We started Higher One as college students in 2000. I believed in the potential of fintech but was naive about the regulatory landscape.
We grew the company to serve millions of college students and became a public company. And we experienced regulatory pressures firsthand. Despite our best intentions to follow the rules, we ended up in hot water with the banking regulators. Not something I would wish on you.
I often talk with founders of consumer fintech companies who are new to the regulatory environment. Here is the advice I have for them. I hope it helps you, too.
Yes, these lessons are a few years old but I’m sure the principles don’t change that fast.
1. Relationships Matter More Than Rules
When I played a new board game, I would go straight to the rules and read them in entirety before starting play. When I entered fintech, I thought I’ll read all the rules, follow them and then everything will be fine.
Sometimes this served me well. We designed our account opening process so that customers did not have to make any physical signatures or return any paperwork. I remember an expert telling me that it was illegal. And it was unusual (unique?), but by our careful reading, the rules allowed paperless account opening. Others agreed and that innovation became commonplace.
Understanding rules is often not enough. Some of the rules are vague to allow for “constructive ambiguity”, regulator judgement or changes in the market or technology. And rules are hard to apply and applied in unique situations.
At Higher One when we filed for a banking charter of our own, we made sure that our application was correct. Which is easier to do. More challenging is building the regulatory relationships. We were able to build relationships at the state level but had more difficulty building relationships at the federal level. There was another fintech company that did a much better job of building relationships with top regulators in Washington. That helped them receive a charter.
Rules matter. But relationships matter more.
2. Regulators Need to Trust Your Intentions
Which leads me to the next point. While you are building a relationship with a regulator, it is less about friendship and more about trust.
Banking regulators want to trust that your motivations. And they want to trust that you have the judgement to do the right thing when they are not in the room.
One way to prove that commitment and judgment is in hiring. Consider adding people with regulatory experience to your executive team and/or board.
The style and choice of messenger makes a big difference in the types of relationships you form with a regulator. If you are a startup founder, consider sending someone else to the meeting with regulators. Have team members or partners that know regulatory relationships act on your behalf or do most of the talking.
3. Press Drives Regulators
One approach we took early on at Higher One was focusing on trade press. We reasoned that we wanted to be in the publications about higher education more than the general press. And it worked to drive marketing and sales.
But it left a blank spot in the general press. When a critic is able to place a negative article, it poisons the well and makes it harder to tell your story in the general media.
And negative publicity can get regulators interested.
Telling your story early enough in the general press can reduce your risk here.
4. Understand the Nature of Regulation
For fintech companies, often the chief focus of regulators is consumer protection. (Or sometimes investor protection.)
For banks regulators also care about safety and soundness, in addition to consumer protection. Regulators have an interest in banks staying in business. For example, the FDIC has a financial stake in ensuring that banks stay in business so they don’t have to pay for deposit insurance. You can see the organization’s commitment to this mission by walking into their offices. Pictures of physical bank runs cover the walls.
With a bank, a regulator wants to see consumer protection and safety and soundness balanced. With a fintech, the pressure is to protect consumers regardless of any economic realities.
5. Write (Almost) Everything Down and Listen to What’s Not
To get credit for all the good stuff you are doing to comply, it is critical to create written evidence. Write policies, procedures, logs, issue tracking and minutes.
It is hard to overstate the importance of written documentation.
Yet, it is also critical to have the ability to have an undocumented conversation with regulators or your bank partner. Regulators will sometimes only say certain critical things out loud. And you want to be listening.
6. Apply the Regulatory Checking Pattern
Many regulations follow a similar pattern. If you recognize the “regulatory checking pattern” then you can apply it in many areas of fintech.
The basic steps are:
- Intention and self-direction: a declaration by management and the board that we care about this topic area. A formal vote for example.
- Written policy and procedure: writing down the general policy and then specific procedural steps required to do work in this area.
- Training: regular training for board, management and relevant employees. Often the relevant employees will be everyone. Remember the training only counts if you have a written record of who participated.
- Log the Procedure: It is best to have a log or written record of specific activities produced.
- Checking Daily: Have the log or the completion of the procedure checked daily.
- Internal Audit: regular but at least annual internal audit of the process.
- 3rd Party Review: for high risk areas, sometimes having an outside expert review all of the rest is best. And write a report, too.
- Issue Resolution: Log and resolve any issues discovered in the previous steps.
- Regulator Review: when a regulator comes in they will want to see written evidence of all the other steps.
7. Watch for the Underdog Flip aka Size Matters
The larger your company, the more than you can expect to come under scrutiny. Beware feeling like an underdog even when others see you as big. I’ve seen this in other industries with young founders who don’t notice that they are the dominant player in the market.