Age of Change: How do fintechs step up to the challenges?
In recent years, the global financial landscape has been continuously shaped by significant events, from the COVID pandemic to geopolitical tensions. Major shocks that were once considered rare, are now a persistent reality, influencing how industries operate. As disruption becomes an economic driver, it not only presents challenges but also opportunities for innovation across sectors.[1] Navigating this volatility requires a measured approach, balancing innovation with resilience.
This is especially true for fintechs. From a new generation of sophisticated cybercriminals that target financial data, to increased regulatory scrutiny in response to recent high-profile failures in the industry, fintechs are under pressure like never before. But for those treasurers that can manage the risks and develop adaptability, there may be incredible opportunities for growth. The global fintech market is set to quadruple by 2032 to reach a value of $1.2 trillion.[2] ?That means plenty of opportunity for those that prioritize long-term resilience alongside innovation.
So, what’s the playbook for fintechs looking for sustained growth? How can they balance innovation with resilience? How can disruption be turned into opportunity?
Below are three focal points that can help fintechs survive and succeed in the age of volatility.
1.???? Boost trust and security through strategic relationships ?
As industries continue to digitalize at breakneck speed, data is the new oil. It has become the world’s most valuable resource – and one of the most vulnerable. [3] While all organizations must prioritize cybersecurity to keep their data safe, smaller firms, like many fintechs, are often seen as soft targets[4]. A major bank may have a security budget in the hundreds of millions of even billions of dollars, something most fintechs are unlikely to match.
Section 1033 of the Dodd-Frank Act points clearly[5] to the interconnectedness of data, while also seeking address security concerns both with data providers and third parties. Simply put, any organization involved in managing or handling data, particularly if it's consumer data, could be at risk of attack from cybercriminals . Due to the value of the information being stored, financial services is one of the most frequently targeted industries.
If a fraudster can get their hands on sensitive financial data (i.e. bank account or credit card), then they can use it to make false transactions or con people into sending them money. And as cyberthreats evolve, protecting data is more complex than ever. Technologies like generative artificial intelligence and voice-cloning are now being used to create incredibly sophisticated phishing schemes that trick people into revealing sensitive information or downloading malware.
As a result, fintechs must be extra vigilant when it comes to security. Some pro-active steps they can take to enhance their security posture include:
·???????? Continuous training of staff to recognize and respond to AI-generated phishing scams and other emerging threats to find weaknesses quickly and use collaborations to move fast
·???????? Improving data visibility to safeguard who has access to what data and what are the controls points, particularly when using multiple cloud-based environments
·???????? Leverage their inherent strengths of technology and agility to deploy the latest capabilities to mitigate threats and protect customers, such as encryption and tokenization
Fintechs should also be exploring collaborations with established financial institutions, such as leveraging the advanced IT fraud and security capabilities of larger players like J.P. Morgan, which invests $15 billion annually in its cyber defenses[6]. To deploy sophisticated tooling more quickly, treasurers must recognise the consistent investment required.
By integrating the innovation of fintechs with the security and stability of traditional banks, the possibility exists to accelerate digital transformation while providing robust defenses against emerging cyber-security risks.
2.???? Focus on compliance as a competitive advantage
The mantra ‘move fast and break things,’ has been a common practice among Silicon Valley entrepreneurs over the past two decades. It suggests that speed-to-market and innovation should be a prioritized strategy. Certainly, for fintechs, the drive to create frictionless solutions and provide a great user experience has sometimes taken precedence over issues like compliance.[7] However, in today’s complex regulatory environment, compliance is becoming a key differentiator for growth and trust. Companies that can embed compliance into their innovation strategies are better positioned to thrive, avoiding penalties and navigate challenges in areas such as:
·???????? Adhering to anti-money laundering regulations
·???????? Ensuring compliance with international sanctions
·???????? Protecting customer data from security breaches or unauthorized use
·???????? Ensuring clients assets are appropriately protected
In 2023, payment and cryptocurrency firms faced $5.8 billion in fines due to regulatory lapses[8], highlighting the growing scrutiny within the industry.
In the coming years, fintechs will need to be prepared for a more stringent regulatory environment. Regulators are becoming increasingly aware of various complex payment activities. This can be seen with recent EBA (European Banking Authority) finding related to VIBANS (Virtual Bank Accounts), or RFIs and statements issued by the OCC & FRB on Banking as a Service. Much of these concerns stemming from embedded level activity within the financial ecosystem and more recent events such as the bankruptcy of Synapse FI and associated lawsuits involving one of its partner banks.
As fintechs and the industry grow, they must ensure they have all relevant regulatory permissions for their business models, both domestically and internationally. Taking a pro-active and collaborative approach with regulators will be crucial, especially considering the constant technological change in the industry.[9] With an incredible 93% of fintechs struggling with compliance, those that can master this area will be the most profitable in the long run.[10] In the future, compliance will become a critical competitive advantage, outpacing speed, cost, and convenience, maintaining the fragile, but fundamental client commodity - trust
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3. Build redundancies and strengthen agility
When Silicon Valley Bank (SVB) failed in 2023 it sent shockwaves through the financial ecosystem. SVB was a sponsor bank for many payment service providers and online marketplaces, providing them with settlement accounts and other banking services. Its collapse left many companies with no way to access funds or complete basic functions like payroll. This experience highlighted the need for fintechs to build redundancies and ensure they do not have a single point of failure. This requires:
1.????? Creating process redundancies
2.????? Leveraging comprehensive diligence practices in partner selection
3.????? Reducing concentration risk by diversifying supplier networks
4.????? Consistently assessing the financial health and credit worthiness of key partners
Many fintechs may opt for larger banking partners to provide greater stability and security, especially as the regulatory scrutiny on sponsor banks intensifies. This can be seen with recent US regulatory actions on certain banking providers that support this increasingly complex segment. The ability to monitor, manage, and support fintech activity requires a significant investment in bank architecture.
Although it can entail some extra cost, the benefits of building redundancies are abundant.? It helps to generate trust with customers and suppliers, who know their funds are properly safeguarded, while it also gives companies the infrastructure to grow and scale. For example, when a fintech expands internationally, having two or more partner banks can provide much greater geographic coverage and expertise. Scaling in the most secure way is how to expand internationally, and that may mean establishing a few key relationships with larger providers. Having a robust and resilient operating framework means that when disruption hits, companies could actually grow stronger, turning challenges into opportunity, as the best innovators have a history of doing.
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Shaping the future of finance through collaboration
At J.P. Morgan Payments, we believe that collaborative innovation will be the cornerstone of the future of financial services. By combining our strengths with those of fintechs, we can address the complexities of the payments landscape, ensuring that security and innovation thrive together. In a rapidly changing environment, it’s not just about responding to disruption—it’s about defining the path forward.
What steps are you taking to ensure your business remains agile, compliant, and resilient? Let’s continue the conversation—share your thoughts on how innovation and collaboration are driving the future of finance.
[1] World Economic Forum, Jan 2023, ‘Disruption may be the new economic driver: Here's how leaders can meet the challenge.’ Available at: https://www.weforum.org/agenda/2023/01/davos23-age-of-disruption-ceos-leadership/ . Accessed September 2024.
[2] Fortune Business Insights, September 2024. ‘ FinTech Market Size, Share & Industry Analysis, By Technology (AI, Blockchain, RPA, and Others), By Application (Fraud Monitoring, KYC Verification, and Compliance & Regulatory Support), By End Use (Banks, Financial Institutions, Insurance Companies, and Others), and Regional Forecast, 2024-2032. Available at: https://www.fortunebusinessinsights.com/fintech-market-108641 . Accessed September 2024 .
[3] Techcrunch, March 2021, ‘Data is the world’s most valuable (and vulnerable) resource.’ Available at: https://techcrunch.com/2021/03/04/data-is-the-worlds-most-valuable-and-vulnerable-resource/ . Accessed October 2024.
[4] Sheffield Hallam University, ‘Conceptualising cybersecurity risk of fintech firms and
banks sustainability.’ Available at:? https://shura.shu.ac.uk/27504/2/Cyber%20Security%20paper2.pdf . Accessed September 2024.
[5] Consumer Financial Protection Bureau, Dodd-Frank Act Section 1033 – Consumer Access to Financial Records. Available at: https://www.consumerfinance.gov/rules-policy/notice-opportunities-comment/archive-closed/dodd-frank-act-section-1033-consumer-access-to-financial-records/ . Accessed October 2024.
[6] Finance Magnates, January 2024, ‘JPMorgan To Invest $15 billion Annually In Fight Against Cybercrime.’ Available at: https://www.financemagnates.com/trending/jpmorgan-to-invest-15-billion-annually-in-fight-against-cybercrime/ . Accessed September 2024.
[7] American bankers Association, February 2024. ‘ Why Fintech companies need to take their compliance to the next level when working with banks.’ Available at: https://www.aba.com/news-research/analysis-guides/why-fintech-companies-need-to-take-their-compliance-to-the-next-level-when-working-with-banks . Accessed September 2024.
[8] Financial Times, January 2024. ‘ Crypto and fintech groups fined $5.8bn in global crackdown on illicit money.’ Available at: https://www.ft.com/content/f2a8c1e4-30f2-49c7-939b-73e0d1a22033 . Accessed September 2024
[9] The Fintech Times, ‘Should Regulators Impose Tougher Penalties on Firms For Non-Compliance?’ Available at: https://thefintechtimes.com/should-regulators-impose-tougher-penalties-on-firms-for-non-compliance/ . Accessed September 2024.
[10] Alloy, ‘Alloy's Annual State of Compliance Benchmark Report 2023.’ Available at: https://www.alloy.com/state-of-compliance-benchmark-report-2023 . Accessed September 2024.