Last week, PayPal, the eBay owned online payment company, was fined $7.7 Million for 486 OFAC violations. And that was a reduced fine just for 2013. 2014 investigations have not been completed at this time. That comes to nearly $16,000 per violation. Considering the number of transactions PayPal does, 486 is nothing. But then again, if fines were applied to a larger number of transactions, PayPal wouldn’t have a viable business model. And these violations were made with a strong compliance and anti-money laundering department. Imagine the violations without such a department in place.
PayPal and other Financial Technology (FinTech) firms are categorized as Money Service Businesses (MSB’s), not banks, because they do not offer depository services. this categorization does not absolve them from regulations pertaining to transactions and sanctions, like banks. Last week, they found out what it will cost them to stay compliant.
Generally, FinTech firms consider themselves to be the new alternative to banks. So, they don’t work with banks unless forced. So, compliance is not something FinTech spends a lot of time worrying about, resulting in less compliance experience.
Banks, however, despite their effort to reduce the effects of regulations, have been beefing up their compliance departments as well as vendor services. Some of the vendors are in the new sector of Compliance Technology, or CompliTech.
CompliTech has been around a decade or more but its recognition as a sector of its own is brand new. CompliTech is made up of a handful of firms across the US and Europe as well as groups within existing large bank systems providers. Their products are not yet fully tested, still require incredible amounts of human intervention and are expensive. Small financial players like community banks, credit unions and FinTech cannot afford their services.
But these are the very firms that need CompliTech services the most. If an organization is trying to provide inexpensive products and services with convenience without compliance programs afforded by economies of scale afforded at large institutions, they run a greater risk of serving cash-based businesses and immigrant populations with ties to foreign businesses. These providers face all of the threats of global banking without the benefits. To make matters worse, when a few CompliTech firms emerge as the leaders in the industry, big banks, bank systems providers and large consulting firms are more likely to snatch them up, leaving fewer options for FinTech to fend for themselves.
PayPal is an exception to all of this, as it is an exception in FinTech. It has been a round a while, it is large, and, these afford it a sophisticated compliance program. It hires PhD’s to do statistical analyses and ex-military intelligence officers to execute counter-terror financing. What startup can afford such programs?
CompliTech will eventually get around to serving FinTech. But until then, FinTech is far from taking over the transaction space.
About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.