Walking the tightrope: How payments companies can balance compliance with innovation

In 1859, Charles Blondin did the unthinkable and walked across the Niagara River in the US on a tightrope. Little did he know that this act was very similar to that of payment companies in the 21st century. Rather than facing a 49m drop in the water, businesses in the sector must find the right balancing act between innovation and compliance.

The payment sector is at the front of financial innovation – from Buy Now Pay Later and Apple’s Tap to Cash to digital wallets and virtual credit cards. However, it is also perceived as being beset by tough legal challenges, high fraud levels, and constant scrutiny from governments trying to regulate an industry evolving rapidly. 

So, how can payment companies shoulder the responsibility of being innovators while balancing compliance and consumer trust? And what can regulators do to unlock the potential of these companies while ensuring the necessary trust and protections that retain the industry’s integrity? 

The state of play

Navigating the fine tightrope of regulation and compliance often feels like a maze. Navigating a patchwork of intersecting rules presents companies with ever-increasing layers of regulatory paperwork and legal hoops to jump through. But we don’t understand the things we trust the least, and transparency and clarity remain the most powerful tools at the payments industry’s disposal to tackle trust and compliance issues.

Last year alone, compliance costs for businesses rose by double digits. 44% of firms are also reporting a desire to increase the size of their compliance teams, while nearly half are finding that they need to update and upskill their own teams and technologies to meet the rise in compliance demands. 

Regulation across the continent is getting increasingly complex. We can see this in the renewed European and American interest in regulating ‘the wild west’ of BNPL and in the FCA’s increasingly hard line on financial crime compliance. Payments companies need to find the crucial balance between the two. A few months ago, PwC was fined £15 million for failing to alert the FCA to suspected fraudulent activity at London Capital & Finance plc. 

The threat of non-compliance to industry-wide integrity is much greater than the short-term upside of gains made by skirting the rules or compliance budgets. Repeatedly, financial institutions that fail to comply with the rules have faced national attention and backlash. Many have seen trust levels plummet and costs increase as they work to ensure customer safety throughout the transaction process.

Innovative compliance

Both payment companies and regulators can enact change. An approach prioritising safety, transparency, and delivery can all aid in creating a more dynamic, trusted industry that puts merchants and consumers at the forefront of decision-making. 

A key component of this is creating a less burdensome business environment where innovation can occur in both a technical and regulatory sense. The key role of organisations like the FCA should be to facilitate this environment, perhaps bringing to the forefront of its policy the new Regulatory Innovation Office (RIO) that could open doors and cut some of the red tape. 

Many current regulations surrounding payments can sometimes seem disproportionate compared to the potential risks involved. While we don’t want to lose sight of safety, one of the key ways to encourage innovation again across the board is implementing a regulatory framework and risk analysis strategy. One that doesn’t just loosen restrictions on payment providers but creates the regulations and framework that support research and development. 

The potential of this new RIO could present opportunities for growth and development across the board. However, emphasis must be placed on companies using risk-based approaches within their compliance infrastructure – where they can put limited efforts into areas that do not pose a high risk and more efforts into areas that do. 

Laws and regulations create limitations to international competitiveness. If the UK wants to increase its international competitiveness, deregulation and a lessening regulatory burden must be the priorities. While this is happening, authorities can focus on regulations that improve competitiveness, reduce limitations, and increase innovation. 

Finding the right balance

The conversation around payments should be optimistic. Plenty of entrepreneurs and creative minds in the sector have challenged the status quo and pushed the boundaries of innovation. Regulators need to recognise this behaviour while working with merchants to create an environment which rewards growth and development.

Authorities need to assess the current laws and regulations and work on tipping the scales back in the favour of the innovators. Removing the ones that don’t provide value to both consumers and businesses can help create a system that empowers the payments industry rather than punishing it.