How fintechs can prepare for Dodd-Frank Section 1071 with compliance automation
Small business lending at fintechs hasn’t had to worry about data collection for compliance regulation. But that’s all changing with the enforcement of Dodd-Frank Section 1071. Not only will small business finance providers need to be trained on compliance regulation – something their counterparts in banking have been dealing with for years with Community Reinvestment Act (CRA) and Home Mortgage Disclosure Act (HMDA) data collection – they will need a way to efficiently track demographic information for all applications – not just on the loans that are fulfilled.
Encapture: the best way to achieve data excellence is through automation
Existing systems and processes will require a massive restructuring ahead of the ruling to be proposed in March of this year as requirements become more stringent and demanding. The current and future success of fintechs depends on the swift and decisive action of fintech leaders with regard to their understanding and implementation of systems and processes to address proper regulatory compliance and mitigate any future risks around Consumer Financial Protection Bureau (CFPB) actions.
New regulations will require more than 100 demographic data points to be reported – just as, if not more, correctly than through manual verification – and automation is the key to ensuring data integrity while also keeping labour costs down.
With an estimated 18 months given for implementation after the ruling is decided, fintechs must think ahead and create long-term, scalable solutions to intensifying financial and data integrity pressures.
Guarantee compliance with automation
The two biggest challenges fintech leaders are facing is increased regulatory pressure and controlling costs to remain competitive in the market. Leaders have stated that the cost of compliance is much less of a factor than the cost of non-compliance and are making it a priority. But are they prioritising it in the short or long term, and are they using all the tools available to propel their teams and companies forward?
Many fintechs will continue to just wait and see and tackle this once it becomes an issue by throwing more bodies at the problem, which only balloons costs and introduces new negative consequences like regulatory fines and reputational risks. Based on feedback from our Industry Advisory board composed of banking and fintech executives, fintechs and banks predict needing to double their compliance staff to adhere to new regulations, a huge blow when taking into account lower loan activity and profits.
Small business loan portfolios will receive more rigorous scrutiny with new 1071 regulations, and new systems will need to be implemented and trained upon. There is no telling how efficient these methods will be, but they do guarantee two things: progress will be slow, and results will vary dramatically.
Fintechs who do not adapt will face the risk of not reaching compliance requirements and sinking their businesses. Banks have known for years that the cost of compliance can be catastrophic and many fintechs will learn this lesson the hard way.
In contrast, those with the foresight to integrate automated systems in their compliance processes will avoid many problems common with manual processes that exist today.
Arun Narayan is chief product officer at Kapitus, a fintech specialising in small business financing. As both a direct lender and a marketplace built with a trusted network of lending partners, Kapitus is able to quickly provide small businesses the financing they need.
“What interests us the most about compliance automation is data integrity,” says Narayan. “Manual processes have historically lacked consistency and been wrought with human error. Our aim is to save small business owners time and money, and when our team is freed from tedious data scrubbing, our specialised staff can provide more consistent and stellar services to customers.”
Digitally transforming systems is a necessary step toward optimisation. Document processing, income verification and calculations, data extraction from verified documents, data trails and chains of custody – all of these things can be achieved by integrating machine learning into current digital onboarding experiences. What used to be a huge headache and cost drain for all fintech executives, maintaining quality data standards amid ever-tightening restrictions, will become a thing of the past. Properly equipped with better tools to handle manual data processing and verification, fintechs will have the energy and funds to look toward the future.
It is difficult to define just how extensive the aftershocks of the new 1071 regulations will be but we know one thing for certain – everyone in the financial industry will feel its effects. Much like how buildings are built with certain safeguards to weather earthquakes and other calamities, so must fintechs safeguard their own systems, processes, and pipelines. It is crucial to be ready for any and all consequences once regulations hit, and the best way to achieve data excellence is through automation.
“We’re definitely being proactive about implementing compliance automation,” adds Narayan. “We owe it to our customers to be ready for the changing regulatory environment.”
By Will Robinson, CEO of Encapture
Sponsored by Encapture, an intelligent automation platform providing banks with documentation efficiency.
Using machine learning (ML) and artificial intelligence (AI) technology, Encapture helps banks reduce compliance risks associated with Fair Lending Guidelines, reduce overhead costs, and improve profitability in a volatile market.
For more, please visit encapture.com.
