Fintech Legal & Regulatory Aspects in 2022-2023

Cover for blog Fintech Legal & Regulatory Aspects 2

Fintech is an extremely large area that covers multiple fields, such as payments, insurance, planning, trading and investments, blockchain, lending/crowdfunding, data and analytics, and security. Having looked closer at its specifics, you’ll uncover that the key concept of this industry is to integrate various tech innovations and solutions (AI, machine learning, data analytics, blockchain, etc.) into traditional financial services. 

In the upcoming years, the financial technologies industry has an extremely high potential  for development and growth. As per a report published by The Brainy Insights, its global market share is expected to grow from $115.34 billion in 2021 to a striking $936.51 billion by 2030 with a CAGR of 26.2% during the forecast period of 2022 to 2030. 

However, as this industry evolves, many companies which are directly operating in fintech or related areas will start facing numerous challenges, risks and issues from a legal perspective. Each entity is required to comply with numerous regulations across different jurisdictions. At the same time, companies also need to keep their focus on specific goals, emerging technologies and trends, as well as their competitors. 

In this article, you’ll uncover the basics of fintech software regulation in different regions, as well as compliance areas for various companies and project types. As a part of our discussion, we’ll explain why you should contact a reputable fintech software provider and the key aspects to consider in fintech development. 

Table of Content

  1. Major Fintech Legal Issues in Software Development
  2. Fintech Regulations Across the Globe: Overview:
  3. Major Categories for Financial Technology Projects
  4. What Areas of Compliance should be considered in a FinTech Project?
  5. Summary

Major Fintech Legal Issues in Software Development

When reviewing the regulations and legal aspects of fintech, it’s essential to first explore the most critical challenges and risks of software development in terms of the current industry. As of 2022, the core areas that fintech solutions need to deal with are:

  • Data protection and data privacy. Since all financial institutions are dealing with personal data and sensitive information, it’s critical to constantly ensure its secure access, storage, management and disposal. If overlooked, this can lead to various legal issues, as well as serious reputational and financial losses. As an example, according to European’s GDPR, the fine framework can be up to €20 million (roughly $20,725,400), or 4% of the worldwide turnover of the preceding fiscal year, whichever is higher. 
  • Cybersecurity. Currently, the fintech industry is one of the most lucrative targets for attackers, which naturally raises valid concerns across numerous companies and organizations. With more and more high-profile cases coming to light, fintech-oriented enterprises, as well as state regulators, have started to prioritize cybersecurity. In some regions, cybersecurity in fintech is exceptionally important:  If there are cyber threats or breach detections, affected companies must report to the relevant supervisory authorities within a particular time frame to avoid penalties. 
  • Money laundering and theft. Being highly connected to transactional operations, fintech can be extremely vulnerable to financial theft and money laundering. Companies need to continually implement Anti-money Laundering (AML) solutions to securely and legally conduct any money-related operations. 

These aspects are exceptionally important for fintech development solutions from a legal perspective in 2022 and will remain relevant in the future. 

Moreover, these issues can be clearly traced in local regulatory standards across different countries. Let’s now review some of the most common examples of fintech software regulation in the US, Europe and Asia. 

Fintech Regulations Across the Globe: Overview

In most cases, regulations are location-specific. But there are some internationally known authorities, such as the Financial Action Task Force’s (FATF), which issues fintech standards for AML, terrorist financing, and other illegal financial operations. In particular, this authority implements proactive regulations for increasing vulnerabilities and challenges in new payment services. 

It’s also worth noting that if fintech software development intersects with other niches, some add-on regulations and security practices can be applied depending on the region’s focus. As an example, in the case of the healthcare industry, fintech solutions must also consider HIPAA compliance (for the US), NHS regulations (UK), PIPEDA (Canada), etc. 

Below you’ll find a general overview of regulatory authorities and documentation for the fintech industry in some popular regions across the globe. 

Who Regulates Fintech in the USA?

In the US, financial services are supervised by these major institutions: 

  • The Financial Crimes Enforcement Network (FinCEN) – is an authority that collects transactional information to identify and prevent crimes in the financial industry. 
  • The Office of the Comptroller of the Currency (OCC) – a regulator service that supervises banks and businesses to ensure their compliance with the numerous fintech laws and regulations
  • The Consumer Financial Protection Bureau (CFPB) – is an authority responsible for supervising banks, lenders, and large non-banking entities (credit reporting agencies, debt collection companies, etc.) to ensure they operate legally and comply with federal laws.  
  • The Securities Exchange Commission (SEC) – a supervising entity responsible for guidance on properly reporting fintech cyber risks and incidents and imposing fines. 

Currently, the core regulations these entities are guided by include but are not limited to the following acts: the Gramm-Leach-Bliley Act (GLB), the Bank Secrecy Act (BSA), the US Patriot Act, the Electronic Signatures in Global and National Commerce Act (E-Sign Act), the Truth in Lending Act (TILA), the Truth in Savings Act (TISA), the Electronic Fund Transfer Act (EFTA), the federal Red Flags Rule, the federal Affiliate Marketing Rule, and others. 

Who Regulates Fintech in Europe?

The foremost authority that regulates fintech companies at the EU level is the European Securities and Markets Authority (ESMA). It ensures the stable performance of the EU’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets. 

However, it’s important to indicate that no one piece of EU legislation covers all the aspects of fintech. Depending on the activity type (payment services, data and consumer protection, crypto-assets, fintech action plan and crowdfunding, and others), companies need to comply with the particular directives within the applicable area. 

Some of the European countries’ most common regulatory compliance measures include the New Payment Services Directive (PSD2), the European Union Directives and Financial Action Task Force, the General Data Protection Regulation (GDPR), and the ePrivacy Regulation. 

Though a considerable number of enterprises still do not follow the EU’s fintech compliance guidelines, the policies have certainly brought their benefits. For instance, since its implementation in 2018, GDPR has made everyone sit up and listen to data protection laws and enforcement. Moreover, in 2021, the cost of GDPR fines rose seven times, reaching €1.087 billion ($1.23 billion), which has brought considerable attention to EU regulations compliance.

Who Regulates Fintech in Australia?

Australia has been an early adopter of financial services innovations and technology. This has naturally stimulated many companies to scale and launch new digital technologies and payment solutions for their target industry segment. At this time, the country has one of the most highly-developed fintech software regulations and supervisory authorities, including the following entities:

  • The Australian Transactions Reports and Analysis Center (AUSTRAC) – an authority responsible for digital-based financial technologies and transactional operations
  • The Australian Securities and Investments Commission (ASIC) – is a national regulator that protects the interests of customers and investing parties. 
  • The Australian Prudential Regulation Authority (APRA) – is a supervising authority that regulates banking and insurance institutions to protect the financial well-being of Australian customers. In January 2020, it also launched a new regulatory framework to simplify and streamline the complexity of rules and distribute supervision depending on the service category revised. 

  • Consumer Data Right (CDR) – an authority that supervises accredited people to disclose consumer data to third-party service providers, subjects them to certain conditions, and assists in providing goods or services to CDR consumers. 

At present, this model has become one of the ultimate standards for fintech regulation that can be implemented in a wide range of existing and potentially emerging technologies. In particular, Australian fintech statutes are highly prioritizing the Regulation of data access and payment services directives, not only on the company’s level but also in terms of the end-users perspectives. 

Who Regulates Fintech in South Korea?

Another country that has been turning into a major player in the fintech market is South Korea. As of the time of this writing, there are two primary institutions in charge of regulatory enforcement over fintech products and services in South Korea:

  • The Financial Services Commission (FSC) – is an integrated regulator responsible for formulating financial policies, supervising financial institutions and financial markets, protecting consumers, and advancing Korea’s financial industry. 
  • The Financial Supervisory Service (FSS) – is a regulator responsible for the examination and supervision of financial institutions in Korea under the broad oversight of the FSC.

Over the past few years, the country has introduced numerous supportive policies to stimulate the fintech market in Korea. Examples of policies are

  • The Financial Innovation Act (aimed to stimulate the development of innovative financial services), 
  • The Electronic Financial Transactions Act (purposed to ensure the safety and reliability of electronic financial transactions, as well as to promote financial conveniences for people and the country’s economic development), 
  • The Credit Information Act, 
  • The Local Information Act and others. 

Also, it’s worth mentioning the widely known Personal Information Protection Act (PIPA), which applies to the processing (collection, use, and transmission) of personal data in the course of financial services. Moreover, fintech companies must be equipped with technical, physical, and administrative security measures to protect client data and sensitive information. Particularly, this covers access restrictions, blocking malicious programs, encryptions, and numerous protective measures that can potentially protect a company’s data. 

Major Categories for Financial Technology Projects

As we’ve already mentioned above, the regulatory compliance for the development of fintech solutions does not solely rely on the regional criterion. Depending on the project’s segment, a deeper exploration of the rules of a particular category may be required. Below we’ve reviewed some of the most important areas related to fintech software development. Understanding these will help identify market segments and key areas for business development. 

  1. Landing area. Fintech app projects and digital solutions enabled online loan requests and approval, which is extremely convenient for both financial institutions and borrowers. An automated system can quickly assess creditworthiness, reduce wait times and increase client retention rates, thus having a positive impact on landing-based businesses. 
  2. Payment solutions. With the rising adoption of blockchain solutions, consumers can send money quickly and cost-effectively without contacting bank institutions. As fintech blockchain software regulations continue to evolve, this model may partially or fully replace traditional transactions in the future. 
  3. International money transfers. In this concept, fintech solutions can benefit in many ways, particularly in speeding up the processing of transactions and reducing the fees for international money transfers. 
  4. Personal finance. While earlier clients were required to get a quote from financial advisors at banks, fintech solutions today have enabled digitalization and optimization and have simplified this process over time. Now, customers can get budgeting assistance in-app, anytime, and from anywhere, regardless of their financial goals (creating budgets, saving money for retirement or investment purposes, etc.).
  5. Equity financing. Fintech adoption can significantly help businesses simplify the fundraising process. For instance, some companies can act as mediators between investors and vetted startups. Or they can use a crowdfunding model to enable anyone to invest in future ventures. Similarly, this helps investors quickly and easily support their preferred projects right from their couches. 
  6. Consumer banking. Here, the adoption of fintech has enabled banking institutions to increase the quality and flexibility of their digital services at a more affordable cost, which is a decent alternative to traditional banking services. 
  7. Insurance segment. The rise of fintech solutions, advanced technologies, and continually changing consumer behavior have a notable impact on the current state of the insurance industry. According to recent research by Deloitte, fintech solutions are likely to make services more personalized, regulated, and adjustable, enhancing data analytics and risk assessment. 

These are the most typical development directions in the fintech industry, although it is not a complete list of potential areas for your project. From there, you can find the most suitable one for your fintech solution. Now let’s summarize the key compliance regulations and data privacy measures that should be considered by fintech institutions to succeed. 

What Areas of Compliance should be considered in a FinTech Project?

Regardless of the project’s development specifics and area of use, companies should typically consider the following compliance solutions for their fintech software:

#1 Anti-Money Laundering (AML) Compliance

Based on the content of most of the regulatory acts, preventing money laundering has become one of the primary goals for financial companies. It protects customers and helps businesses stay afloat. Also, the most recent AML regulations require companies to submit suspicious transactional activities regularly. 

#2 Know Your Customer (KYC) Compliance

These standards were initially introduced for financial institutions to prevent fraud and tax evasion through secure customer identification. 

#3 Data Security Compliance

This category covers a variety of standards related to data management, storage, access, and disposal, as well as hardware and software, which can impact security. For instance, the requirements of the Payment Card Industry Data Security Standard (PCI DSS) apply to any company dealing with international payment systems and will vary depending on the region and card issuer. 

#4 Digital Signature Certificate

This regulation requires financial institutions to integrate secure digital keys to validate user identities. 

#5 Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) Compliances

Based on the content of CDD regulations, financial institutions are required to monitor and manage the following processes:

  • Customer verification
  • Identity verification for the company’s account access
  • Customer risk profile development 
  • Transactions activity monitoring

When any financial operation is to be completed, the system has to check the customer’s identity, analyze the request for suspicious activity and possible risks, and implement EDD policies when needed.  

#6 Adverse Media Screening

A recently introduced practice that is highly valuable for maintaining the reputational image and numerous security processes of financial institutions. Being an important element of EDD, it can reveal activities related to money laundering, financial fraud, drug trafficking, human trafficking, financial threats, organized crime, terrorism, or other related incidents. 

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Final Words

As you can see, there are various legal and regulatory aspects to follow in fintech development. Each of them focuses on different problems and has regional specifics. In most cases, fintech regulations are focused on improving software efficiency and effectiveness, enhancing system security and data management, and improving product performance on both the vendor and client sides. Without a doubt, software regulations have already become integral components for fintech development, and their role will continue to increase over time. 

At IdeaSoft, we have accumulated years of experience working with fintech software development. So far, our portfolio has over 250 successful projects delivered for companies of different scales and industry focus. Our team has proven expertise in MVP development, QA testing and software optimization, and many other related services. Are you looking for a dedicated team of developers for your upcoming project in fintech? Contact us to explore the top-notch financial technology solutions which can benefit your business today!

Business Development Officer of IdeaSoft
Yulia Shmitko
Business Development Officer

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