Regulatory Compliance & Digital Banking

Igor Izraylevych

3 min read

As digital banking has surged, so have the complexities of regulatory compliance.

When developing a product for the digital banking space, therefore, having a deep understanding of regulations and compliance is essential. 

How can you architect a product to ensure that it adheres to financial regulations and compliance? 

Having an understanding of how regulatory compliance functions across the world of digital banking is a good place to start. With the information in this article, you will be able to:

  1. Choose an ideal market for your solution
  2. Architect your solution to align with regulatory compliance
  3. Establish a realistic timeline for launching your fintech solution in a new market

Let’s get started. 

What is compliance in banking?

Compliance is the state of meeting rules or standards. In the context of banking, it is the process by which a bank and its employees follow and adhere to all of the regulations, standards, and ethical practices required by the financial regulators of a specific region.

A bank defines its own internal and external compliance practices to ensure that it is always in line with regulations. 

The role of compliance in banking

What is the role of compliance in banking? The compliance branch of a bank serves as an internal check of sorts, much like Internal Affairs in a police department. 

This department not only defines the internal practices that ensure compliance but also runs regular checks to ensure that practices at a firm are in adherence with regulatory requirements. 

In digital banking, regulatory compliance must often be “built into” financial software and solutions. Much like a human employee at a bank must align their habits and tasks with regulatory compliance, the functions and tasks executed in software must adhere to protocols. 

Types of compliance in banking

Regulatory compliance and digital banking

While compliance has the high-level goal of detecting and addressing any deviations from regulation, there are several different types of compliance that need to happen at a bank. Compliance has to address:

  • security
  • risk management (investments, portfolios, etc.)
  • how customer information is processed
  • ethics and conduct
  • data reliability

With regards to the latter, compliance gets an added layer of complexity in the digital world. 

Since digital profiles are anonymous and digital transactions can be cross-border, digital transactions have the potential to lead to money laundering. 

As such, digital banks must ensure that they address AML risk, or Anti-Money Laundering risk, in their compliance protocols. 

Service providers in the digital banking space must focus on methodologies that can ameliorate the risks of phishing and malicious software and also handle virtual currencies in as consistent and ethical a manner as possible. 

Who regulates the financial services industry?

Different entities regulate financial services from one country or region to the next. 

Given the cross-border nature of much digital banking, it can behoove an organization to start small, developing a solution that focuses on one country or region first before expanding.

The following are the major regulatory bodies that oversee financial services in some of the major markets around the world. 

In the US

Given the size of its economy and that economy’s impact on global markets, it may come as no surprise that there are several different entities that oversee and define regulation in the country. 

One of the most dominant is the Federal Reserve Board, which maintains responsibility for liquidity and credit via open market operations and interest rates. 

The Federal Deposit Insurance Corporation is perhaps the second most relevant to banks. It was established in 1933 in response to the Great Depression and insures deposits at several thousand banks across the country. 

The Office of the Comptroller of the Currency is yet another entity that defines federal regulation in the US. This agency regulates and supervises charters to any bank that operates within US borders. 

The Securities and Exchange Commission, established in 1934, enforces all federal laws related to securities, including the stock exchange. 

Finally, the Consumer Financial Protection Bureau, or CFPB, ensures that bank protocols related to customers and customer transactions are ethical and protect consumer interest.

In the UK

Within the UK, now of course separated from the EU, the Financial Conduct Authority (FCA) regulates all financial services. It does so in partnership and consultation with HM Treasury. This organization serves as the conduct regulator for over 58,000 financial services firms in the UK, as well as its financial markets. The FCA also sets specific standards for about 19,000 firms and serves as a prudential advisor to about 49,000. The FCA defines protecting consumers and markets and promoting competition as its operational objectives.

In the EU 

Within the EU, a consultative group comprised of advisors from countries across the EU draft regulations for the financial services industry. 

This group, known as the Expert Group on Banking, Payments and Insurance (EGBPI), first defined its current regulatory process in 2001 based on the proposals reached by the comprehensive Lamfalussy Report

The report focused on ways to make financial services more agile and effective and included a Level 1 and Level 2 of regulations. Level 1 involves establishing basic laws, while Level 2 involves the technical implementation of measures across the EU. 

In the aftermath of the global financial crisis in 2008, however, the EU established significant revisions to its Level 2 set of regulations.

In Switzerland

Switzerland has maintained its position as a financial powerhouse by maintaining its autonomy from the larger European financial system. 

As such, the Swiss Financial Market Supervisory Authority, aka FINMA, oversees the small country’s financial regulations. 

The Bottom Line

Choosing an initial market and understanding what kind of regulations exist there is the main task for banking/financial institutions looking to develop digital banking solutions. 

Given that banking applications are not very agile, you can estimate six months to one year when entering a new market before gaining momentum. 

With the increasing complexities of regulations around the world, starting small can benefit any digital banking enterprise. 

Smaller markets with simpler regulations are a good place to start. This allows a digital banking solution to work out kinks and establish market share before expanding. It also helps to ensure that the solution adheres to all regulations. 

Make one market your solution’s priority from the start so that you can start clean and not waste time ‘treading water’ in bigger and more complex markets.

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