Last week, we joined thousands of the financial sector’s leading professionals in Las Vegas for the Money20/20 USA conference.
A key theme throughout was the importance of compliance and consumer protection amidst new innovations in the consumer finance industry.
Here are our key takeaways from the event for compliance professionals, including using compliance as a competitive advantage, key considerations for BaaS partnerships, the impact of artificial intelligence (AI), and consumer protection and financial inclusion.
Compliance is a competitive advantage
Compliance, as we know it, is undergoing a radical transformation. It’s evolved from a check-the-box mandatory process to a competitive differentiator. Understanding the spirit of regulation is the first step in gaining a competitive edge—acknowledging the reasoning behind regulations (although they sometimes can feel tedious) can help foster a better product or service from the get-go.
To truly excel with compliance, it should be integrated into a company’s culture from the beginning and be an ongoing program with everyone on the team taking part. If an organization starts “the right way,” then there are numerous advantages you can get out of compliance down the line—increased speed-to-market, seizing opportunities, avoiding silos, building trust with partners and consumers, and more.
In the fast-paced world of consumer finance, and especially for fintechs, agility is vital for success. To achieve total agility, companies must have someone knowledgeable about legal and compliance matters on board from the beginning. This enables them to move swiftly and make informed decisions while mitigating risks.
Not to mention, the cost of noncompliance can be hefty. In a compliance survey conducted by Alloy, it was found that 60% of fintechs identified noncompliance costs as a significant concern, with 37% of them paying over $500,000 in compliance-related fees.
And, if an organization gets hit with an enforcement action, they then have to navigate additional costs, including those of an investigation and legal fees, and internal teams must dedicate time to investigations. Investing in compliance from the beginning is not only a strategic choice but also helps reduce costs in the long run.
As the industry continues to evolve through partnership and technology advancements, compliance must take a front seat. Organizations should look at compliance as a competitive advantage and integrate it into the company culture from the beginning to reap its benefits—increased speed-to-market, trust-building, risk mitigation, cost savings, and more.
BaaS partnerships thrive with trust and compliance
Another key theme revolves around partnerships between fintech companies and banks—a relationship led by trust and transparency.
For fintechs, embracing their bank partners allows for open communication and swifter market entry. Meanwhile, building a solid foundation in compliance requirements can lead to higher customer satisfaction, repeat business, and sustainable long-term value.
Fintechs that invest in compliance can avoid silos that often form in more established companies, where compliance and risk data get disconnected from other parts of the business. This integration and open communication help build a strong relationship between fintechs, banks, and regulators, fostering success on all sides.
The takeaway is that as the sector continues to evolve, we can expect to see an increasingly consistent approach to compliance. And, banks and fintechs alike play a critical role in ensuring marketing compliance and helping their partnerships thrive.
AI’s promise also poses risks to the industry…
AI was brought up in probably just about every session this year, and its potential is almost limitless—but a much-discussed risk in the consumer finance industry was specifically around bias and discrimination.
There’s a need for comprehensive and unbiased data to support ethical AI practices. The output from AI is only as good as the input—meaning, if biased and skewed data goes in, biased and skewed results come out.
While formal regulations are lacking in the space, the CFPB has been vocal about AI and its expectations, and other regulators will likely follow suit in the near future.
The takeaway is that AI should be used responsibly. Explainability is the name of the game—organizations have to understand and be able to explain the data used, what it’s being used for, its outcomes, and the controls in place to mitigate risk.
While bias can’t be completely eliminated, there are certainly efforts that can be made to minimize it.
…But AI is revolutionizing compliance in a good way
Although AI does pose risks if not used responsibly, it still offers benefits for the compliance function.
AI, bots, and automation are revolutionizing compliance—creating dynamic, proactive systems that replace outdated, static practices. The benefits? Reduced financial and regulatory risks and greater efficiency.
Consumer finance organizations should be eyeing automation and bots to modernize and enhance their compliance procedures while bearing in mind their limitations and ensuring that procedures and practices are compliant with existing regulations.
Using technology and automation for compliance efficiency
In the dynamic landscape of finance and compliance, technology encourages successful partnerships between risk and compliance teams for fintechs and banks.
As growth and profitability remain priorities, technology serves as a valuable tool to help manage costs, improve compliance processes, and resolve data quality issues—especially for established banks still working with outdated systems and fragmented data.
As the sector continues to evolve, the adoption of innovative technology is key for effective risk management and successful partnerships.
PerformLine hosted an entire session on this topic—Watch the session on demand here.
Financial inclusion is just as important as consumer protection
A pivotal concern in the financial industry is finding a balance between consumer protection and financial inclusion. Both of these are important as financial technologies and products continue to innovate—but so far, only consumer protection has made it to formal regulation.
The absence of legislation to address access to capital creates roadblocks for underrepresented consumers. While there are years of consumer protection rules, regulations, and precedents, research shows that the bottom line hasn’t moved for underrepresented consumers.
It’s clear that the Consumer Financial Protection Bureau (CFPB) is a substantial player in the space. The CFPB has made innovative strides toward financial inclusion in recent years but has yet to publish clear rules or regulations for consumer finance organizations.
The takeaway is that financial institutions should be at the forefront of advocating for—and implementing—inclusive policies, prioritizing consumer protection while promoting inclusion.