Tips to Developing #FintechStrategy for Investment Firms

Start-up technology ventures are exploiting Financial Services with a flurry of Fintech firms posing a threat to big banks. Broker-dealer firms, RIA’s, and wealth fund managers are feeling it too.

The staying power of Fintech Firms

Emerging Fin-tech firms are faster at innovation and willing to accept low margins as a cost of entry to the market. They have also benefited from slow-to-react regulatory authorities blinded by the word technology even as many cross over into risk based financial dealings. One strategy of Fintech’s is to offer niche solutions to customers; such as mobile bill payment solutions, peer-to-peer lending, and digital currency. As their subscriber base grows, they offer more and more services, pulling clients away from banks and traditional investment firms and into a fold of multi-layered solutions.

Some say Fintech firms will pull back when regulators catch up and start mandating oversight with examinations, monthly reports, and minimum net capital requirements. More likely, technology firms will come up with innovative technology and reporting features to satisfy regulator cries for control.  As a compliance consulting firm, we’re seeing an influx of #regtech solutions (also called regulatory technology) for compliance and audit management.

FINRA release: March 2016  Report on Digital Investments Advice

Office of Comptroller of the Currency release: April 2016   Responsible Innovation for Federal Banking System   

As emerging trends gain ground, regulators have taken note by releasing a series of recommendations and white papers about the Fintech surge, urging sound risk management and investor protection standards. Why are Fintech firms able to evolve and grow so fast? Economies of limited scope and awesome technical resources are one good reason. Here's more - 

• Private investors and non-public, pre IPO entities give leaders more control
• Limited focus on only one or two good ideas, for now…
• Specialized workforce with technical skill and experience in emerging technology
• Starting with new technology and platforms rather than adding on top of slower legacy platforms and procedures

How Investment & Brokerage firms get involved with Fintech Solutions

Securities firm executives are asking themselves how can I get on board with a Fintech strategy that captures the new breed of market share who doesn’t care if they ever talk to a human being at my firm, wants real-time data, and access to their account everywhere they go.

Get started with your own #FintechStrategy  

Determine a goal. Firms first need to decide on a strategy and then discuss action to implement a Fintech business plan. A team should collectively decide the role technology will take such as;

• Reduce overhead costs – (i.e. replace an employee with technology)
• Drive revenue – (i.e. pay per transaction service)
• Add Value, Client Retention  – (i.e. convenience services; mobile stock alerts, text transactions)

Research Fintech business models. Consumers receive value from all kinds of technological advances including; the internet of things, mobile access to the web. They expect access to real-time data, and efficient on the go solutions. Many prefer talking to machines as opposed to people. There’s a variety of Fintech sector firms that securities businesses are suited to launch or participate in. Here's a few examples - 

• Retail Investments – Sigfig, Wealthfront, FutureAdvisor
• Institutional Investments – Stocktwits, SumZero, HedgeSPA
• Financial Research – Stocktagon, Q
• Consumer Banking – Gobank, Simple
• Business Tools – Zen Payroll, Xero Accounting
• Online Lending – Orchard Bank, Lending Club, Prosper
• Personal Finance – HelloWallet, BillGuard, CreditKarma
• Payments – Paypal, Wepay, Stripe
• Equity Financing – Seedinvest, EquityNet

Firms may also choose a less involved strategy like purchasing or investing in a Fintech firm by way of crowd-funding or a strategic partnership. Large banks and technology companies are already doing this. For instance, Google Ventures is heavily invested in the automated robo-advisor service “Robinhood”, while Goldman Sachs is backing “Motif-Investing”. One advantage to this strategy is the technology skill set is already in place.

Understand your target customer. Client investors these days are looking more and more for firms they can engage with. Consumers want real-time insight and advice. They’re highly mobile, active on social media, and enjoy participation in peer-to-peer structures. 

In looking at your Fintech plan, think in terms of what you’re capabilities are today and where you would like them to be in the future. From there, draft out a strategy to reach this goal. Consider that the differentiation between Fintech firm types is blurred. Many services cross-over into other unanticipated uses. Anticipate the unexpected.  For instance, smarter, faster trade solutions can lead to clients wanting simpler ways to raise money for investing, or access to simulated investment training, or even virtual reality trade exchanges. Online wealth portfolio management services can lead to a need for integrated banking solutions and on demand mobile money platforms. 

Take a look at your target market and anticipate what future needs will be or what needs are not being filled today. Develop a vision for your future business model that relies on new revenue drivers. Ask yourself what role technology can play in the business model. 

From there move forward to elements of the Fintech business model considering; budget and cost structure, revenue stream, and changes in overhead or organizational structure. With these elements in place, teams can decide if they want to build or enhance systems already in place, or invest in a Fintech firm. Some firms can develop a strategic partnership to launch their idea.

The best ideas will usually include; cloud computing capability, client pay-as-you-go services, or strategic vendor relationships.

RND Resources Inc is a compliance and audit consulting firm to the securities industry. We provide scaleable, integrated solutions for risk management and compliance. Visit our website for more details www.finracompliance.com/services  

We assist securities firms with a suite of regulatory compliance support programs;

• FINRA New Member or Change applications: NMA, CMA FINRA applications

• Financial Reporting & FinOps: FOCUS filing and related schedules, Annual Assessment reports

• Compliance Services: Procedures & Policies WSP, Advertising review, Annual Compliance Reviews, Outsourced CCO Principal Service

• Audit Services: FINRA regulatory examinations, Certified BD Audits, Custody Audit, AML review, Custody Exams

• FINRA Notice, Sanction, Complaints & Arbitration: Respond to regulatory notices, Customer complaint filings, Forensic Accounting, Expert Witness Service

• Cybersecurity Consulting: Procedure and planning, vendor management, staff training

• Fintech Consulting: Regulatory Compliance Consulting and Support Services for Financial Technology firms; Development and strategy consulting for Fintech entry firms

RND Resources Inc is a proud member of McGladrey Alliance. McGladrey is a leading provider of middle market audit, tax, and consulting services. This strategic membership gives us the competitive advantage of access to audit, technology, research, and tax planning tools. As a full service compliance firm for middle market brokerages and investment advisors, we’ll be able to serve clients with robust solutions and trusted technology platforms. McGladrey Alliance has global capabilities with professionals able to assist from over 100 countries. Visit our website for more details: http://www.finracompliance.com/about-us/mcgladrey-alliance-member/

Taking #CyberSecurity to the Executive Level

Financial industry executives have a unique responsibility to protect investors and proprietary firm information from compromise. 

For FINRA (Financial Industry Regulatory Authority), cybersecurity protection measures include a broad swipe approach that covers compromise through use of any electronic digital media (e.g. computers, mobile devices, Internet based systems, ipads, software solution providers). And, no matter how much of the cyber security task is outsourced to IT professionals, the ultimate responsibility lands on the shoulders of each firms executive leadership.  For this reason cyber-security practices have taken a front and center seat in board room discussions that reach past IT to operations, sales, vendors, and anyone else with access to electronic company data.

RND Resources has created an action plan for compliance officers and executives leading  #cybersecurity initiatives for their firm. A comprehensive plan includes components such as; Cybersecurity Governance and #RiskManagement, Cybersecurity #RiskAssessment, Technical Controls, Incident Response Planning, Vendor Management, Staff Training, Cyber Intelligence &  Information Sharing, Cyber Insurance.  These topics are discussed more completely on our website at www.finracompliance.com . 

Tips for taking action:  Guideline for Cyber-Security Board Room Meeting

• Form a cyber-security committee to design, implement, and oversee day-to-day cybersecurity compliance efforts. Calendar regular reports and reviews to assess the activities and effectiveness of the team.
• Educate yourself on Information Security: Research and understand various types of cyber-security threats. Speak with industry colleagues about what firms are doing to protect themselves. Make assessing cyber threats and solutions a regular part of the business cycle.
• Know the plan. Read and keep a copy of information security policies handy. Make sure you thoroughly understand what to do in the event of an attack. Prepare as if an attack will happen one day, because chances are it will.
• Review the plan regularly to make sure it remains relevant and up to date with current threats and trends.
• Test the plan. Ask IT and other professionals or staff to try and break through the systems to see where the weaknesses are.  Run surprise or mock tests on your staff to see how they measure up on policy and procedures.
• Work with professionals to identify security issues and industry trends. Audit procedures and conduct forensic investigations following a breach or at regular intervals.
• Supplier Due Diligence. Vendors and suppliers have their own management weaknesses that present a threat. A motivated hacker may find their way in to your company records through an unsecure supplier system or other means. Test supplier and vendor portals for weaknesses and make sure the staff alerts appropriate parties of anything unusual.
• Prioritize the security to do list  Some risks are naturally greater than others.  Get an understanding of which efforts require the most resources and match them up with level of threat. Handle items that pose the greatest risks first. Set aside some time for simple fixes and plan for long term solutions.
• Create a cyber-secure culture   Make certain all staff has a clear understanding that cyber-security is needs are taken seriously. Ask them to consider cyber risks when hiring staff, adding new customer accounts, and establishing business partnerships.

RND Resources provides regulatory compliance services and consulting for broker-dealers, investment advisory firms, and fund managers. For assistance developing a cyber-security plan tuned to regulatory requirements, feel free to call us at 818.657.0288