A Roadmap for Speed and Safety within FinTech by Chris Dean | Wednesday, August 30th

Hi there,

In the fast-paced realm of the startup ecosystem, speed and momentum are your most potent allies. Time, however, is a formidable foe.

To quote Paul Graham, "Startups almost never die in mid-keystroke. So keep typing!" And while that philosophy holds merit across a spectrum of startup domains, FinTechs are uniquely poised on a razor's edge.

To understand the precarious balance FinTech startups need to maintain, it's crucial to recognize that they exist in a world of heavy regulatory oversight and never-ending fraud attacks. The specter of regulatory oversight, not merely a possibility but a certainty in the financial sector, casts a long shadow and must be considered from the first day of a fintech’s life.

They also live in a landscape riddled with fraud. It's not just about devising the next groundbreaking financial technology; it's about ensuring its ethical deployment amidst a storm of attackers.

This dual challenge – harnessing the speed essential for any startup's survival while navigating the turbulent waters of regulations and fraud – can seem daunting. Recognizing the depth and breadth of a problem is halfway to solving it. FinTechs can and must grow quickly, but they must do so safely.

Here's a roadmap for that journey:

1. Partner as closely as you can with the bank or regulated entity: In the intricate dance of FinTech, established banks and regulated bodies are your seasoned partners. They bring a wealth of knowledge and resources, not only about how to move money but about how to do so with the utmost safety and compliance. Forge robust alliances with these entities, and your fintech will stand on a solid foundation. For example, aviation platform Tuvoli has been working with Piermont Bank since 2021 and in that time was able to grow their payment volume and accounts without incident. Direct relationships through an embedded banking platform allow partners to tackle issues quickly and grow together in the long term.??
2. Do not accept an unregulated not-a-bank to handle your fraud and compliance: It might be tempting to hand off compliance responsibilities to another entity; However, the risks far outweigh the advantages. Partnering with someone who doesn't undergo regular audits from a regulatory body is akin to building your house on sand, as we have already seen from recent crackdowns on banks that work with fintechs. When I was the CTO of API Banking at Silicon Valley Bank, I saw the importance of having a direct line of communication between banks and their fintech partners. That’s why when I co-founded Treasury Prime, I insisted on facilitating a direct relationship between the two parties, instead of being an intermediary that intercepted communications and compliance, like some other BaaS providers.?
3. Have a great KYC (Know Your Customer) program: Understanding your customer isn't merely good business practice; it's the bulwark against potential financial misconduct. A robust KYC program can act as your first line of defense against fraudulent activities, ensuring that the transactions facilitated by your platform are legitimate. Underestimating the importance of this can lead to serious consequences, and there are unfortunate incidents such as a startup that advertised their app on Instagram and wound up attracting a lot of bad actors. Because their KYC program was weak, they were not able to catch the fraud attacks in time and millions of dollars were lost.?
4. If you do a lot of consumer work and expect to be attacked, have a good identity program: In today's digital age, identity theft is a genuine concern. Ensure that you have rigorous protocols in place to verify the identity of those using your platform, especially if your primary clientele consists of individual consumers.
5. Constantly monitor your transactions and lock outbound money movement when you see a spike in unusual activity: Real-time transaction monitoring can be your most potent weapon against financial wrongdoing. The quicker you detect anomalies, the faster you can act to mitigate potential damage.
6. Tune your KYC, Identity, and Transaction Monitoring every few weeks for the first year: The financial landscape, especially in the world of fintech, is continuously evolving. As you grow 20% every month, what worked last month might be obsolete today. Regularly revisit and refine your protective measures to ensure they remain watertight.
7. Work with a responsible embedded banking software platform: Not all banking as a service (BaaS) companies are equal. Look for one that can facilitate a direct relationship with banks, along with integrations with a slate of fraud prevention partners.?
8. Work with multiple banks to build redundancy: After the SVB collapse, many companies came to us in a state of emergency, seeking to relocate their funds but lacking a backup bank option. We were able to connect these companies with multiple banks in our vast bank network so that they would never be in that position again. The takeaway here: never have a single point of failure.?

By diligently following the above steps, FinTechs can fortify themselves against potential pitfalls and position themselves for rapid, sustainable growth. Implementing protective measures doesn't stifle innovation.

On the contrary, startups can afford to be more audacious and experimental with a solid infrastructure in place. They can push the envelope in product development and marketing, knowing they're shielded from the most significant risks.

The challenge is unique, but the rewards for getting it right are immense. Grow fast, by all means. But grow safely. The future of FinTech depends on it.

—

Chris Dean

Co-founder and CEO of Treasury Prime, Empire Startups Contributor

The?Empire Startups Contributor Cohort?is a community of experts providing unique perspectives and insights on the latest in FinTech. Our model is is merit-based and does not offer monetary compensation.

Learn more about our contributors?here.

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