Compliance is the cornerstone of bank/fintech partnerships
It's the last all-hands meeting before launch day for your fintech startup. In a crowded market, your product seems like a standout. The accompanying mobile app sparkles and the perks you came up with for cardholders are a hit in early audience testing.
You can't help but daydream a little, imagining a user base that leads to exponential growth, creating the next digital product that makes exchanging money easier for banks and end users. As you celebrate with your team, you look over and see your partner bank's chief compliance officer taking in the festivities with a dour expression. She doesn't seem to be having as much fun, and there's a good reason why.
Your compliance strategy still needs work. And to your bank partner, compliance means everything.
It took a while for banks to view fintechs as partners who could help them innovate faster. Yet it's safe to say that fintechs still need traditional financial institutions more than these institutions need them.
While you're innovating on the front end, banks supply the sponsorship and licensing that make your payments system possible, and compliance is one of, if not their most important concern. Why? They're legally responsible for ensuring it.
This fact should resonate not just in a founder's head, but across the entire staff: business development, marketing, your product development teams. Have you considered compliance at every step of the way, and if not, how can you ensure you’re keeping your bank partner happy to avoid potential liability?
Compliance has two main buckets: problem prevention/remediation and dispute resolution. Anti-money- laundering and anti-fraud are primarily in the first one, through Know Your Customer guidelines, transaction monitoring, investigations and reporting.
Transaction disputes live in the second, and are the main focus of this post. These occur when a customer takes issue with a charge and complains to the card issuer. Debit card and ACH disputes fall under Regulation E, while credit card resolutions follow Regulation Z. These regulations are meant to protect the rights of customers, but they can create massive operational challenges, losses and regulatory penalties if they aren’t handled properly.
Card issuers investigate the customer's dispute, and for debit cards issuers have the option to credit the customer’s account with the disputed amount in order to buy a little more time for the investigation. The issuer may decide to send a chargeback to the merchant, kicking off another process in parallel to the dispute. And don’t forget all of the mandatory disclosures and complicated timeline calculations that govern the dispute handling. So simple, right?
Transaction disputes can be very difficult to handle at scale without proper tooling, and savvy fraudsters have learned to game these inefficiencies to extract payouts from the system over and over. Many successful card companies have awakened to a hangover of huge losses as a result of poorly handled disputes — once you’re in that hole, it’s tough to climb out.
The good news is there's a path to making compliance a more efficient, scalable process for fintechs and banks. It involves breaking bad habits and practices, though.
Spreadsheets and other ad hoc tools can't get the job done. Neither can an off-the-shelf platform from a single vendor. The ideal solution helps automate the organization and timing of casework. It should fit into your company's existing technology stack and complement the systems you’re already using for customer support. And perhaps most of all, the system should provide a way for ongoing collaboration and visibility between you and a banking partner.
But ultimately, compliance can't be a bolt-on solution. It's critical to build it in from the start, across your people, technology and partnerships.