Dataspike - Compliance-as-a-service: the future of fintech


In 2023, if a business function exists, there is a solution-as-a-service for that. This delivery model isn’t limited to software: everything from sales to manufacturing, logistics to customer service can be turned into an as-a-service product. The critical difference between as-a-service and other outsourcing models is that it comes in a package (easy to install and always up-to-date) with transparent pricing and seamlessly integrates with the business flow.

The increase in complexity of business functions provided as-a-service led to the emergence of Regtech, a category of software products that enhance regulatory and compliance processes. Such products, often called compliance-as-a-service, include online identity verification, transaction monitoring, etc. It’s a game changer that significantly reduces compliance costs and facilitates growth.

There are several reasons why the compliance-as-a-service model will inevitably replace legacy solutions and become a standard in the finance industry, particularly fintech.

Compliance is (very) expensive

Compliance is an onerous burden for the financial sector, and the situation is worsening. According to LexisNexis Risk Solutions’s financial crime compliance study, by 2020, the global financial compliance expenses reached USD 213,9 billion, with the U.S. and EU totaling 89% of that amount (+15% year to year). One-third of the U.S. banks participating in the Global Regulatory Outlook Survey the same year reported spending over 5% of their revenue on financial compliance.

Fintech startups face the same compliance challenges as mature financial organizations but lack the resources and a multi-year planning horizon. Compliance expenses can quickly get out of control as the project gains traction. The growth inevitably leads to increased compliance costs as more customers require a larger compliance team, while entering new geographies means new requirements to meet and more regulatory reporting.

Compliance-as-a-service providers offer seamless OpenAPI integration, easy start, and transparent pricing, allowing fintech startups to scale without commitment (especially with a pay-as-you-go pricing plan, which is not still the standard case in Regtech, by the way) and ensure regulatory continuity across jurisdictions.

Fintech evolves (really) fast

Fintech companies simplify financial services and connect traditional finance with digital payments and cryptocurrencies. Fintech democratized finance, made it more convenient, and even delivered services to people previously ignored by traditional financial institutions.

Fintech is closely monitored by regulators that try to balance fostering innovations, protecting customers, and preventing money laundering and other fraudulent activities. Because of novelty, fintech startups sometimes face additional scrutiny from regulators.

Compliance-as-a-service providers keep track of the changing regulatory environment and ensure that startups comply with the new rules, allowing them to focus on improving user convenience.

Legacy compliance management systems (seriously) underperform

Financial services is a conservative industry that mainly relies on legacy software, including compliance management solutions (CMS). Such on-premise software is hard to deploy, has a long learning curve, and requires a whole team to manage, which results in high operation costs. Most legacy CMS are rule-based, meaning they can’t effectively use AI, machine learning, and other innovative instruments. All this increases the risks of non-compliance, leading to wide-ranging negative consequences.

Legacy systems are still common among traditional financial companies. Even financial regulatory bodies in many countries support the modernization and responsible regtech innovation that strengthen compliance programs and create safer markets.

Compliance-as-a-service as a part of (strong) fintech stack

KYC, AML, and transaction monitoring delivered as a service are building blocks of an effective fintech business. They significantly reduce time to market and minimize non-compliance risks, giving startups an upper hand in competition.

Like other cloud solutions that revolutionized information technologies, compliance-as-a-service is the natural step in the evolution of financial compliance, which will inevitably become an industry standard.