How to Launch a Regulated Product
August 18, 2021
Compliance for Fintechs – Part I: Getting Started
So you’re building a product that will be regulated, and you need to develop a compliance plan. Good news—we’ve worked with dozens of companies in your position, and we’ve compiled our best advice here on how to get started.
There are three basic considerations when establishing a regulated financial product or business:
- Decide whether you want to work with a bank or be regulated yourself.
- Familiarize yourself with what examiners will expect of you.
- Build your compliance team.
Through a series of three articles, we’ll dive deep into each of these elements and walk you through what to expect. In this first article, we’ll go through the main differences between working with a bank and being regulated yourself.
Working With a Bank vs Being Directly Regulated
Trying to decide whether you should work with a bank partner or be regulated yourself is a complicated decision, often with no clear right answer. It’s also worth keeping in mind that you could start out working with a bank partner, and as you grow, eventually decide to be directly regulated. Let’s take a closer look at what’s involved in each of the two options so you can determine which option is right for your company.
Work with a bank
When you choose to partner with a bank, in most cases, you’ll fall under the authority of the bank’s regulator. Working with a partner bank offers a faster and cheaper alternative to becoming directly regulated if you’re looking for access to payments systems, the ability to take deposits, and the ability to issue cards.
There are a few things you should take into consideration if you’re going to work with a bank. For starters, banks looking to partner with fintechs fall broadly into two categories: banks that have been in the partnership business for many years, and banks that are looking to diversify their revenue sources through partnerships. There’s a growing group of banks that have decided partnerships will be core to their strategy in the future. These tend to be the best companies to work with since their goals will be aligned with yours.
Banks in the partnership business
These banks have been through many review cycles with their regulators and have proven they know how to partner with fintechs. They tend to be more conservative and more expensive, but they carry more weight with regulators and other potential partners. They also have infrastructure that makes it easier to work with tech companies so you won’t need to spend as much time educating them.
Banks looking to diversify
Partnering with fintechs has become a trend in the banking space and many smaller banks are starting to explore it as a way to diversify and expand their revenues. They may have more of a risk tolerance than the established players, offer better pricing, and be more flexible in how you work with them, but there are some notable trade-offs. They may not have as much experience working with fintechs, so the learning curve could be significant for both their internal teams and their regulators. They also may not have invested much into the infrastructure to work with a tech company.
Be regulated yourself
Getting regulated yourself is a different story than partnering with a bank. If you do decide to take this route, we recommend hiring a Chief Compliance Officer with direct experience building a regulated business from scratch. For card products and lending, you’ll be bound by either state-by-state or federal regulation (this depends on what types of products you offer). For payments, the typical path is at the federal level through the FDIC via bank partners and state-by-state money transmitter licenses. Should you choose to be directly regulated, you’ll get more freedom, but it will require a more significant investment, which costs more and could delay the launch of your product.
Get expert advice
If you have follow up questions, or would like recommendations specific to your business case, Hummingbird can help. Book a spot on our calendar for a free, 30-minute advisory session with compliance experts. Our team includes former regulators, compliance program operators, and policy makers; and we’ve helped everyone from pre-launch fintechs to large institutions. See why our customers say that working with us is “like a crash course in best practices for building an effective, scalable compliance program.”