Enigma CEO: Domain-Specific Regulation Will Shape Future of Payments

The not-so-secret sauce in the 21st century’s growth engine is a mix of digital innovation and data-decisioning.

Digital innovations beget digital gains, and while the world is changing faster and faster, payments sector innovation is keeping pace, driven by parallel advancements in technological capabilities and shifts in consumer behavior.

“With the increased digitization of everything, there’s a lot to think through, a lot to build, and at the same time, regulate,” Hicham Oudghiri , co-founder and CEO of Enigma , told PYMNTS CEO Karen Webster as part of the “What’s Next in Payments” series.

“I think what we are going to see is much more domain-specific regulation,” Oudghiri added.

Given the rapid clip of today’s technical advancement, regulation increasingly plays a critical role in shaping the payments industry, ensuring consumer protection and maintaining the integrity of financial systems.

Oudghiri explained that right now, “regulation in FinTech is like a proxy regulation,” where FinTechs are regulated “off of the back of the ecosystem that they plug into.”

But regulators are getting smarter, increasing their scrutiny as concerns around shadow banking move up their priority list.

As regulatory authorities become more tech-savvy, Oudghiri predicted the emergence of domain-specific regulations within the FinTech sector, tailoring rules that cater to the unique characteristics of various financial services.

Challenges and Opportunities in the Digital Age

The payments industry is now extending its efforts to combat more subtle and complex fraud activities, in one way by leveraging innovative digital tools to fight next-generation digital scams.

For instance, behavioral analysis can identify anomalies in user behavior, such as copying and pasting a password, and trigger security measures. This approach ensures a more personalized and effective security framework.

Still, the emergence of digital payments has led to a significant identity verification problem, particularly in the commercial sector.

“We have a big identity problem,” Oudghiri said. “The next 10 years will be very freaky in terms of fraud.”

“When you’re going out there and prospecting, look for real businesses,” he explained. “Don’t think about marketing as something that’s a big throw-the-net exercise and we’ll filter it later.”

The challenges of verifying the identity of businesses are more fluid and dynamic than individual identities. Businesses can change names, jurisdictions and addresses, making it difficult to establish trust. Innovative solutions are required to address these challenges and ensure smooth, secure transactions in the digital economy.

“The ways in which you need to triangulate a business are very difficult … [but] we have the data as an industry to be really smart about that,” Oudghiri added.

The Role of RegTech and Compliance

Still, in the absence of regulation, many FinTechs might not know just what the best practices are around what they should be doing.

Oudghiri pointed to RegTech companies, which are focusing on streamlining compliance processes for financial institutions. These companies offer solutions to automate compliance-related tasks, making it easier for businesses to meet regulatory requirements.

Compliance has evolved from being a bottleneck to becoming an integral part of the financial services ecosystem, and as regulations become more stringent, financial institutions are adopting RegTech solutions to onboard vendors and partners more efficiently.

Touching back on the challenges of digital commercial identity verification, Oudghiri noted that modern and innovative know your business (KYB) processes are crucial for verifying the integrity of business relationships as organizations, particularly smaller businesses, work to determine whether a business is creditworthy and whether it is a legitimate entity.

Inadequate KYB processes can hinder business growth, as many businesses may choose not to onboard questionable partners or clients. Existing, legacy processes need to adapt to the dynamic nature of businesses and the changing economic landscape.

Sweeping digital updates are often easier said than done, however.

“One of the reasons you don’t see tectonic shifts in the small business sector — it’s really because they’ve never had access to capital,” explained Oudghiri. “We think at least 40% of them that could be deserving of financing solutions are not getting it.”

As for what the Enigma CEO sees looking ahead?

“We’re starting to see an adoption curve of data into the small business space, whether it’s marketing, targeting, etc. — and that is very exciting,” he said. “It’s really injecting some creativity into how we think about things for the financial services ecosystem and payments ecosystem.”