Fintech is an industry that covers many areas such as payments, insurance, planning, trading and investment, blockchain, crowdfunding, data and analytics, and security. Having understood its features, one can find that the key concept of this industry is the integration of various technical innovations and solutions (AI, machine learning, data analysis, blockchain technology, etc.) into traditional financial services.
In general, the financial technology industry has a high potential for development and growth. According to a report published by The Brainy Insights, global market share is expected to grow from $115.34 billion in 2021 to an astonishing $936.51 billion by 2030 at a CAGR of 26.2% over the forecast period 2022 to 2030. year. If you want to launch a fintech startup, then, first of all, you need to understand the regulatory and legal field of FinTech, which may differ depending on the country, and is also constantly being upgraded.
As this industry matures, many companies directly involved in fintech or related fields will face numerous risks and challenges from a legal standpoint. At the same time, companies need to focus on specific goals, new technologies and trends, and their competitors. This article explains the fundamentals of fintech regulation in different countries, as well as areas of compliance for different companies and project types.
When considering the regulatory aspects of fintech, it is important to first examine the most important issues and risks of software development from the perspective of the current industry. As of 2022, the main areas that fintech startups should work with are:
These aspects are extremely important for decisions on the development of fintech from a legal point of view in 2023 and will remain relevant in the future. Moreover, these issues are clearly visible in the local regulations of different countries. Let's now look at some of the most common examples of fintech regulation in the US, Europe and Asia.
Most of the time, the rules are location-specific, meaning laws differ from one country to another, or even from state to state, such as in the case of the United States. In addition, it is important to remember that this area of activity requires fintech companies to apply for fintech licenses, and this procedure also differs depending on the place of registration.
We would like to point out that there are some global bodies, such asFinancial Action Task Force(FATF), that develop fintech standards to combat money laundering and other illegal financial transactions that must be carried out by all companies operating in the fintech industry without exception (regardless of the country). In particular, the FATF is implementing proactive rules to reduce vulnerabilities in new payment services.
It is also worth noting that if fintech software development overlaps with other niches, some additional security rules and practices may apply depending on the regional focus. Below you will find a general overview of fintech regulatory bodies and laws in some popular regions of the world.
However, we want to draw your attention to the fact that the launch of a fintech project that is successful in the long term can be real only with proper support. The implementation of the project should be carried out simultaneously with the protection of intellectual property, know-how, and the interests of employees. In addition, legal support for fintech projects will allow investors to be sure that contractual relationships with employees, business partners, suppliers and customers will be agreed within the framework of applicable regulations in a particular country.
In the US, financial services are overseen by the following authorities:
Currently, the main rules that govern these organizations include, but are not limited to:
The main body responsible for regulating the activities of fintech companies in the EU is the Securities and Markets Authority (ESMA). The regulator ensures the stability of the EU financial system by strengthening investor protection and promoting orderly financial markets. However, it is important to point out that none of the EU legislation covers all aspects of fintech. Depending on the type of activity (payment services, data and consumer protection, crypto assets, fintech action plan and crowdfunding, etc.), companies need to comply with certain directives in the applicable area.
Interested in launching a fintech startup in 2023? Then check out some of the most common European compliance measures:
Australia was among the first to innovate in the financial services industry. This has naturally prompted many companies to scale and launch new digital technologies and payment solutions for their target industry segment. Currently, the country has some of the most developed regulatory and oversight bodies in the field of fintech regulation, including the following organizations:
Fintech statutes in Australia place a lot of emphasis on data access regulation and payment service directives, not only at the company level, but also from an end-user perspective.
Another country that is turning into a major player in the fintech market is South Korea. At the time of this writing, there are two main institutions in South Korea in charge of regulatory compliance for fintech products and services:
Over the past few years, the country has introduced numerous measures to regulate the financial technology market, including:
It is also worth mentioning the well-known Personal Data Protection Act (PIPA), which covers the processing (collection, use and transfer) of personal data in the provision of financial services. In addition, fintech companies must be equipped with technical, physical and administrative security measures to protect customer data and confidential information.
As we mentioned above, compliance with regulatory requirements for the development of fintech solutions depends not only on the regional criterion. Depending on the segment of the project, a deeper understanding of the rules of a particular category may be required. Below, we will look at some of the most important areas related to the fintech industry. Understanding this will help identify market segments and key areas for business development.
With the growing adoption of blockchain solutions, consumers can send money quickly and cost-effectively without having to contact banking institutions. As FinTech software rules continue to evolve, this model may partially or completely replace traditional transactions in the future.
Fintech solutions can benefit from this concept in many ways, in particular, in speeding up transaction processing and reducing fees for international money transfers.
Modern fintech solutions have made digitalization and optimization possible. Clients can now get help with in-app budgeting anytime, anywhere, regardless of their financial goals (budgeting, investment goals, etc.).
Introducing fintech into business can greatly help businesses streamline their fundraising process. For example, some companies may act as intermediaries between investors and proven startups. Or they can use a crowdfunding model so that everyone can invest in future ventures.
The introduction of financial technologies has enabled banking institutions to increase the quality and flexibility of their digital services at a more affordable price, which is a worthy alternative to traditional banking services.
Advances in advanced technology and ever-changing consumer behavior are having a significant impact on the current state of the insurance industry. According to a recent study, fintech solutions are likely to make services more personalized, regulated, improving data analysis and risk assessment.
These are the most typical directions of development in the fintech industry, although this is not a complete list of potential directions for the project.
Regardless of the specifics of project development and area of use, companies should generally consider the following compliance solutions when creating a fintech project:
Proceeding from the content of most regulations, the prevention of money laundering has become one of the main tasks of financial companies. These requirements are intended to protect customers. AML compliance helps companies stay afloat. In addition, the latest AML rules require businesses to regularly report suspicious transactions.
These standards were originally introduced for financial institutions to prevent fraud and tax evasion through the secure identification of customers.
When registering an innovative company, it is important to consider that in the course of activity it is necessary to comply with many standards related to data management, storage, access and deletion, as well as software that can affect security. For example, the requirements of the Payment Card Industry Data Security Standard (PCI DSS) apply to any company dealing with international payment systems and will vary by region and card issuer.
This regulation requires financial institutions to integrate secure digital keys to verify a user's identity.
Based on the contents of the CDD rules, financial institutions are required to monitor and manage processes such as (I) customer verification, (II) identity verification for access to a company account, (III) customer risk profile analysis, (IV) activity monitoring deals. When any financial transaction is to be completed, the system must verify the identity of the client, analyze the request for suspicious activity and possible risks, and implement EDD policies if necessary.
The number of possibilities is huge, so below are the most well-known technologies to use:
Thus, there are various legal aspects that need to be followed in the development of fintech. Each of them is devoted to different problems and has a regional specificity. In most cases, FinTech regulation aims to improve the efficiency and effectiveness of software, improve system security and data management, and improve product performance on both the provider and customer side.
We have experience in supporting fintech projects of various sizes and industries. If you are looking for subject matter experts for your upcoming fintech project, you can contact us directly. We will help you develop a strategy in line with your business goals.
