Innovating during a regulatory wave

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American financial institutions already face an incredibly complex regulatory environment. What is coming will only make things more challenging.

Because? A convergence of emerging political priorities in Washington is creating a host of new compliance risks. This trend may have increasingly negative impacts on industry innovation by diverting time and resources that could instead be allocated to improving product development or customer services.

Institutions hoping to stay ahead of the regulatory curve will need to reinvigorate their compliance operations with a technology-first approach and involve compliance early on in any product or service development effort. Doing so saves time and money and helps drive a culture of continuous innovation during regulatory ebbs and flows.

The future of open banking regulation

At the recent Money 20/20, the Director of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra, announced the rulemaking process, pursuant to Section 1033 of the Dodd- Frank, to develop regulations that will “strengthen consumer access and control over their financial data.


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This is a major step toward “open banking” and “open finance” that will have significant ramifications for financial institutions that offer deposit accounts, credit cards, digital wallets, and other transaction accounts.

Under this rule (which is due to end in 2024), covered businesses will be required to provide consumers with their financial information or provide it to a third party at the consumer’s instructions. Other proposals will also be considered, such as efforts to ease the process of transferring accounts between companies and new requirements around the privacy of personal financial data.

Disruption of the US financial sector

The general objective is to boost competition in the market by making it easier for consumers to switch financial services providers, forcing companies to innovate and compete to keep customers. The regulatory impact will bring significant new requirements related to customer data: data portability, data sharing, data security, data storage, and more.

Banks and other companies that handle personal financial data will need to make changes to their internal processes and digital infrastructure, such as establishing secure data sharing methods like APIs, to comply with these regulations. Some companies will even have to adjust their business models.

Chopra called the initiative one of the “most important rules the CFPB is working on, or will ever work on in its history,” foreshadowing the wide-ranging ramifications the rule could have on the US financial sector. .

New disclosure requirements

Another regulation to watch is the SEC’s proposed rule requiring registrants to disclose robust amounts of information about climate risks and greenhouse emissions, which should be finalized in the coming months. The disclosures will require extensive reporting and information sharing on companies’ environmental practices and strategies, especially around emissions reduction, creating new compliance hurdles.

In addition to Dodd Frank Section 1033 and ESG, financial institutions must prepare for new compliance requirements related to digital assets (especially cryptocurrencies following the FTX collapse), data privacy, cybersecurity, and more. In the coming era of divided government, President Biden is likely to become more reliant on executive orders to advance his regulatory agenda.

Compliance costs for banks have already increased by approximately 60% since the 2008 economic crisis, and the fact that these regulatory challenges can arise during a recession makes matters even worse.

New solutions for a new era

During economic downturns, companies are forced to stretch budgets and make difficult decisions about their workforce, growth strategy, and product development. Rising compliance costs aren’t helping. Any additional dollars spent navigating CFPB, SEC, or Treasury regulations reduce budgets for innovation, affecting individual companies, US economic competitiveness, and the financial industry as a whole.

Compliance will stifle innovation unless business leaders innovate their compliance systems and processes to maximize efficiency and minimize costs.

Additional training and manpower are likely to be part of the solution, but the central focus of compliance teams is to embrace new technologies that more quickly identify new or relevant regulations and better coordinate business operations.

The adoption and implementation of enterprise software solutions that are based on artificial intelligence (AI), machine learning (ML), and cloud computing is the most cost-effective and efficient mitigator for an increasingly complex and expensive regulatory environment.

Compliance part of the “innovation engine”

Still, having the latest technology is not a panacea. Forward-thinking FinTech innovators are also changing the way they work with compliance to keep up with their pace of innovation.. Fulfillment teams should be brought in during the early stages of product or service development, even during ideation.

Incorporating compliance feedback and expertise during development can significantly reduce delays caused by compliance challenges. Compliance should not be seen as a “door to go through” in the final stage of product development, but rather as part of the innovation engine that drives companies forward.

It is impossible to completely predict the future regulatory landscape. But with the right tools and workflows, financial institutions and FinTech innovators can work smart to minimize risk and maximize innovation.

Kevin Jacques and Ben Malka are partners at Cota Capital, a San Francisco-based technology investment firm.

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