FinTech is playing an increasingly essential role in small business lending and shaping the future of SMB finance regulatory practices. According to the FDIC Small Business Lending Survey (SBLS), 31% of banks use FinTech for small business lending, while another 22% are actively discussing or developing the technology.
Despite FinTech’s usefulness, adhering to regulatory compliance laws is crucial to ensure safety and transparency and avoid fines and penalties. Unfortunately, 93% of FinTech platforms admit struggling with meeting regulatory compliance requirements. While the industry once lacked the same scrutiny and regulation as traditional banks, that is no longer the case. Although the regulatory landscape remains in limbo, there is increased oversight by regulators, particularly surrounding SMB lending and finance.
As new regulatory trends emerge and the industry reshapes SMB financing, it’s vital to stay apprised of and incorporate the latest compliance strategies to mitigate risks, enhance operations, and facilitate trust between all stakeholders.
Compliance Challenges Within the FinTech Industry
Data Management
As data is integrated across multiple platforms and systems, data management becomes crucial, from protecting data and ensuring privacy to accuracy to data storage and complying with regulations. FinTech lenders must implement robust frameworks prioritizing data governance to prevent sensitive data from falling into the wrong hands.
Rapidly Evolving Regulations
Regulations are swiftly changing to adapt to innovation within the FinTech industry. Lenders may struggle to keep up, which can hamper the pace of innovation. Balancing these challenges is essential, however, if lenders are to remain competitive while maintaining compliance.
Compliance Costs
Administering an agile and effective compliance program can be an expensive and time- and resource-intensive undertaking for lenders. These programs require technology investments, the assistance of compliance experts, and regular audits to ensure ongoing compliance. Nonetheless, these costs must be weighed against the potential financial penalties for failing to meet regulatory standards.
The Risks of Non-Compliance
The failure of any FinTech to meet regulatory requirements can result in several adverse outcomes. The worst outcome is that a lender can lose its license and ability to operate. Other potential outcomes can include the following.
Penalties and Fines
The financial penalties associated with non-compliance can be significant. In 2022, 60% of fintechs paid at least $250,000 in regulatory fines, while one-third paid more than $500,000 each. U.S. government agencies such as the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) have are adamant about levying penalties against FinTechs violating regulatory laws.
Operational Disruptions
Any active investigation into non-compliance accusations can trigger an audit, with regulatory authorities potentially imposing operational restrictions or freezing assets until the compliance problems are resolved. Any disruption costs money and diverts resources away from business operations.
Reputational Harm
Consumers expect their information and transactions to be secure and meet legal regulations. The slightest violation can potentially damage a company’s reputation, leading to distrust among users. This can have devastating effects and limit the ability to grow and scale.
Increased Scrutiny by Regulatory Authorities
Unfortunately, once a platform is flagged, it can lead to additional audits, and regulatory authorities are likely to impose stricter reporting requirements.
Key Regulatory Trends Shaping SMB FinTech in 2025
Increased Governance of Embedded Finance
As embedded finance becomes more prominent, there is a lack of clarity regarding who is responsible for disclosures, compliance, and protections for consumers. FinTechs must provide more transparency in loan terms and clearly define their roles, boundaries, and responsibilities within their operations and in contracts with their partners.
More Robust KYC and AML Requirements
According to a study by LexisNexis® Risk Solutions, SMB lending fraud increased by 13.6% in 2023. Moreover, 72% of the study’s respondents, which included digital lenders, banks, and credit unions, say they plan to increase their fraud prevention budgets to prevent financial crimes.
As fraud becomes increasingly more common in digital transactions, regulatory authorities expect FinTechs serving SMBs to implement rigorous Anti-Money Laundering (AML) and Know Your Customer (KYC) practices. Doing so can ensure regulatory compliance while warding off unlawful financial misdeeds.
Document scanning and Biometric verification can authenticate business and personal data, particularly with high-risk customers. Automated transaction monitoring systems that utilize machine learning can detect suspicious activity. Finally, performing regular audits and having internal controls can enhance the effectiveness of a FinTech’s AML program.
Regulatory Technology (RegTech)
RegTech has become instrumental in simplifying compliance and helping FinTechs navigate regulatory hurdles. RegTech leverages advanced technologies such as AI, machine learning, and blockchain to streamline risk management and enhance the regulatory process. AI and machine learning automate routine compliance tasks and regulatory reporting and adapt to new regulatory rules. Meanwhile, blockchain enhances KYC processes like transaction monitoring.
Operational Requirements
Operational disruptions are a significant concern in the industry. Regulators have new guidelines that require FinTechs to identify the risks of operational failure and assess the operational resilience of the platform. FinTechs are also expected to have contingency plans in place to deliver continuous service.
Cross-Border Compliance
Some FinTechs operate across borders, adding an extra layer of complexity since the platform must meet different regulatory requirements in the countries they operate. Cross-border regulatory compliance is trending for organization that operate internationally. Some countries are focused on creating consistent regulatory standards to facilitate a more cohesive and streamlined compliance rules.
Open Banking and Data Privacy Controls
Open banking is set to expand and grow, presenting an opportunity for FinTechs as well as challenges. Open banking allows SMBs to share financial data across multiple platforms, enabling Fintechs to deliver highly tailored financial products, including automated accounting software solutions, business insights, and personalized business loan offers.
However, with vast amounts of data moving across platforms, there is increased scrutiny on how the data is stored, utilized, and shared. FinTechs will need to ensure transparency and compliance with data privacy laws. Robust encryption practices, customer education, and secure Application Programming Interfaces (APIs) are essential to safeguard sensitive user information.
Compliance Training Programs
An effective compliance training program can educate employees about how regulatory laws and compliance apply to operations. It’s also wise to tailor training by department.
For example, marketing teams should prioritize advertising transparency, while product teams can design user interfaces compliant with FinTech-related regulations. Meanwhile, customer service training should focus on resolving customer disputes. Refresher courses can keep team members updated on new regulations.
Final Thoughts
As innovation within the industry continues to evolve and transform SMB financing and lending, so does the regulatory landscape. Understanding the trends and staying ahead of changes can build a foundation of trust and transparency while avoiding fines and reprimands from regulatory authorities. FinTechs that utilize compliance as a strategic asset and embed it into their operations will thrive and succeed.
Biz2x is a trusted platform that was built for SMB lending, helping financial institutions streamline compliance through embedded risk management tools and automation. The stakes are higher than ever, and increased regulatory scrutiny is changing the SMB and FinTech sectors.
Download our white paper, “The forthcoming revolution in small business lending,” to learn how streamlined regulation is transforming the intersection of SMB finance and technology for FinTechs.
