Turning Compliance Burden Into FinTech-Regulator Collaboration

Lithuania wants to become a global FinTech powerhouse. In recent years, the market has gone from one struggling with high financial illiteracy and limited card acceptance, to a bright spot in Europe for FinTech innovation.

Regulation is perhaps the strongest driver of Lithuania’s FinTech-friendly environment. Particularly amid the continuing uncertainty surrounding Brexit, FinTechs are turning to Lithuania to retain their European footholds and operate in a country that supports their innovative ambitions.

But financial regulatory compliance can be a headache for any market.

For traditional banks, compliance experts agree that it’s all about data — and the ability to share information with regulators.

“Banks that take a strategic approach towards regulatory reporting understand that they have access to a goldmine of reconciled, granular information that, if extracted properly, can meet the twin demands of regulatory compliance and better insights to compete in the commercial landscape,” said Dries Verboven, market manager of regulatory reporting at Wolters Kluwer Finance, Risk & Reporting, in an interview with PYMNTS earlier this year.

FinTechs, too, face growing scrutiny among regulators and struggle with data sharing requirements that, if unmet, can shut a company down.

Just ask Sergiy Barybin, CEO of Lithuanian cross-border payments technology company SatchelPay.

Barybin recently took up the position to head the cross-border payments technology company after the Bank of Lithuania halted SatchelPay operations earlier this year. (SatchelPay announced last week that the central bank has given the company the green light to resume operations.) The central bank’s decision, Barybin explained, had everything to do with strict data sharing and reporting requirements with which SatchelPay could not keep up.

Barybin spoke with PYMNTS about the journey to regaining SatchelPay’s compliant stance, the data sharing burden for high-growth FinTechs, and the opportunities for regulators and FinTechs to collaborate on promoting transparency in the financial services sector.

Resuming Operations

Reports first surfaced in August that Lithuania had halted SatchelPay’s operations because the FinTech had failed to comply with its requirement that FinTechs provide quarterly financial reports to authorities. The burden is high, said Barybin, and can cause especially large headaches for high-growth, but new, FinTechs.

“The suspension was levied by the Bank of Lithuania due to some concerns that they had regarding the company’s internal controls,” he explained. “The bank is pretty strict when it comes to what it sees as a potential risk.”

At the time of the suspension, the Bank of Lithuania released a statement that noted while “Lithuania is aiming to become a regional FinTech hub by creating favorable conditions for financial market participants” the central bank has “a zero-tolerance approach to any risk and irresponsible activities.”

Barybin noted that while SatchelPay “completely” understood the bank’s decision, “it was unexpected at the time and, of course, inconvenient.”

The Downside of Success

According to Barybin, SatchelPay’s inability to meet regulatory requirements is the result of fast-pace growth, demonstrating the potential downside of FinTech success and the risks new businesses face for compliance processes to fall through the cracks.

“We grew a great deal in the past year, and it got to the point where we were out-kicking our coverage in terms of being able to assign enough resources in a timely manner to submit comprehensive reports in time,” he said.

Data aggregation and reporting challenges are at the heart of the suspension, but SatchelPay is hardly the first financial services player to have experienced such challenges.

“With innovation in mind, EMIs [electronic money institutions] have to not just concentrate on business development, but also dedicate enough resources to stay compliant with the regulatory protocols in place,” he said. “Even though they do not actually hold banking licenses, the same spectrum of regulations and responsibilities apply to electronic money institutions.”

He noted that Lithuania’s central bank is currently developing new strategies to ease data collection and sharing between regulators and FinTechs as the market continues to promote its FinTech-friendly stance without compromising security, customer protections and compliance.

An Opportunity for Collaboration

As Lithuania explores ways to ease the data sharing burden, it is also working with industry players, including SatchelPay, as part of the effort, said Barybin. The initiative reflects opportunities for financial services companies and regulators to collaborate with a common goal in mind: improving transparency.

The experience of having to temporarily shutter operations and address internal compliance processes was “an intense regulatory bootcamp,” Barybin said. During this time, the company focused on restructuring and management enhancements to ensure the company can, moving forward, comply with reporting requirements. It was an opportunity to not only invest in the resources required to ensure compliance, but to also better understand the role of a FinTech company in promoting innovation, security, a positive end user experience, and a more trustworthy financial services market overall.

“Corporate transparency is fundamental for every regulated financial market,” noted Barybin, adding that transparency remains a focal point of the European Union’s wide-reaching regulatory initiatives that impact the financial services market, like PSD2.

“Transparency helps build trust towards FinTech companies and contributes to business legitimacy, allowing alternative financial institutions to grow, develop and mature as an integral part of an industry,” he said.