Over the past few years, the alternative financial services sector has been flooded by a growing field of fintech companies and money services businesses (MSB). Many of these companies offer a wide range of financial products, including traditional loans and lines of credit. 

If they are operating as lenders, fintech companies and MSBs must fulfill a number of compliance requirements such as those included in the Bank Secrecy Act, the US Patriot Act, and the Truth in Lending Act. Though achieving full compliance with federal and state regulations can be an expensive, resource-intensive process, the cost of non-compliance can be exponentially higher.  

The real cost of non-compliance goes beyond financial penalties. In fact, fees for non-compliance are in many cases the cheapest expense. The true cost of not fulfilling compliance requirements includes many “hidden costs.” These are expenses that are hard to quantify, such as reputational damage from adverse media mentions, as well as business disruption and lost productivity as staff are pulled away from their regular roles to deal with the compliance emergency. All of these hidden costs will ultimately lead to “revealed costs,” meaning lost revenue and fewer customers. 

Lately, fintech companies and MSBs that rely on online channels for customer onboarding, loan origination, payment processing, and financial transactions are being looked at more closely by regulators and governmental agencies, such as the Consumer Financial Protection Bureau (CFPB). 

These same small lenders, however, are simultaneously facing increasing competition and tighter profit margins. Some may even have legacy systems that may not be keeping up with the constant drumbeat of regulatory changes. One major compliance mishap can easily put the company out of business.  

In short, it’s extremely important for alternative lenders to bake regulatory compliance into their business model and internal systems. They simply can’t afford not to.