Importance of Cybersecurity and Compliance in Fintech
Fintech is a term used for ‘financial technology’, which is the application of new technological advancements to products and services in the financial industry. Financial services companies deal with highly sensitive personal and business information through services such as digital banking, digital payments, insurance services, trading, and cryptocurrencies. Currently, the Fintech market is projected to reach $190 billion by 2026, growing annually by 13.7%. The unique combination of financial-based services on tech platforms makes them attractive targets for cybercriminals. As a result, cybersecurity in FinTech is becoming ever more important. With the advancement of the industry, so is there a growing cybersecurity concern among businesses considering their data storage issues, cross-platform malware contamination, data leakages, and other vulnerabilities that often jeopardize the data. All Fintech organizations share similar cybersecurity challenges, so it is important to implement best practices to prevent potential attacks. Fintech cybersecurity risks are further compounded by the regulatory environments in which FinTech companies operate, and which place a high value on data protection and information security.
In this article, you will read about:
Why is Cybersecurity important in the Fintech Industry?
Fintech Cybersecurity Tips
Information Security Frameworks for Fintech
What is Fintech Compliance?
US Fintech Regulations
Fintech Best Practices
Managing Fintech Regulations for your Company
Why is Cybersecurity Important in the Fintech Industry?
Fintech or Financial technology has revolutionized and its impact reaches beyond ordinary people, allowing companies to improve operational efficiency and customer convenience. With this new technology comes a greater responsibility to protect consumers’ financial and personal information by keeping up-to-date on Fintech compliance regulations. Much like healthcare data, financial data is extremely sensitive and under constant threat of attack by hackers. Some risks and challenges include:
Securing networks and applications – Today, applications that are at the heart of most Fintech businesses are under scanner all the time. Cyber attackers target them to gain access to the entire network.
Protecting data against breaches – Fintech companies collect, manage, and store large amounts of data every single day. Online transactions are some of the easiest online activities for hackers to breach. If they breach the application and steal user data, the Fintech company will be held responsible by regulators, and actions such as levying penalties, fines, and others can be taken against them.
Digital identities – An identification, authentication, and authorization system should safeguard any Fintech app against any intrusion or suspicious activity.
Data Ownership – Fintech companies need robust mechanisms and procedures for regulating who can access, create, modify, and delete their data. Data ownership, i.e. the possession of and responsibility for data, requires the knowledge of multiple technical and legal processes and compliance with applicable state regulations and standards.
Fintech systems vulnerabilities – Hackers can exploit system weaknesses to access sensitive information. Unfortunately, most companies become victims of attacks and data breaches and only realize until it’s too late. The increasing use of mobile devices, gadgets, and IoT devices complicates the management of these vulnerabilities.
Involvement of third-party services – Integrations with popular payment gateways, analytics systems, social networks, or chatbots can compromise the security of fintech apps. Hackers may use third-party access to replicate a legitimate user and access the system.
Cloud migration– Many fintech companies have moved their operations onto cloud services for better performance, scalability, and cost optimization something that is both an opportunity and a risk for businesses. The benefit is that you can deliver hassle-free services to customers, but the drawback is the exposure of data and security to a cyberattack. So, implementing a robust cloud security strategy ensures necessary protection that keeps your company and customers safe. Securing the cloud fortifies your business against current and emerging threats.
Human errors – Human error is the main reason for successful phishing attacks. Lost or stolen devices also provide opportunities for cybercriminals.
Identity and Access Management– Robust and tight security measures especially for system access can dramatically improve the organization’s cybersecurity posture. Sometimes an organization is facing insider threats. Providing restricted access to sensitive data and only allowing privileged access based on employee roles and responsibilities can reduce risks. Fintech companies also tend to struggle with maintaining transparency about the system and network access. Relying on manual access management processes runs certain risks and takes up Information Technology Team time. Automated access and revoking help save time and thwart threats.
Cyber attacks – Fintech attract the attention of hackers for the critical data they store and maintain such as Personal Identification Information (PII) and financial access that it provides. Some of the most common cyber-attacks targeting Fintech include:
- Denial of service attacks where attackers flood the application with traffic preventing legitimate customers from using the app;
- Phishing attacks where cyber criminals pose as businesses or even government agencies to extract information from users and use that information to steal their information and access the application; and
- Ransomware where attackers infiltrate the network and encrypt it demanding payment to decrypt the network or files. All of these tactics can have a significant impact on the success of a FinTech company.
Fintech Cybersecurity Tips
Cybersecurity within the fintech industry is a necessity, and failing to implement best practices invites risks to your business. Organizations should be mindful of basic principles such as the following:
- Know your assets and manage change effectively. Determining which assets are the most valuable to your organization is an essential part of implementing practices to promote growth without ever exposing the assets.
- Practice cybersecurity hygiene. Basic security measures should never be overlooked, such as using the latest authentication solutions (regularly changing passwords) and consistently performing security updates and patching.
- Implement a defense-in-depth approach. This works to combine multiple security controls to monitor, detect, and combat cyber-attacks. A layered security structure ensures that if protection fails, other defenses will still operate smoothly.
- Educate employees and increase communication. With proper training of staff, and encouraged better communication, ensure they know exactly how to respond during an incident.
Cybersecurity is a concern for modern businesses, especially among Fintech companies. The Fintech industry is growing rapidly, and Fintech companies cannot afford to have security risks, as they are responsible for the financial information of customers. So, they should be particularly cautious and take necessary measures to ensure maximum safety.
What is Fintech Compliance?
Fintech compliance refers to the obligation of financial service institutions to adhere to regulatory laws regarding data privacy, consumer security, and the use of financial technology in general. Ultimately, these laws protect consumers and investors in the financial services industry.
Regulations usually change from region to region, as they are under different government jurisdictions, so different regions have their regulatory bodies that manage the legislation and enforcement of laws regarding Fintech solutions. Typically, these laws protect consumers and set out rules for how supervision and regulation will be conducted. Various regulatory bodies are then responsible for specific areas of the law.
Before designing these regulatory guidelines, the government and regulatory bodies consider a few risks related to Fintech. These risks include:
- Data privacy is one of the essential considerations that regulators need to focus on to prevent breaches. A key point of risk assessment is that the regulators can find the guilty upon detecting a data leak. In countries that work under the EU (European Union), non-compliance with anti-data-leaks laws may result in a fine levied up to 2-4% of the company’s revenue.
- Money laundering has become the most pressing matter for financial institutions and governments alike. It is estimated that governments and companies lose almost $2 trillion annually in money laundering. To handle and counter such huge losses countries are compelled to develop and enforce anti-money laundering (AML) policies to detect and eliminate money laundering. Certain bodies support operations and data related to anti-money laundering activities.
- In this post-pandemic era, the world quickly moved to digital payment and transaction systems, and cyber-attack risk has doubled. Financial institutions, including banks and Fintech, are a hot target for these cyber thieves and significant concerns for governments. Protection against such attacks needs strict adherence to cyber security laws by Fintech to mitigate the threat level.
Information Security Frameworks for Fintech
An organization’s information security framework is an agreed-upon set of policies, documents, or guidelines that determine how the information systems are handled. The outcome of the framework is to reduce vulnerabilities and risks associated with the information systems operation.
There are over 200 information security frameworks used worldwide. Some of the frameworks have been elevated to legally binding status, such as the CMMC (formerly the NIST 800 self-certification framework).
Other IS frameworks form part of the regulation itself, such as the GDPR. The statutes and articles within the regulation lay out a foundation for a data privacy security framework.
As a nascent industry, there is no information security framework specific to the fintech industry. However, there are existing, robust frameworks that can work well if implemented in a fintech infrastructure.
NIST Cybersecurity Framework
The National Institute of Standards and Technology (NIST) is an established NGO specializing in cyber and information security. Their Cybersecurity Framework is a great starter framework that works for almost any industry.
It goes beyond surface-level security, but at the same time, it is not fully detailed to fit a specific industry.
Furthermore, the NIST cybersecurity framework is tailored toward the private sector. It provides a basic model of computer and information security that any fintech business can implement and follow.
The core principles of the model are to identify, protect, detect, respond, and recover. With these core principles, your organization should be on the right track to building a security culture. But it does not stop there.
Once your organization has implemented the NIST Cybersecurity Framework, you can plan to be a bit more ambitious with your framework certification.
The next information security framework on the list is the NIST 800 Special Publication (SP) series. This framework is incredibly detailed and covers everything from third-party risk management to device security.
When it comes to fintech, there is nothing within the 800 SP series that is specific to the industry, but you can pick and choose which will fit best; some examples are:
- Zero Trust Architecture (SP 800-207): if you are running a fintech in blockchain or cryptocurrency, you might be interested in developing or implementing a zero-trust architecture.
- NIST Third-party risk management: This is an ideal framework for any business that deals with vendors or acquisitions. Within the fintech industry, it is common to have a vendors’ and suppliers’ ecosystem before the final product reaches your customers.
- Digital Identity Series (800-63-3 A, B, C):. It is the nature of fintech to cater to a global and digital audience. Their main challenge stems from knowing whom they are serving and falling in line with anti-money laundering laws. In this case, a robust KYC is necessary, and protecting and confirming those identities is essential.
These are a couple of examples of the NIST 800 SP series relevant to the fintech industry. Keep in mind that the 800 SP series is pervasive and covers a wide array of topics and security measurements.
US Fintech Regulations
The United States has the largest ecosystem of Fintech, and they also have one of the largest varieties of Fintech regulations to govern associated companies. You will fall under Consumer Financial Protection Bureau (CFPB) if your Fintech company targets the US market. Other rules that ensure safety, security, and smooth financial transactions include the Financial Crimes Enforcement Network (FinCEN), Commodities Future Trading Commission (CFTC), and Office of the Comptroller of Currency (OCC).
· FinCEN gathers information about every financial transaction. It is then used the info to prevent financial crimes.
· OCC supervises businesses to ensure their activities align with FinTech laws and regulations.
· Federal deposit insurance corporations (FDIC) regulate mobile-only banks.
· Securities and exchange commissions (SEC) regulate trading platforms.
· The Federal Trade Commission (FTC) designs the regulatory framework for the financial market. It also approves new technologies for trading.
SOX Compliance: The Sarbanes-Oxley Act of 2002 is a federal law that established sweeping auditing and financial regulations for public companies. The Act contains provisions affecting corporate governance, risk management, auditing, and financial reporting of public companies, including provisions intended to deter and punish corporate accounting fraud and corruption.
Fintech Best Practices
As Fintech grows, more industry overlap and partnerships will likely occur. Consequently, it’s important to understand how your company can adapt and comply with Fintech regulations. The decentralization of Fintech increases the difficulty of reducing risks and identifying relevant regulations. Thomson Reuters suggests some best practices when it comes to entering the world of Fintech:
1. Keep abreast of digital-only banking
Some banks are turning solely to an online presence. While the OCC is considering how to regulate this changing banking environment, online-only Fintech companies should proactively develop a consumer interaction policy as well as a security policy. Likewise, emerging online-only Fintech companies should seek FDIC charters to gain more confidence both from industry partners and consumers.
2. Develop an AML policy
Just like regular banks, Fintech companies must incorporate anti-money laundering (AML) into security procedures. This also extends to the software. If considering the acquisition of a Fintech company, first check to see if there are already AML checks in place. If not, it is vital to implement such checks before rolling out any Fintech platforms. Digital currency is particularly vulnerable to AML as it allows for anonymous and cross-border transactions. To combat digital currency AML, some countries now track device identifiers and digital wallet addresses. Two major Fintech AML fighters include blockchain and machine learning (i.e., algorithms that can detect subtle irregularities). Notably, not implementing an adequate AML plan can result in hefty fines.
3. Consumer awareness
The Consumer Financial Protection Bureau (CFPB) has shifted more attention to Fintech in the last few years. Fintech companies, particularly lenders, must ensure standard CFPB standards are carried over into Fintech operations. For example, lending Fintech companies must ensure customers are given opportunities to improve their credit or be considered for loans at reduced rates. The CFPB provides a free, complete list of the Code of Federal Regulations that will help identify which regulations apply to your company’s operations. Although the list does not specifically mention Fintech, the CFPB can still fine Fintech companies as they fall under financial institutional purview.
4. Know Your Customer (KYC) Compliance
KYC applies to Fintech. This means Dodd-Frank reforms, the Fair and Accurate Credit Transactions Act (FACTA), and the Customer Due Diligence Final Rule apply. The regulations address onboarding digital customers and identifying who operates a bank account. KYC goes hand in hand with AML, as the goal is to mitigate fraud by better monitoring customer activity. For example, under KYC regulations companies must flag suspicious activity. KYC technology is necessary for both big and small financial institutions. Experts have noted with increased scrutiny (since the 2008 financial crash) more money laundering has occurred through smaller, regional banks.
Managing Fintech Regulations
Existing and new entrants in the Fintech sector will feel overwhelmed by all the regulations. These regulations need knowledge and understanding to prevent you from falling into any unlawful activity.
An ideal way to manage this challenge is to hire a consultant or a compliance team. Even though hiring a team is not an easy task but pays better than not having one. Non-compliance may lead to business closure, so hiring a professional for the job is best.
Hiring a Compliance Expert
Hiring a compliance expert who has a keen understanding of rules and regulations related to Fintech enables you to have interactive communication and get expert advice on Fintech regulatory system. This choice is good if you oversee a sizable part of consumer data.
Outsourcing Compliance
Outsourcing compliance activities is another way to manage rules and regulations to run smooth operations. If you are a small firm with a limited budget, outsourcing is the best way. It means entrusting a third party to oversee all compliance-related activities and align them with your company.
As technology continues to evolve, so have the techniques and methods of hackers to infiltrate systems against the fintech industry evolved. Implementing the above-mentioned tips will help improve cybersecurity for financial institutions and protect their data. Other than the above-mentioned techniques consider the following suggestion as well pertinent to cybersecurity.
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