An Industry Insider on the Growing Importance of Compliance in Bank-FinTech Relationships

With fraud on the rise, an industry insider explains why regulators will ramp up scrutiny of bank-FinTech relationships.

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Fraud has long been a troublesome problem for banks and other financial service providers — and it has only gotten worse. This dynamic could have a big impact on banks and their FinTech partners as the year unfolds, according to Kiran Hebbar, chief financial officer at identity decisioning platform Alloy.

In an interview with PYMNTS, Hebbar explained that last year’s profusion of fraud has prompted regulators to increase their oversight of bank-FinTech relationships this year, meaning that both parties may need to reevaluate their fraud-fighting capabilities.

The fraud prevention efforts of the past are no longer able to keep up with the current level and nature of threats, he said. As an example, rules-based fraud detection and prevention platforms, long a staple of fraud mitigation measures, are simply outmatched by the volume and increasing sophistication of attacks.

These attacks are not limited to external fraud, either. The FTX implosion, Hebbar asserted, demonstrated the significance of internal fraud, and as the case’s impact has fanned out across the crypto space, calls have grown for increasing scrutiny of FIs’ and FinTechs’ participation in this emerging area of payments, banking and finance.

Compliance could be a major problem for FinTechs. Because FinTechs typically are not used to operating in strict regulatory environments, regulators are starting to embrace a more proactive posture to ensure successful anti-fraud measures. This may require FinTechs to place a greater primacy on compliance and fraud prevention.

“What’s needed in this modern world is a holistic approach to solving fraud,” Hebbar said.

He added that technology will be central to this new strategy, and this is why firms such as Alloy are working with banks and their FinTech partners to bolster their compliance and security capabilities.

“There will be a new operating environment for many companies [in 2023 and beyond],” Hebbar said. “There will be a focus on improving efficiency and profitability … and prioritizing fraud and compliance. Compliance needs to be built into the fabric of every company.”