The global financial system is a highly complex network governed by numerous regulatory agencies, at several levels of government, which enforces a large, and evolving set of rules. At the most basic level, the purpose of regulations is to protect the trust of market participants. They need to be assured that they won’t unwittingly lose their assets (e.g. money, securities, identify, real estate) by falling victim to bad actors. Think of this system as a train car. A fintech startup is like a new door. Left unguarded, that door can be used by no-do-gooders to get on the train undetected and wreak havoc. In this instance, regulatory agencies and regulated institutions (chartered banks, etc.) are called upon by the system, to be its guardians – they must evaluate the new door to make sure it has the right set of built-in controls that prevent no-do-gooders from entering. For this reason, a fintech startup can expect to be required to demonstrate that it is able to mitigate the risks it potentially introduces into the financial system before it is allowed to connect to it.
- Know your risk exposure.
Understand to what risks your business model exposes your customers and other participants of the financial system. Know the letter of the law and applicable regulations. Equally, know the reasons other regulations don’t apply and why. Once you understand where the regulations fit in you can adequately gauge the impact of your business decisions on your company’s inherent risk.
- Own your risk.
If you’re building a fintech startup, the risk is at the core of your strategy. Regulated financial institutions and market regulators are likely to view your business model as having a high inherent risk. Understand what your business looks like from their lens and learn what methods they recommend to mitigate risks inherent to your business. Implement these methods early on, integrate them into your blueprint for everything - the way the technology is developed, user experience is designed, product roadmap is planned, back-office processes are structured, third party systems are integrated.
- Find your risk-based path.
Mitigating risks inherent in your business - to what extent and how - is critical to scaling. Effectively utilizing technology, resources, and capital to build out a viable business with a high inherent risk is commonly referred to as ‘risk-based’. To make this work, you need to find the right fit of strategy and tactics for the specific risk profile of your business. Generic approaches and policies will by definition be misaligned and often exposed to the detriment of business credibility. How you design, execute and operationalize your risk mitigation matters – it can impact business continuity and success of institutional funding rounds.
- Align your board.
Some startups create advisory boards to help make introductions, provide business acumen, or add initial brand name power. Some do not even have a board of directors. The corporate structure will dictate its formation and how many seats. Typically, venture capital funding will come tied with seats on the board seeking to protect its investment and an eye on an exit strategy. However, board composition should mirror the startups marketplace as it scales where domain experience is critical to risk management.
- Build trust with your bank.
Any startup should understand that the bank-to-business relationship is vital. This is a partnership that only works if both sides are clear on what the other needs. Approach the conversation with full transparency on your baseline - business plan, target market, and growth aspirations. Once the relationship is established, even if it’s just an operating account, proactively communicate any contemplated pivots that change to the baseline and solicit feedback on how it may impact the risk side of the equation ahead of time. All startups face risk, in every phase of their growth and development. It’s important to anticipate those roadblocks. Strategic planning and a clear vision is the most certain way to fintech startup success. To find out how Stratis Advisory helps fintech startups reduce risk and compliance costs, visit http://www.stratisadvisory.com/fintech. Are you looking for a data aggregation partner that follows the leading industry practices for security and privacy? Learn how Envestnet® | Yodlee® adheres to, and in many cases exceeds, the security and risk management standards required to engage with consumers and their financial data: https://www.yodlee.com/dots. ------ Stratis Advisory is an objective resource in strategy, risk and regulatory compliance for the Fintech ecosystem. We connect the dots between startups, investors and banks by integrating deep domain expertise into the broad context of business strategy, risk management and compliance operations. Our tempCCO solution delivers on-demand risk, strategy and compliance expertise that is right sized for the growth stage and business scale. Brian Stoeckert, JD, CAMS, CFE Brian is a Managing Partner of Stratis Advisory with more than 15 years of experience in strategy, risk, legal, and compliance serving startups through Fortune 500 companies. Brian served as an expert in civil and regulatory matters related to anti-money laundering (AML) and digital currency compliance, and international bond swaps. Maria Potapov, CFA, MBA Maria is a Managing Partner of Stratis Advisory with 20 years of experience in strategy, risk, investments, and compliance. Maria started 11 ventures and served as C-level officer, board director, advisor and mentor for startups and investors in finance and technology.