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The Coming Storm!

This week, German digital bank N26, the country’s highest valued start-up, was fined $5M for AML failings by BaFin following two years of close scrutiny by German regulators.  Earlier this year, N26 was issued an order to improve AML controls, including addressing deficiencies identified by regulators in 2019 that remained unresolved while they experienced growth to become “Europe’s top fintech.” And in an unprecedented move, “having done so only once previously — with Deutsche Bank in 2018” following the Wirecard scandal, BaFin had a ‘special commissioner’ appointed earlier this year in order to monitor the bank’s compliance, confirming fears that after Wirecard, the “fintech sector faces scrutiny and questions of trust.”

Trust, a precious commodity in financial services in general, plays an “extremely important role in the use of digital banking services,” especially for fintechs like N26, who acknowledged that “building trust is at the ‘core’ of their business model.” A model, which merged financial services and technology, and birthed the fintech industry as one of the fastest growing sectors in recent years, is not immune from market forces beyond regulatory scrutiny. According to a recent research report, “customers of the largest US banks have higher than average levels of ‘digital trust’ with their banks than with fintechs and other digital-only companies [and] that customers are more satisfied and engaged with their bank than those customers of newer organizations.”

“Two years on, and [as] the fintech sector continues to boom, [with] the pandemic having dramatically accelerated the shift towards e-commerce and online payment models,” the future will inevitably bring not only growth that will see the industry reach new heights but the heightened scrutiny that comes with it.  According to a study released last month, fintechs were “almost five times more likely than traditional lenders to be involved with suspicious loans issued through the U.S. government’s Paycheck Protection Program,” with fintechs constituting “nine out of the 10 lenders with the highest rates of suspicious loans.” And just last week, as the Biden administration announced key nominations for financial regulation, its nominee for the Office of the Comptroller of the Currency (OCC) of the Treasury was seen as “a signal [that] the OCC will seek to impose tougher regulations on FinTech and cryptocurrency—two areas the nominee has previously expressed concerns regarding risks they pose to the banking system.” With the coming scrutiny, as fintechs learned to pivot and adjust to the pandemic, the time may have come to recalibrate their strategic priorities and view compliance as a strategic function that will allow it to prosper and thrive in a post-pandemic world. 

AML Compliance Regulations
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