Risks Involved in Fintech

Posted on June 8th, 2022

The fintech industry has made incredible progress in the past few years. In the pandemic alone, we all witnessed an evident upsurge in the adoption of fintech by people globally. Because of the gigantic scope of technology, the fintech sector has attracted countless professionals and experts, who continue to work relentlessly to create innovative fintech solutions for customers and businesses.

With the rise in demand and the adoption rate of fintech, the number of fintech startups has grown astonishingly.


Fintech hubs like Silicon Valley, London, and Singapore have uncountable startups offering various fintech services to customers all over the world. The extent of innovation and dynamism in the industry calls for strict regulations.

Because of the ever-evolving nature of technology, compliance and regulatory standards have become a mandate for operating in fintech. With so many players in the market, there is a persistent possibility of risks like money laundering, hacking, etc., that could lead to immense damage. Therefore, the need for a robust regulatory system is a must.

More than anything, it is the scope of technology that is used and abused by criminals to beat the regulatory structure of the industry. To curb and mitigate the risks involved in fintech, all players in the industry would need to consistently work together to streamline processes and set up efficient systems.

The Risks Involved

Fintech is an increasingly dominating industry that is gaining popularity quickly. With businesses and customers adopting fintech practices all over the world, the possibility of data and information falling into the wrong hands, increases. The most commonly occurring risks involved in fintech are:

Money Laundering

Money laundering practices have been quite prevalent in the past and are still going on in the present age at a big level. Fintech enables the easy and quick transfer of money, especially transactions that require cross-border activities. If there is some level of leniency in the regulatory system, it could lead to the transfer of power from regulators to the people, leaving scope for anonymous and unverified transactions. 

Quick Transfers

Fintech allows very fast transfers and transactions. Big amounts can be transferred across borders in a matter of seconds. This speed can also be used as an advantage by criminals. By quickly transferring big amounts from one account to another, there is the possibility that the trails created by these transfers outpace the regulations and scrutiny by the authorities. 

Criminals target “money-mules”, who are vulnerable customers like elderly or disabled people, who would not have the resources or the robustness to manage their financials very efficiently.

Customer Identities & Data Privacy

As fintech operations and functions exist online, it leaves some space for anonymity that is exploited by criminals and hackers, where they can conduct transactions online by breaching companies’ customers’ data and filling in their information. 

Criminals can also hack into company systems if there are regulatory lags and can steal personal and financial information of the customers or the company, putting everything at risk.

Bad Loans

Another risk involved in fintech is bad loans. With verification processes being conducted virtually, there is a huge possibility of people manipulating their data to get loans from banks, which then turn into bad loans. These bad loans make the entire system vulnerable and unstable.

Risk Management

With an innumerable number of players functioning in the fintech sector, the role of regulators has become indispensable. It has become absolutely essential for regulators to prioritize handling and mitigating the risks involved in fintech. Risk management is a vital tool for fintech companies that they should invest in. By following regulations and meeting industry standards, the possibility of risk exposure lessens. 

Due to the changing landscape of the fintech industry, the need for robustness is essential. It is crucial for the regulations system to match pace with the level of innovation existing in fintech. 

With a proper risk management system in place, the safety of customers and businesses can be ensured. The well-being of customers, market integrity, and financial stability depends on risk management. Fintech companies should follow some practices that could help them sustain stability and security in the market like:

Due Diligence

Conducting proper customer due diligence and verifications brings integrity and stability in the market. Adequate verifications, along with strict KYC (Know Your Customer) can help curb many problems.

Monitoring Transactions

Fintech firms should also invest in regulatory systems that help them closely monitor all transactions being conducted through them. Every purchase, every transfer, regardless of the amount should be tracked, which would help bring a level of transparency and trustworthiness in the industry.

Following Regulations

Abiding by regulations and compliance at the country and international level is crucial for fintech companies. The regulatory system is also continuously evolving alongside fintech. This requires robust changes according to the changes in fintech. For companies to keep track of and comply with all regulations, it is advisable to invest in reg-tech, which would make their systems much more efficient.

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