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Risky Business – here’s the top 5 risks in FinTech operations

Fintechs offer convenience, lightning-fast service, and adaptability in a market dominated by established institutions and systems. Market expectations have changed quickly as a result of quicker services and better products, and a new standard for financial instrument experience has emerged. 

On the other hand, working in an industry where security and accountability are paramount entails some or many risks, which are discussed in this article. 

Let’s first examine the operational risk associated with the FinTech industry. 

 The Operational Risk of FinTech

The majority of these risks fall on the operations departments of FinTech companies. It is a challenging assignment because, frequently, work acceleration, shifting market conditions, and the rate of unforeseen changes outpace the firm’s established procedures and operational norms. 

Traditional financial institutions benefit from having time on their side, while FinTech demands that everything happen at breakneck speed. Furthermore, the area where FinTech teams are most vulnerable is real-time operations management, where 99% of the most serious errors occur. 

 Top Five Risks in FinTech Operation

 The top five risks to the FinTech operations are listed below. 

1. Unexpected Market Events 

“The financial system can overreact to news,” the Financial Stability Board asserts. “The Gamestop incident was not the first, and it would not be the last, to so abruptly shake up the world of finance and regulation. Market events pose a serious operational risk because of how unpredictable they are. 

Overreacting to a swift market event can lead to severe liquidity and solvency problems for FinTech companies and financial institutions. Pro-cyclicality, contagion, excessive volatility, and a number of other market risk factors could disrupt FinTech services. 

2. Cyberattacks and data breaches

The potential for FinTech to actively raise risk in already established financial markets and systems is a significant drawback. The more systems connected through FinTech, the more entry points there are for cyberattacks. Due to the variety of organizational and business models used in the FinTech sector, there is no “one size fits all” cybersecurity infrastructure. 

Employing skilled cyber risk management and IT security teams is crucial to ensuring that high-potential vectors for cybersecurity breaches are identified and managed. Any cyber threat will demand an immediate, strategic response from operations staff, just like market events do. 

3. Both individual and collective liability

The majority of FinTech either provides or facilitates financial services. This puts the company at risk for poor customer service, carelessness, fraud accusations, and other risks common to the financial services industry. 

As they offer brand-new financial products through innovative and novel service models, fintechs are particularly susceptible to professional liability claims. Customers frequently misuse FinTech applications carelessly and fail to take security precautions to protect their sensitive data, including personal and financial information. 

4. Noncompliance with Regulatory Requirements

In terms of regulatory and compliance considerations, the risk is unquestionably at the top. Regulators must make sure FinTech companies properly assess risk and apply the suggested risk mitigation techniques. 

The regulatory frameworks of many jurisdictions, however, are unable to keep up with the rate of technological advancement. Because regulatory regulations are changing so quickly, many FinTech teams find it extremely difficult to standardize compliance procedures. If the rules are not strictly followed, businesses run the risk of being found in violation, paying steep fines, and losing their favourable market reputation. 

5. Global Competition is Increasing

Traditional financial institutions have always faced obstacles because of the regional characteristics of their specific markets. Each national jurisdiction has a complex set of financial regulations and laws, which leads to financial institutions that are compliant and offer services that are particular to the needs of the region. 

But due to the explosive growth of FinTech companies that offer global financial solutions, these boundaries have rapidly blurred in recent years. Institutional finance is now forced to choose between learning to collaborate and form alliances with agile FinTech companies or going head-to-head with them. 

The conventional versus agile dynamics have sparked a highly competitive environment on a global scale, and participants who want to win this FinTech race must make wise strategic partnership decisions. Operations teams may face operational risk as a result of the increased pressure from the competition and the need to rely on partnerships and third-party services in order to remain competitive. 

Final Thoughts

Operational risk in the FinTech industry is simply inevitable. 

The most efficient and dependable way to reduce operational risk is to automate your operational processes so that your operations teams always takes the right action.

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