‘Move fast and break things’ might sound like a good way to build technology, but the financial space operates by different rules. A fintech app that ‘breaks things’ can quickly attract regulatory scrutiny, examinations, and fines. ‘Move fast and break laws’ is no way to run a business.

However, there are options. 

Francesco Matteini, CEO and Founder of InnReg, has helped many fintech disruptors strike the right balance between moving fast and managing regulatory risk. Because so much of the financial space is regulated, building in compliance from the beginning helps protect against risk. Moreover, counter to what many people might think, the right approach to compliance can even open up new avenues of innovation. 

Matteini founded InnReg to help companies achieve exactly that balance — innovating while navigating the complicated web of regulations in the financial space: “You bring us a disruptive idea in a highly regulated business environment, and we’ll creatively chart a path to overcome your regulatory obstacles.”

We gave Matteini a call to better understand how to “operate in uncertainty” when innovating in the financial space and the possible green space for community banks to be fintech innovators.

What are the biggest compliance hurdles that innovative financial products seem to run up against most often?

Lately, it's uncertainty. There are significant open questions about which regulator has oversight over their specific type of innovation, as in the case of cryptocurrency. We also see concerns about which existing regulatory body or regulation applies to the innovation. And sometimes, it's even the general sense that there is a regulatory vacuum. 

Therefore, fintech product creators have to operate in that uncertainty, knowing that perhaps the existing rules do not give you a clear frame of reference on how to behave and remain compliant.

In your experience, do those gray areas work as a deterrent to innovation? 

I don't believe that this type of uncertainty has stifled innovation. The marketplace already has enough incentives for technologists and innovators of any kind and for capital providers to finance that innovation despite regulatory uncertainty. 

Instead, it tends to make innovators assume risk that could have been avoidable. Still, you innovate, you do your best to identify the rules that apply to you, and then do your best to comply. 

And the last part is important. Some innovators pretend that the risk doesn't exist. Their compliance approach is to hope for the best. That never works out. 

Unfortunately, innovators who try to do their best to identify which regulatory framework applies to their business and then to be compliant suffer from the actions of innovators who ignore the risks. It creates a blanket perception of recklessness among regulators and the marketplace. And that has the effect of stifling an entire area of innovation under a perception of disregard for rules, safeguards, and consumer protection. It’s a shame because most founders do their best to navigate a complex landscape.

Is there a reticence to offer innovative financial tools by community banks and credit unions because of an over-cautiousness?

Absolutely. Banks operate under a highly evolved regulatory framework that touches upon every aspect of their operations: from how they market to how they onboard customers to how they sell new products to how they provide service. 

From the moment a banker wakes up in the morning and drinks a cup of coffee, there is a rule that applies to how they're supposed to take their coffee. In this situation, the incentive to take on any regulatory risk is very low, especially in innovative scenarios where there hasn't been a consolidated approach by enforcement bodies on how to apply the regulation. So, there is a risk aversion that probably goes too far. 

On the other hand, innovation has been part of the banking services sector long enough, so a bank does have the tools needed to enhance their compliance program and incorporate that innovation into their operation. 

First, to try to bring on innovation, community banks must factor in the regulatory risk consideration. They also have to consider the technology development that comes with that innovation. Almost all innovation is technology-based, and bringing in technology built on much more modern platforms into banking systems is a challenge. So, the regulatory challenge goes along with the technology-integration challenge. 

Second, the challenge can be finding all the right compliance boxes to check, given the size and scope of a bank’s existing compliance requirements. Banks, by their very nature, have a very sophisticated system of governance with many layers. So, when you push out a new product, it needs to get multiple sign-offs, and there's probably regulatory interaction very early on, even before adopting a new product. These factors make it challenging for banks to take on innovation and make it part of their offering, regardless of their size.

Obviously, smaller community banks and credit unions have fewer steps to go from identifying an innovative technological tool and approving implementation. With a better understanding of compliance and the available tech, do you think that actually creates an advantage for these smaller institutions?

Yes, if they take the right approach. The advantages you mentioned, such as a more nimble sign-off process and a more streamlined governance structure, would allow quicker decisions to be made on adopting that technology. 

Another element that I believe would be helpful is the fact that a community bank, by definition, has a closer relationship with its client base. They know them very closely, so they can be more sensitive to the need for enhancements, new experiences, and new products. As a result, there is a shorter path between understanding the demand for more innovative services and the decision to take the steps to satisfy that demand. 

So, in other words, a community bank is closer in its makeup to an innovative technology company, which can be an advantage when they work with each other.