTechs in 2022

In many regions, the FinTech sector was unregulated a couple of years ago and became the ground zero for scams and frauds. Because the FinTech industry is so vast, it impacts several industries and the authorities can’t develop a single approach to the problems. 

For many areas, governments worldwide have updated the existing Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Some regulatory bodies have implemented FATF’s risk-based approach to tackle fraud. However, FinTechs are affected in numerous ways, so an industry-specific customer due diligence (CDD) approach is vital.

United States Regulations

FinTechs in the US aren’t regulated by any particular regulation. However, the firms are subjected to federal and state laws for registration, ID verification, and background screening is vital. The first fighter of fraud in the country “FinCEN” has issued a number of AML/CFT policies for FinTechs. The country’s FinTech companies have to perform customer due diligence during onboarding and submit Suspicious Activity Reports (SARs) to the regulatory body. 

United Kingdom Regulations

Just like the US, the United Kingdom doesn’t have any regulatory framework for FinTechs. However, any FinTech that offers traditional financial services, such as banking has to comply with the FinTechs set by regulatory authorities. If FinTech wants to operate in the UK, they have to get authorization from one of the UK’s financial regulators – the FCA (Financial Conduct Authority) or PRA (Prudential Regulation Authority).

EU’s Anti-Money Laundering Directive

The latest AML Directive (AMLD6) has a more profound impact on different sectors of the FinTech industry. From cryptocurrencies to wallet providers, AMD 6 has a far better influence and impact on fraud prevention across industries.

  1. Cryptocurrencies

Any platform that offers cryptocurrencies will have to go under tougher regulatory controls. All virtual currency exchanges have to register with the relevant authority, conduct necessary CDD protocols, and submit suspicious activity reports (SARs). Financial intelligence units (FIUs) have to maintain customer records with the name and address of the customer buying and selling digital currency.

  1. Prepaid Cards

According to the new AML directive, the limit for the prepaid card has been set between €150 to €250 and there’s a limit of €50 for online transactions. Additionally, cards are only allowed in the region unless a foreign provider meets the AML standards. Payments can only be accepted if the jurisdiction meets the AML standards.

  1. Beneficial Ownership

AMLD6 now requires all businesses to maintain publicly available and interconnected ultimate beneficial ownership (UBO) registries. National authorities will have access to these registries for trusts and bank accounts.

  1. High-Value Goods

High-value goods have been a part of money laundering activities for a long time. The use of high-value goods is now subject to new reporting requirements with updated thresholds. These goods include art, precious metals, artifacts, tobacco, and other items.

What FinTechs Can Do for Effective Compliance?

The FinTech industry is highly diverse and every sector has to re-evaluate and reform their customer due diligence programs according to the updated regulations. As a part of the FinTech industry you need to consider a few questions:

  • Are you complying with the country’s KYC/AML laws that you are serving in?
  • What customer due diligence protocols are you following as a business?
  • Is your customer screening process effective or is your drop-off increasing?
  • Is your customer due diligence process equally effective worldwide?

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Challenges to FinTech Growth: Regulatory Compliance and Geographical Restrictions

fintech growth challenges

When it comes to complying with regulations, FinTechs tend to face tons of trouble, be it KYC or AML. According to a survey, FinTechs all over the globe considers KYC and AML compliance one of the biggest challenges to FinTech growth. FinTech companies, regardless of their scale often face trouble with compliance. Let’s discuss all FinTech growth challenges and how they can prepare better.

FinTechs Regulatory Challenges Looking to Enter International Markets

There are a couple of challenges that FinTechs face while trying to enter other markets. Here are the biggest FinTech regulatory global challenges:

1. Expanding Digital Products and Services to Other Countries

FinTech companies such as Robo advisors and automated wealth managers run into lots of trouble while trying to enter new geographical markets. Apart from licensing issues, they also need to analyze and adapt to the needs of customers. This will depend on the customer’s nationality, domicile, and expertise, and will require acquiring knowledge of all customers involved. To do this, FinTech regulatory compliance needs to be followed thoroughly.

2. Offering Credit Cards in Other Countries

What are the requirements for offering free credit cards to a potential customer? There isn’t one perfect rule for all types of customers and every country. The requirements vary from country to country and these FinTech growth challenges. Understanding these rules can be challenging for small to big FinTech businesses.

AML Requirements for Onboarding Global Clients

Just like banks, FinTech needs to monitor and investigate suspicious activities. To make this happen, FinTechs require a robust risk management policy when it comes to onboarding customers from other countries.

Different countries have different AML requirements. One of the best examples can be the UK and Europe before Brexit, UK companies had to follow EU regulations for AML and KYC. With Brexit in place, financial services are now required to follow local rules and regulations for AML and KYC compliance. This is one of the biggest FinTech regulatory challenges.

This has led to the discontinuation of passporting across the EU, new implications for transferring and protecting data, and mandatory compliance with new regulations. If a company based in the UK wants to onboard a new customer in the EU, the company now has to acquire a license in an EU country and comply with the local rules and regulations of every country.

Benefits of Having Regulatory Answers

Regarding regulations, FinTechs have a tougher challenge to overcome compared to other types of startups. FinTechs have to penetrate a highly complicated and regulated market that acts as a hamper for growth. The best part is that there are endless benefits to being prepared to overcome FinTech regulatory compliance.

1. Scale Globally

For FinTech companies that want to enter cross-country markets, understanding the rules and regulations in every country is crucial for facilitating growth. It decreases the number of mistakes, enables the right partnerships, and supports a powerful growth that’s more calculated for growth.

2. Plan Strategically

Consumers will expect FinTech companies to consider and plan out financial regulations for growth. Consumers expect this because regulatory compliance can affect the business model, so it’s important to be strategic and plan. Based on the products and services, it makes sense to expand to one country rather than another.

3. Pick up Speed

One of the biggest FinTech regulatory global challenges is that the responses require a considerable amount of time even when they’re negative. The lengthy procedures reduce time in product development, expansion, and investment plans. 

Having the regulation answers ready via enterprise-ready solutions can bring down the time to reduce the market and cost of market entry.

Enhance Brand Value

In the end, it’s all about having solutions for regulatory compliance that decreases the risks of regulatory and reputational damage. Some FinTechs around the world are getting fined for not complying with regulations and it can hurt the brand’s reputation of the company.

The financial technology landscape world is still a new one, which means that the challenge to earning trust is higher. Being regulation-ready allows FinTech companies to stay compliant with KYC and AML regulations around the globe. 

Acquiring customers from other countries has plenty of challenges, and dealing with them remains a huge challenge for FinTechs. FinTech companies that aren’t prepared will spend significant time and resources on remaining compliant. 

With the right tools and solutions, FinTech companies can use regulation as a stepping stone for global reach. 

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Affect of Financial Data Aggregation and Digitization on Mortgages

Data Aggregation Impacts Mortgages

As the Covid-19 pandemic slowed down almost every sector of the financial industry, some markets are finally starting to make a comeback. The Australian property market is experiencing a major comeback, and house prices are rising at a record level.

This is the result of all-time low-interest rates and household savings that have accumulated to drive demand for property among first-time and veteran buyers. This is in line with this bullish housing market, home loan lenders have also started adopting digital services to make online customer onboarding faster and more secure. Companies like RBA Group have reported a rise in investment in technologies that are being made for streamlining the home loan approval process.

Barriers to Home Loans

The value of real estate in Australia has increased to $9.1 trillion, and it gained 1 trillion dollars in just five months, which was a whole new record for the industry. The unexceptionally high prices for the property are the primary barrier for customers to enter the Australian property market. More than 65% of all young people in Australia believe that it’s impossible to buy property in the Australian market. To fix this problem, innovative FinTech has started building products that can provide Australians with an opportunity to convert a portion of rent payments into equity payments. 

Not just FinTechs, other entities are also trying to help potential property owners. To protect borrowers and prevent risks in the home lending industry, the regulatory body “Australian Prudential Regulation Authority” (APRA) has issued a statement saying they will assess new borrower’s ability to keep up with their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. 

Industry experts believe this movement to be a first to restrain credit and housing markets, with the biggest shock for homebuyers to come in 2023 when the hike is supposed to decline by 5 percent.

Reducing Inefficiencies in the Lending Process

There are countless high barriers to entry in the property market, such as:

  • Going through the tedious and lengthy mortgage procurement process. 
  • Paper-based customer ID verification and bank verification can be solved with online bank account verification software.
  • Human error in the loan approval process. 

All these barriers make entry into the market for buyers extremely tough. Sometimes, the mortgage approval process can even take up to 50 days. 

With digitization, it is easy to streamline the application process, which makes it easier for approving mortgage applications. Data aggregation and innovation throughout the mortgage providers are trying to provide a seamless customer experience and speed up the process. 

By using technologies such as online customer document verification software, online bank verification software, or online KYC verification software, the customer verification process can be enhanced. 

Open Banking can connect a person’s banking data and lenders can get a clear picture of an individual’s financial history, which means the one who approves the application can make educated decisions. The process of deciding if an applicant qualifies for a mortgage should be driven by data.

With data aggregation and analysis functions, there is a huge opportunity to digitally transform the mortgage approval process. This can significantly reduce mortgage turnaround time and allow more people to get a mortgage.

Role of Digitization in Mortgage Approval

The recovery of the Australian property market after the Covid-19 pandemic has also boosted the prices of houses. The role of digitization is simple, it helps in streamlining the mortgage application process and makes it accessible for customers who’re looking for a mortgage.

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How Community Banks can help with FinTech Due Diligence

fintech due diligence

Since the last couple of weeks, bank regulatory bodies have released tons of publications applicable to Community Bank FinTech partnerships. This can be called a newly proposed guidance, a FinTech due diligence guide, and a Federal Reserve white paper on types of FinTech partnerships:

The growth of FinTechs is a major concern for Federal bodies and regulatory bodies. With the release of recent publications, the efforts made by regulatory cross agencies continue to ensure growth throughout the evolving space. To boost that growth, the FinTech due diligence guide was made.

FinTechs need to be careful moving forward and build sustainable mutually beneficial partnerships between banks and FinTechs. So what does the FinTech due diligence checklist have in place?

A Pathway Towards Innovation

The last 10 years have been an incredible time to build a FinTech company as global equity investments in FinTechs have reached more than a trillion dollars with a 45% annual growth rate. The FinTech industry is becoming a threat for banks as they offer better services when it comes to online banking services. When it comes to community banks, FinTechs are an even bigger challenge as they don’t have the scale to access the expertise of a large institution.

Additionally, this is the best time for community banks to choose innovation over anything else. Community banks can provide their relationship experience and knowledge of compliance in partnership with FinTechs that are building innovative financial solutions that are focused on fulfilling customer needs. This is the core aim of the FinTech due diligence guide. 

The US Paycheck Protection Program (PPP) increased the possibilities of community bank-FinTech relationships as FinTechs helped enhance the PPP loan application portals and also became a source of distribution. After all their help in enhancing the banking sector during the pandemic, it’s clear that by building relationships with FinTechs, banks can take their services to the next level. Regulatory bodies have shown more interest in the role that innovation can play in the financial sector and this led to them addressing the FinTechs. There have been several regulatory bodies sponsored events to facilitate better community bank-FinTech relationships. 

The new proposed guidelines were released in July 2021, and the complementary guidelines released in August 2021 by regulators stated that FinTech partnerships are becoming vital in the growth of the financial industry. The proposed FinTech due diligence checklist acknowledges the importance of innovative partnerships for financial institutions.

With increasing relationships, the due diligence process should also be built around the relationships keeping in mind that FinTechs don’t have the compliance experience or infrastructure of a mature bank. The Federal Reserve even acknowledges that keeping up with due diligence is a huge burden for smaller banks, that’s why the “Due Diligence Guide” was built to reduce the burden by offering some tips and tricks.

What Should Sponsor Banks Do for FinTech Due Diligence?

Based on the new proposal guide, there are four main suggestions for sponsor banks to keep up with required FinTech due diligence:

1. Review the Current Due Diligence Process Against Suggested Process

The first and foremost step is to conduct a high-level assessment of the current due diligence process against all the suggested areas in the proposed guidelines. Regulators don’t want the process to be exactly as they suggest, but comparing your current due diligence process against their suggested key areas can help enhance the process in the future. 

This is also a great opportunity for businesses to review their contracts as the due diligence guide offers suggestions and examples of ideal contracts between sponsor banks and FinTechs. These contractual guidelines will help in mapping out the bank’s oversight and FinTech’s responsibilities.

2. Build a Due Diligence Process based on the Maturity of FinTechs

The second step for better FinTech due diligence as proposed by the guidelines is to tailor build the due diligence process based on the FinTech you’re partnering with. Sponsor banks should review their process for FinTechs that have several levels of maturity. 

Let’s say a FinTech company is taking its baby steps, its projected financials won’t have as much weight, and it won’t have a perfect management team and a stable source of funding. Understanding these things as a sponsor bank can help build better and secure bank-finTech relationships.

3. Your FinTech Partnerships Should Act Like a Portfolio

The FinTech due diligence process is the best way to understand how a FinTech can help in making your relationship portfolio stronger. Similar to a portfolio manager that assesses the correlation and concentrations on their investments, sponsor banks also have to evaluate whether their FinTech partnerships are focused on specific customer segments or specific industries. 

For community banks that are always full of deposits, having a better understanding of balance sheets and regulatory ratio impacts can become an essential part of the due diligence process.

4. Learning When to Say No

Both the guidance and the Federal white paper revolved around a key factor “aligning the sponsor bank’s diligence and decision-making on partnerships.” In the Federal White Paper, there’s an example where a bank refused to partner with a FinTech solely based on how they handled customer data.

Each bank needs to have core principles and regulations regarding the type of FinTechs they’re open to partnering with. These principles can be based on product type, industry type, maturity, and level of sophistication. Sponsor banks should also be ready to present their concerns to regulators about why they turned down a deal due to certain findings or simply due to misalignment of business goals.

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Adopting Digital Assets in Financial Services

digital assets

Any technology that shows any type of promise is always met with hype. Cryptocurrencies and other digital assets in the financial industry feel the same way, but over the last few months, the developments in the industry show all the signs of digital assets becoming a mainstream service. Needless to say that there are several challenges to overcome before that happens. This is the primary reason why digital assets in financial services are being surveyed thoroughly to gain a better understanding of the adoption of digital assets. 

The inspection of digital assets will analyze the industry attitude towards cryptocurrencies, stablecoins, central bank digital currencies, tokenized securities, and non-fungible tokens from executives in banking, asset management, FinTechs, and future digital asset companies. The timing to put digital assets under a microscope is ideal as there have been some developments to push digital assets into financial services. With increased customer interest and several advances made by banks, it is high time to determine the future of cryptocurrencies and other digital assets. But most customers don’t even know what are digital assets cryptocurrency.

Almost 90% of global central banks are taking steps towards launching their digital assets cryptocurrencies. The biggest example of this in the USA can be the CITI bank, which started to be looking into the crypto markets to keep up with customer demands. In May 2021, Goldman Sachs introduced their first-ever crypto trades, after announcing that they were entering the bitcoin market.

Not just cryptocurrencies, this year also brought non-fungible tokens, NFTs came to public attention. Theoretically, anything that can be represented digitally is issued as NFT for sale and purchase. Digital art, tweets, and soundbites are a few top examples of NFTs. The familiarization of NFTs has opened up new revenue models for artists, sports companies, and video game developers.

The rising customer interest suggests positive growth, but the market is volatile and unpredictable and it can go down at any given moment. China’s recent stoppage of Bitcoin mining led to a significant price collapse in the market.

Does the Financial Industry See Digital Services as Long-Term Services?

The financial industry can make all the announcements and plans, but it won’t make a difference for customers until some solid actions are taken. The primary concern at the moment is “Do banks and other financial institutions consider digital assets worthy of a long-term investment?” 

Top banks from all over the globe have been working and experimenting with digital assets for several years, even before the hype. However, the transition from research and experimentation to investment and execution can be a difficult step to take. As the experimentation phase is over, most banks are now focusing on launching services that will fulfill the customer demands for cryptocurrencies. Other banks are investing in building better digital infrastructure, while the rest are focusing on building digital assets of their own like stablecoins and tokenized securities. 

This states that there is a divide in the financial industry regarding the future of digital assets. Some players in the industry are investing significantly in crypto while others are unsure. Firms operating in the financial industry are unsure of whether or not to invest in crypto or to adopt a ‘wait and see’ methodology. 

Another reason why some banks and institutions are adopting digital assets and cryptocurrencies is because of the rising customer demand. By sitting back to analyze the market, banks are afraid to lose customers.

What’s the Biggest Challenge to Mainstream Adoption of Digital Assets?

As mentioned above, a lot of development is being made in the digital asset in the financial industry, so what’s stopping crypto and other digital assets from becoming mainstream? The lack of regulations in the industry makes it susceptible to fraud, but over-regulation can stop the momentum of the industry altogether. So it’ll be interesting to analyze the next step of the industries. 

Regulators are trying their best to make sure the digital asset in financial services is available to customers without over regulations. The UK Financial Conduct Authority issued a warning to consumers about the dangers of betting on digital assets. The Central Bank of Ireland stated that Bitcoin can’t be treated as a currency as it doesn’t meet the requirements of a functional standard currency, it’s more like a high-risk asset.

The European Union issues a regulation for markets in crypto assets to help in regulating the currency and the service providers in the EU and provide a licensing regime for all member states by 2024. This update in regulation will cover all the digital assets that don’t fall under any regulation.

Impact of Tokenization of Financial Assets

Tokenization simply means a representation of a digital assets cryptocurrency, which can be any physical asset. However, in this situation, tokenization is required for digital assets such as equity or share. While traditional payments take up to 3 days to reflect in the banks, the sale and purchase of token assets offer almost real-time transfers. This fast-paced transfer of funds can increase demands and change the current financial infrastructure.

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FinTechs and the Financial Industry Revolution

Financial Industry Revolution

FinTech is a word combined by mixing two words, “financial and technology.” FinTech stands for financial startups that develop technologies to assist banks, and financial institutions in enhancing common day-to-day activities such as online money transfers, mobile payments, and online customer onboarding, and so on.

New technologies are constantly disrupting the financial industry. From peer-to-peer lending to Robo-advisors, customer screening, and onboarding, old business models are slowly moving towards technologies. FinTech companies can fit into any of the three main models of the financial institution, such as lending, asset and wealth management, and payments.

This growth of FinTech is pushing high-end banks to reconsider the way they interact with their consumers and potential customers. In the last few years, technology has transformed the way banks operate and the way consumers invest, make payments and apply for a loan. This is possible because banks partner with FinTechs to provide better services to banks, which in turn helps in providing better services to the customers. 

The emergence of technology has changed the way the financial industry operates, it changes the structure of the industry and brings in unseen opportunities. Below we have listed how FinTechs have changed the financial industry.

How FinTechs Enhance the Financial Industry?

1. Virtual Revolution

Traditional banks with their traditional service offerings are becoming monotonous for the newer tech-savvy generation. Gone are the days that banks had to deal with the risks of loss of physical data such as guarding servers and material documents filled with personal customer information. With the help of FinTechs, banks can have computerized tellers, e-payments, digital records, and much more. All this digital data can be accessed and leveraged with simple buttons. 

2. Need for IT in the Industry

IT in financial services is just as important as any other industry. The need for technology is more than vital in the financial industry and is increasing day by day. Mobile apps are quickly becoming the biggest asset in the financial industry as more and more customers are utilizing smartphones for everything. This applies to firms that largely deal with cloud data. Having an agile technological framework is essential for banks in this technology fuelled world.

3. Everything is Global

Technologies allow banks to enhance their customer base and operate globally. With online customer onboarding technologies and online document verification software, banks can reach out to customers everywhere on the globe and onboard them seamlessly. As more and more players are entering the market, the need for technologies is growing at an incredible rate and this demand is pushing forward the need for digital transformation in the industry.

4. Data Encryption

It’s essential to protect customer data because of the growing amount of data breaches. Because of this, security has become a major concern for financial institutions. The vulnerability greatly exists because of the amount of data that’s existed in the cloud which can be shared or hacked. FinTechs have helped banks and financial institutions to secure their data, ensure that the customer data is secure and build better customer-business relationships. 

Conclusion 

FinTech solutions like online document verification software, online bank account verification software, and online AML and KYC verification solutions can help banks to push their services further.