How fintechs can address the rising challenge of compliance costs

Fintechs are the backbone of India's rapidly evolving digital financial ecosystem, significantly enhancing financial inclusion by delivering last-mile services and supporting Aatmanirbhar Bharat. However, in this dynamic sector, innovation and compliance are intrinsically linked; it is essential that innovation does not compromise regulatory compliance.

The Reserve Bank of India (RBI) has implemented several regulations to foster transparency and digital trust in the financial ecosystem. These include stringent Know Your Customer (KYC) guidelines, requiring fintechs to thoroughly verify customer identities, preventing fraud and ensuring anti-money laundering compliance.

While these measures aim to enhance the integrity of the financial system, they have led to increased operational costs for fintechs. To mitigate this challenge, fintechs should leverage advanced technological solutions that streamline compliance processes and reduce associated costs, without compromising innovation.

The Regulatory Landscape and Compliance Costs

Regulatory bodies are implementing stringent regulations aimed at promoting responsible innovation within the fintech sector. However, many of these regulations remain unaudited, and if fintechs do not adapt their approach, costs will likely escalate with the upcoming implementation of the Digital Personal Data Protection (DPDP) Act and other unaudited regulations.

These policies are designed to ensure that fintechs operate ethically while maintaining high standards of consumer protection and data security. Consequently, “compliance” has become a critical focus for fintech operations, with rising compliance costs impacting both operational efficiency and financial stability. 

According to a Yubi report, fintechs allocate 6-10% of their operating expenses to compliance, which includes auditing, legal services, due diligence, and corporate governance. Early-stage fintechs often face even higher costs due to initial setup requirements, with annual compliance expenses ranging from Rs 0.9 crore to Rs 1.17 crore for new entrants, and Rs 2.5 crore to Rs 3.2 crore for established firms.

As regulations evolve, these financial burdens will likely increase, prompting fintechs to adopt advanced technological solutions to streamline compliance processes and mitigate costs.

Employing AI And ML And Their Strategic Implementation

One of the most effective techniques for managing the rising costs of compliance is the adoption of artificial intelligence (AI) and machine learning (ML) technologies in the compliance process. This solution enhances the work efficiency of compliance officers while reducing the risk of errors.

AI and ML technologies can greatly improve operational efficiency by analysing large datasets and automating repetitive compliance tasks such as transaction monitoring, risk assessments, and report generation.

This automation reduces the need for manual intervention, streamlining processes and minimising errors. For instance, machine learning algorithms can sift through vast amounts of data to identify suspicious activities and detect potential fraud in real-time, significantly boosting the overall efficiency of compliance operations.

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AI-powered compliance solutions also offer proactive risk management by delivering real-time insights into emerging risks and regulatory changes. Continuous monitoring and analysis of data enable fintechs to stay ahead of potential compliance issues and adjust their terms and conditions accordingly. Additionally, these solutions provide early alerts to fintechs about regulatory deadlines.

By complying with all the regulatory guidelines, fintechs maintain their business reputation, further enhancing the trust of all stakeholders.

As fintech companies continue to innovate and expand, managing compliance costs effectively becomes paramount. By utilising AI and ML technologies, fintechs can maximise operational efficiency, reduce costs, and mitigate risks associated with regulatory compliance.

Strategic investment in these technologies not only helps fintechs navigate the evolving regulatory landscape but also safeguards their business reputation and ensures long-term success. As the regulatory environment continues to evolve, adopting advanced compliance solutions will be essential for fintechs to stay ahead of the curve and achieve sustainable growth.

(Ankit Ratan is the Co-founder and CEO of Signzy.)