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Record-breaking fines and growing regulatory scrutiny are pushing fintechs to rethink “check-the-box” compliance strategies. Addressing the most pressing challenges in business onboarding, fintechs can adopt practical strategies to not only meet regulatory requirements but also turn compliance into a competitive advantage and growth driver.
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The regulatory landscape is changing
In recent years, penalties for non-compliance have surged dramatically. In 2023 alone, financial institutions paid over $6.6 billion in fines for non-compliance with anti-money laundering (AML), know your customer (KYC), environmental, social, and governance (ESG), sanctions, and customer due diligence (CDD) regulations. U.S. regulators accounted for about 77% of these global penalties, with U.S. fines increasing by 69% to reach $5.1 billion in 20231.
High-profile failures in the fintech sector have further underscored the severe consequences of poor risk management. These incidents revealed critical vulnerabilities across various fintech models, including Banking-as-a-Service (BaaS) platforms. The resulting disruptions affected hundreds of thousands of accounts, left millions of dollars temporarily unaccounted for, and interrupted financial services for numerous clients.
Such failures have intensified regulatory demands for greater accountability and transparency in onboarding processes. Areas like address verification and ultimate beneficial owner (UBO) identification have come under particular scrutiny. Additionally, these incidents have raised broader concerns about oversight and accountability in fintech-bank partnerships, especially within intermediary-driven financial operations.
Key challenges in business onboarding
- Address verification under scrutiny
Regulators now expect financial institutions to confirm the true operating locations of businesses, moving beyond simple address matches. The rise of virtual offices, shared PO boxes, and registered agent addresses has introduced new vulnerabilities. Without robust verification processes, fintechs risk onboarding fraudulent businesses, exposing them to regulatory and reputational harm. - Ultimate beneficial owners (UBOs)
Identifying UBOs is critical for combating illicit activities like money laundering and terrorism financing. The FinCEN Beneficial Ownership Information (BOI) registry, launched in 2024, offers a tool for transparency, but compliance remains complex. Bad actors frequently use convoluted ownership structures to obscure their identities, making it essential for fintechs to implement continuous monitoring of UBO information. - Increased enforcement and penalties
Regulators have made it clear that compliance programs must be both effective and demonstrable. Financial institutions that fail to show proactive risk management will face intensified enforcement actions, making it crucial for fintechs to stay ahead of regulatory expectations.
Strategies for success
Fintechs can navigate these challenges and build trust with regulators, banks, and customers by adopting these strategies:
- Conduct an address risk audit
Regularly evaluate approved business applications to uncover hidden address risks. This helps identify weak points in your onboarding program and ensures that your systems can flag fraudulent or high-risk addresses. Conducting audits annually—or more frequently for high-risk industries—can provide ongoing insights to refine your approach. - Link individual and business data
By connecting individual and business data, fintechs can uncover ownership structures and assess risk more effectively. Understanding these relationships is critical for identifying indirect control or connections to high-risk entities, enabling more thorough due diligence. - Invest in dynamic compliance controls
Compliance is not a one-time effort. Implement dynamic controls that evolve alongside regulatory changes and business needs. Regularly monitor and refine your onboarding processes to minimize false positives, improve customer experience, and optimize approval rates. Tools like Middesk’s business verification platform can play a pivotal role in achieving this balance.
Why tailored compliance matters
Compliance isn’t just about avoiding fines—it’s a chance to differentiate your fintech and build trust with sponsor banks, customers, and regulators. A proactive, distinct approach to compliance signals your commitment to transparency and positions your business as a leader in risk management.
For example, sponsor banks value fintechs that demonstrate advanced compliance capabilities, which can unlock stronger partnerships. Similarly, regulators look for businesses that go beyond minimum requirements, rewarding those that prioritize risk mitigation and customer safety.
Ready to take the next step?
Download our free eBook, Navigating regulatory changes and mitigating risk in business onboarding, to equip your fintech with the tools and insights needed to thrive in today’s regulatory environment.
