May 12, 2022
5 mins read

What you should know about fintech regulations

Employee withdrawing cash at the ATM
Quick summary

In 2021 fintech investments totalled 210.1 billion US dollars worldwide, cementing its place as a leading player in the financial services industry.

But as providers become increasingly drawn to software-powered financial solutions, questions arise about fintech’s regulation, their privacy laws, and increasing security requirements during this rapid rise to the top.

Do fintechs follow the same regulations as big banks?

When it comes to finance, it’s easy to assume the big-name banks have a legacy of trust and reliability that surpasses all others and that they are the pinnacle of regulations in the financial service industry, armoured with superior privacy laws and rules.

But what prospective businesses may not know about fintech companies is that they comply with fintech regulations exactly like big banks and are actually subject to more intense scrutiny.

So, when it comes to the question ‘are fintech companies regulated?’ The answer is yes. They are held to a standard equal to any other financial institution and share the predominant focus of customer protection, just like a bank.

What regulations must fintech companies meet?

Complying with regulations helps to bolster a fintech company’s trust and credibility in an industry like b2b financial services, where trust is essential.

Both big banks and fintechs must follow strict rules and regulations to work in the financial sector. Fintechs may have the upper hand when it comes to implementing new initiatives with smarter technology like AI and automation. But the fact is, no matter how banks and fintechs choose to implement the rules, they must follow them, and they must be able to prove their adoption.

See how Fintechs revolutionize spend management & outshine banks

What regulations do fintech companies have to comply with?

  • PSD2: Payment Services Directive Two (PSD2). This framework is a core EU legislation framework that connects third parties and banks alongside technical providers so they may easily and securely exchange data beneficial to their customers. It also innovates better customer authentication processes.
  • Open Banking: This refers to policies that allow customers to use their own data to access financial services from third-party providers.
  • E-money: A supply of digital money in the appropriate national currency for customers to use cashless payments is monitored by various jurisdictions, like the EU. For example, Payhawk’s company credit cards and digital wallets.
  • BNPL: Buy now, pay later, or BNPL refers to a new way of giving consumers low amounts of money in credit. Many consumer-facing e-commerce sites offer BNPL through a third party.

Many other regulations include anti-money laundering, anti-financial crime, operational resilience, and competition. To learn more about regulations and fintech, download our ebook, Fintechs, and Big Banks: How innovation shapes finance for businesses and consumers.

How did Open Banking change fintech forever?

It was initially challenging for fintechs to enter the highly-regulated market finance industry as the legacy players had all the power. Thankfully for consumers and businesses alike, updates eventually came about due to initiatives like Open Banking.

Open Banking, born in 2018, gave customers the right to share their banking data with third parties to access new financial services for the first time.

It was originally a set of activities created in the UK via the Competition and Markets Authority and enabled under PSD2. But Open Banking now refers to any set of policies from around the globe that lets customers (both business and consumer) use their data to access financial services from third-party providers.

Why do fintechs care about keeping data secure?

It’s obviously both best practice and ethically sound for customer data to be kept secure. But fintech companies also care because the fallout of a security breach can be extremely grave for both the business and customer.

Like most economic structures, customers are vital for fintech companies to operate and innovate. Poor trust due to a data breach would lead to bad feedback and increased customer attrition. And if it was a severe breach, including something like GDPR, the fines, lawsuits, and legal repercussions could be business-ending.

The business would suffer in credibility beyond its customer retention, too, due to a data breach with the loss of faith also from stakeholders, investors, and affiliated companies. The brand name would lose its reputation.

With trust being the key component between providers and consumers, there may be no going back if lost.

At Payhawk, privacy is a priority, and we take multiple steps to protect customer data from harm. There are many dangers out there, from malware to phishing, and we continuously update our security measures to stay safe.

Book a demo today to hear more about how Payhawk both operates within all required regulations and provides faster, more intuitive card and expense management.

Trish Toovey - Content Director at Payhawk - The financial system of tomorrow
Trish Toovey
Senior Content Manager

Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.

See all articles by Trish →

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