Fintech

What ESG challenges do FinTech companies face?

Published

9 months ago

19 July, 2024

Now, with a focus on social and environmental impact, the term “fintech for good” has evolved from its initial meaning of charity. But it doesn’t stop there. This July, we’re on the hunt to discover how the fintech sector is doing “good” for local communities and the world, revealing current and future plans to make changes.

Green washmisinforming the public about a company’s ethical and environmental impact has been one of the biggest challenges that fintechs have faced at one point. There was a lack of transparency in the past, however, in the last couple of years, this has been severely addressed, resulting in more accurate news being shared about ESG (environmental, social, governance) and how they are achieved.

However, challenges persist, so we spoke to the industry to find out what challenges fintech companies still face.

Don’t forget the “S” in ESG

Sundip Patel, Co-Founder and CEO of Avana Companies

When it comes to ESG, it is very easy to get caught up in environmental impact. However, organizations need to ensure they also focus on social and governance aspects, according to Sunbathing Patellaco-founder and CEO of Havana Companiesfinancial technology that drives social and environmental change.

“One of the biggest challenges is measuring social impact. It’s important to be deliberate in collecting data and be clear about what action or activity your company can take to create and measure social or environmental impact. Another challenge many companies face is getting an entire company to align social impact with business goals if profit has been the primary motivator for years.

“As a leader, it’s important to understand that changing minds by thinking about both profit and purpose takes time and resources. Using existing frameworks like united nation‘S Sustainable Development Goals (SDGs) can help operationalize impact measurement and alignment. While it can be difficult to implement SDGs into initiatives, they ultimately contribute to business success.

“A third challenge business leaders face is trying to achieve too many SDGs at once and then struggling to maintain them. Leaders need to tackle the SDGs and social impact goals one step at a time. For fintech companies, consider the ones that best align with your company’s mission, such as financial inclusion.

“You just have to start somewhere: think of ESG or SDG goals as a continuum. It can be overwhelming trying to set big goals all at once. It’s a journey that requires conscious effort, so approach the tasks slowly and deliberately. Eventually, the company will have met and changed course to prioritize social impact and profit.”

Authentic values must be the foundation of a company

Francois Terrade, Global Head of Structuring at Demica

Francis TerraceGlobal Head of Structuring at DemicThe supply chain finance platform points out that many companies would not have so much difficulty integrating ethical values if they incorporated them into the company’s core business.

“Fintech companies often seek to raise funding for specific projects that will only become profitable after a certain number of years.

“In this context, the short term can be tempting. ESG considerations can take a lower priority and corporate decisions can ‘cut corners’: having software developed in countries without adequate social protection or creating a work environment that promotes internal competition and short-term gains by recruiting people with similar backgrounds.

“To stay relevant and grow rapidly, fintechs need to establish a strong set of genuine values as the foundation of their vision. Fast-growing fintechs are more diverse and have strong values, which allows them to see opportunities faster and be more agile in implementing them with highly motivated employees. Corporate values and culture that incorporate ESG principles will attract and retain talent, customers and investors.”

Ensuring a good reputation

StockAlarm, Shawn Carpenter; president, CEO Shawn Carpenter; president, CEO, StockAlarm

Scarf Carpenter, President and CEO, Stock Alertthe stock app, also stresses the importance of establishing an ethical culture. However, it also goes on to note how data privacy and security can be challenging.

“Despite the potential benefits, fintech companies face challenges when implementing ESG initiatives.

“A big problem is that there are no same rules and ways to communicate numbers. ESG encompasses many different things, so without clear guidelines, companies find it difficult to measure their performance and compare themselves fairly with others.

“Data privacy and security are also very important. Fintechs use a lot of data, so keeping it private and secure is a must. Any breach can damage trust and reputation, so balancing data use with stringent security measures is very important.

“Furthermore, keeping pace with technology and regulatory changes is a challenge. Fintech companies must continuously adapt to new laws and public expectations, which requires regular investment and adaptability.

“Finally, creating an ESG-focused culture can be difficult. It involves shifting from the pursuit of quick profits to the goal of long-term sustainability, a shift in thinking that takes time and dedication.

“Overall, while fintech can bring about major positive changes for ESG, it is important to overcome some challenges. By addressing these challenges head-on, the industry has the opportunity to lead the way in creating a more sustainable and responsible financial future.”

Maintaining customer trust while achieving ESG goals

Erik Severinghaus, Founder & CEO, Bloomfilter

Erik House of severityFounder and CEO, Bloom FilterA company that specializes in AI-based process analytics for software development, has found that as companies try to find the perfect balance between profitability and being “good,” other concerns such as data privacy and security emerge.

“When it comes to ESG issues, fintech companies face many challenges. The lack of uniform ESG reporting and analysis frameworks is a big problem. It is difficult to consistently track and talk about ESG performance without shared rules that everyone must follow. As a result, stakeholders get confused.

“It is not easy to incorporate ESG factors into current business models while still making money. Many fintech companies struggle to find the right balance between earning profits and acting ethically. The desire to show quick financial gains often works against the long-term goals of investing money in ESG. This makes it difficult to find a good balance between these two aspects.

“Data privacy and security are now very big concerns. As more and more fintech companies use AI for ESG projects, it is very important to ensure that customer data is used correctly. Effective data protection measures are very important to prevent breaches and abuse, which keeps customer trust intact and also helps to advance ESG goals.”

Regulatory obstacles

While data privacy and security are some key challenges, Pat PatelExecutive Director at ElevatingThe company that offers programs and forums in the financial technology sector, highlights why regulations can create obstacles and how training is needed to overcome them.

“Fintech companies face a range of ESG challenges, including regulatory hurdles, technological barriers and resistance to change. The regulatory landscape can be complicated and vary widely across jurisdictions, making compliance a real challenge. Technological barriers are another issue, especially in regions with limited internet access and lower levels of digital literacy.

“To overcome these challenges, significant investments in education and infrastructure are needed to make technological solutions accessible to all. Additionally, there is often resistance from organizations and stakeholders accustomed to traditional methods and who may be skeptical of new technologies. Addressing these challenges is critical to the successful implementation of ethical fintech solutions.”

Energy sources, inclusion and regulations

Roman Eloshvilifounder and CEO of XData Groupa B2B software development company, analyzes every aspect of environmental, social and governance, explaining the challenges that arise in each area.

Environment

“Data Centers and Energy Consumption: Fintech companies handle large volumes of data, which requires significant computing power and consumes significant energy. Data centers require constant cooling and power, which can result in high carbon emissions. Managing the environmental impact of this energy use is a major challenge.

“Renewable Energy Sources: While adopting renewable energy sources is a desirable option, they can be expensive and may not always be available in all locations, leading to reliance on non-renewable energy to maintain operations.

Social

“Financial Inclusion: Ensuring that fintech services are accessible and affordable to diverse populations is a significant challenge. Many underserved communities lack access to traditional banking services. Fintech companies must design inclusive products that meet the needs of diverse demographics.

“Security and Privacy: Protecting customer data and preventing fraud are other critical concerns. Fintech companies must implement robust cybersecurity measures to safeguard sensitive information from breaches and cyberattacks.

Government

“Regulatory Compliance: Navigating the complex and ever-changing regulatory landscape is always a major challenge for fintech companies. Regulations are constantly evolving, with new areas being regulated and existing regulations being updated. Fintech companies must stay informed and compliant with these changes to avoid heavy fines and maintain operational integrity. The cost of mistakes in this area can be extremely high, both financially and reputationally.”

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

9 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

9 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

Source

Fintech

M2P Fintech About to Raise $80M

Published

9 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

9 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

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Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”