Article
Three strategies for fintech companies to navigate the changing regulatory environment
May 12, 2025 · Authored by Chuck Kronmiller, Mark J. Boettcher, Mark Wuchte
Fintech companies consistently push boundaries and disrupt traditional financial services models. However, despite their innovative approaches, they still must meet the requirements of a highly regulated industry and navigate an ever-evolving compliance landscape.
The regulatory landscape for fintech companies is expected to continue evolving in the coming years, shaped by several potential trends and developments. Increased standardization of banking as a service (BaaS) regulations across different jurisdictions could provide greater clarity and consistency for companies operating in multiple markets. The continued development of open banking initiatives will likely further impact data sharing practices and create new opportunities and challenges for fintech's leveraging BaaS. Evolving regulations around digital assets, including stablecoins and cryptocurrencies and their intersection with BaaS offerings will also be an area to watch closely. A continued strong focus on consumer protection and data privacy in the digital finance space is anticipated, potentially leading to more stringent requirements in these areas. The increasing adoption of technological advancements like AI in financial services will likely prompt regulators to further refine frameworks for their responsible use in areas like compliance and fraud prevention.
Here are three crucial strategies fintech organizations should prioritize:
A primary challenge for fintech companies involves maintaining compliance with anti-money laundering (AML) and know your customer (KYC) requirements. Companies must implement thorough customer due diligence and verification processes, accurately identifying customers and beneficial owners. Effective transaction monitoring systems are essential for identifying and reporting suspicious activities.
Another critical area is adherence to consumer protection laws and regulations. Fintech companies must ensure fair lending practices and avoid any discriminatory actions. They are also obligated to provide transparent disclosures of all fees, terms and conditions associated with their financial products and services. Compliance with regulations governing the advertising and marketing of financial products is also essential to avoid misleading consumers.
Establishing a dedicated compliance team ensures strong leadership and clear oversight. Written policies outlining compliance responsibilities related to anti-money laundering, know your customer (AML/KYC), consumer protection, data privacy and third-party risk management are essential. Regular risk assessments, ongoing compliance training for employees and periodic audits help maintain compliance rigor and adaptability.
Effective relationships with sponsor banks are essential for fintech companies utilizing BaaS. Conducting comprehensive due diligence on potential banking relationships helps assess their compliance history, risk management capabilities and Fintech alignment. Clearly defined contracts must outline the compliance obligations of both fintech and the bank.
A significant hurdle for fintech's lies in clearly defining the allocation of responsibilities for regulatory compliance between themselves and the banks they are working with. Ambiguity in contractual agreements and operational processes can lead to oversight, increasing the risk of non-compliance. While the ultimate regulatory liability often rests with the bank, Fintech's must understand and fulfill their specific obligations, particularly in customer-facing areas. Sponsor banks are likely to ensure adherence to the following areas:
- Information security and cybersecurity: Requirements will include comprehensive IT audit procedures to be performed and may also require a System and Organization Controls (SOC) 1 and/or SOC 2 report, depending on the services of fintech's
- AML/KYC: requirements will include independent testing to show adherence to AML/KYC requirements.
- Regulatory compliance: Requirements may include applicable alphabet soup of regulatory compliance, depending on the scope and services the fintech offers. The fintech should be prepared to understand what compliance areas in-scope would be and applicable, and ensure appropriate policy and procedures are in place.
- Model validation: For those fintechs that may be offering a model as part of the services, the fintech should be prepared to have a model validation performed over the core product to meet model risk governance requirements.
Maintaining open, consistent communication channels with banks facilitates transparency and collaborative compliance management. Regular compliance reporting and updates strengthen relationships and prevent misunderstandings. Additionally, fintech companies should proactively prepare contingency plans to manage potential disruptions or relationship terminations to help ensure business continuity.
Scaling compliance programs to keep pace with increasing transaction volumes, a growing customer base and evolving regulations can be a significant challenge, potentially leading to compliance lapses if not addressed proactively.
There are also solutions in the marketplace to automate AML/KYC processes, transaction monitoring and regulatory reporting. Implementing AI-powered tools and advanced data analytics further strengthens risk assessments and fraud detection capabilities.
Working with advisory firms specializing in fintech and BaaS can provide critical regulatory compliance expertise, risk management strategies and robust internal control frameworks. Legal counsel experience in financial regulations is also vital for navigating complex compliance issues. Participation in industry forums and webinars helps fintech companies stay informed and share best practices with industry peers.
Compliance should be seen not merely as an obligation but as an opportunity to build trust with customers and banks, creating competitive advantages and sustainable growth opportunities. Baker Tilly’s specialized knowledge in Fintech and BaaS can support companies in developing effective compliance strategies tailored to their unique needs. Our risk advisory, financial crimes solutions and audit teams offer valuable guidance and practical support for navigating the regulatory environment.
Fintech companies can effectively manage regulatory challenges by prioritizing robust compliance frameworks, cultivating strong banking relationships and leveraging technology and professional insights. These efforts foster growth and innovation within the BaaS ecosystem.
