In our latest insights article we look at the fintech world, a sector where the appetite for growth can often outpace the appetite for risk.  Our Senior Director, Financial Services, Dafydd Hobbs in conjunction with Webhelp’s Head of Risk, Compliance and Innovation Faye Sadler-Clark consider how fintech organisations can work better work with risk management and use it as an enabler of business growth.

Financial technology (fintech) organisations cover a broad range of services, from payments to loans, savings to insurance and, more recently, cryptocurrency. Their business models, products and markets are constantly evolving, with a laser focus on growth, agility and cost reduction. 

Taking financial services as an example, fintechs typically focus on a niche product or service offering, either meeting unmet customer needs or solving particular customer pain points not addressed (or not addressed well) by traditional banks or insurance providers. Their customer centricity, product innovation and ability to leverage the latest technologies are just some of many reasons fintech organisations are successfully disrupting traditional FS markets at pace and scale.  

By their very nature, fintech organisations need to be disruptive, but this doesn’t mean they aren’t susceptible to disruption themselves. Extreme growth, business model evolution, competition from new market entrants, cyber-security concerns – all represent threats to fintech organisations and are therefore risks to manage. 

Fintech founders often come from a strong technology background vs a Risk or Compliance background. Combined with the focus on growth and consistent concerns with disruption, this means that risk management (the process of identifying and mitigating potential threats and challenges to a business or market) can be missed. The need to meet Risk and Compliance requirements can be underestimated, but can be fundamental to the ability to secure further funding, and ultimately can underpin the long-term viability of the business. 

With the recent FINRA announcement of the settled enforcement action of over $70m for Robinhood Financial for “Systemic supervisory failures and significant harm suffered by millions of customers”, it shouldn’t be a surprise that regulators are increasingly paying closer attention to fintech organisations. The question we should be asking is– how can Fintech organisations continue to grow and flourish whilst meeting increasingly stringent regulatory requirements, ultimately ensuring that customers and clients are protected? 

Risk as an enabler of growth 

In a recent article for Webhelp, Faye Sadler-Clark made the case that risk need not be seen as a roadblock to progress and growth, but rather as a value-add enabler that drives growth for organisations, their investors, and their customers. 

As Simon Taylor of 11:FS says whilst discussing the Robinhood situation in his fintech Brain Food Column, “Being a brand that looks after customers’ money is a huge responsibility. Those that can find the right balance of managing risk and reducing friction have a fintech superpower”. This will be the new gold standard that investors and the market are looking for. 

Indeed there are shared opportunities here for both the fintech and regulators. The FCA has, for example, committed to being more ‘innovative and adaptive’ in its 2021/22 business plan. The overarching objective of ensuring customers are protected remains, but there’s also a desire to streamline compliance requirements so as not to stifle innovation in FS markets. The regulator understands that increased choice and innovation can lead to delivery of better customer outcomes and encourage competition – both key strategic goals for the FCA. 

Establishing risk capability within a fintech scale-up 

It can often be a challenge for fintech organisations to proactively manage risk, needing instead to react to reports and regulations, and making changes after regulators have identified emerging risks in the market, or even after the risks have materialised.  

Building risk into the business as a crucial component from Day 2 - helping to shape the business and allow it to grow safely and resiliently, while also allowing for much greater agility in reacting to emerging market risks – is a successful approach taken by leading Fintech organisations. 

This also helps reframe risk as a contributor to innovation, allowing it to work closely with the product and engineering areas, and providing meaningful insight to inform product development. 

For example, a fintech organisation with sound risk management principles built into their business structure can subsequently incorporate risk into their product and data models at an early stage. Risk management by design allows for much greater ability to leverage analytics, machine learning and AI – a significant edge on competitors. 

What is of key importance in practice? 

It’s crucial to bear in mind that any incorporation of risk into a fintech organisation’s model needs to be underpinned by the clear awareness, accountability and engagement of the board (hence the Financial Conduct Authority’s (FCA) introduction of the Senior Manager & Certification Regime [SM&CR] which was extended to all FCA regulated firms in December 2019). This is particularly important to the FCA, who places a great deal of focus on “tone from the top,” linking a company’s culture and conduct to the fair treatment of its customers. Equally important and cascaded from the top of the organisation down should be a shared understanding of, and adherence to, ‘risk appetite’. 

From a resourcing perspective, it’s important to work with strategic, well rounded risk professionals who are a good cultural fit, embrace disruption, constructively challenge, and who bring a different perspective to innovation. Any initially higher cost outlay will be mitigated by the value they will bring across the commercial, product and customer facing areas of the business. 

So, where to start? 

Fintech organisations wondering where to make the first steps towards this business model, developing their compliance culture, and leveraging risk management as a value enabler, should look to define their risk and compliance framework by taking a number of key steps: 

If you’d like to discuss how you manage risk within your organisation, and how to enhance your operating model to take advantage of risk as a growth enabler, then why not get in touch? Our experts can help you quickly design and implement practical changes to effectively embed risk and compliance into your operating model. 

To download our guide to Risk as opportunity: Fintech’s Gold Standard click below: