Why many fintechs get compliance wrong

As a fintech operator, you are, in many ways, like a general contractor building a skyscraper.

Imagine that, one day in the middle of construction, the subcontractor in charge of all the building’s doorknobs comes to you and explains that all of the doorknobs in the building have a faulty design. If you don’t fix them, they say, your building might fall apart one day. Now, you have no reason to doubt this person– after all, they’re the expert on doorknobs. They went to school for it. They’ve studied doorknobs their entire life.

But you, and only you, as the general contractor who can see everything, know that at some point the electrical wiring will fail and that you’re going to have plumbing issues the day before the building opens its doors to visitors. You know this because you are an experienced operator who has a holistic view of the entire operation.

What most fintech operators get wrong about compliance is understandable. Faced with the sheer volume of specialists and specialty problems clamoring for your attention (Transaction monitoring! California privacy laws! Bank partner audit! Regulation E!) it's easy to focus on the wrong problem, or worse, fall into analysis paralysis and do nothing at all. 

The smartest fintech operators take a methodical approach to compliance. They employ the 80/20 rule and they do it knowing, with some conviction, how to spot a doorknob problem and how long they can ignore it. 

In the book “Fintech Law and Compliance: A History and Operator’s Guidebook,” fourteen contributors, all operators spanning decades of experience from bank sponsors to fintechs, helped me give some practical, inside tips on how the savviest fintechs approach that seemingly scary word: compliance.

Taking some examples from that book, here are some common mistakes to avoid as a fintech founder or operator when it comes to approaching compliance. 

Before you can build a compliance program, you need to understand the terrain you’re building on. 

Start with your regulatory environment. Every fintech business is, in some way, a regulated business – but making thoughtful decisions at the start will dictate your degree of regulation. 

Do you want to work with a bank partner or get directly licensed? There are important trade-offs to each.  

How are you dealing with money (Lending it? Moving it? Storing it?)?

Do you understand your funds flow well enough to know when you’re accidentally tripping up money transmission? 

Once you know your regulatory traps, you can better understand your risk profile. No two fintechs face the same risks, and your compliance program should reflect your unique product. 

The next question to ask: Of all the regulations that apply to you given these decisions, which ones carry the most risk?

Draw a matrix and identify what regulations and risks fall in the high impact/high probability upper left quadrant. 

If your primary business is moving money, your primary compliance obligations are AML and Reg E and you probably don’t need to worry about fair lending risk. If your customers are established businesses or prime credit consumers, your AML risk is far lower than if you operate in digital assets, and you can probably deal with  transaction monitoring manually until you scale.

With all this in mind, design your compliance architecture from the ground up starting with your highest risk areas first. Think of compliance like building a house. You don’t need to build a mansion on day one. You just need  to build it intentionally, one floor at a time.

Hire when you’re building the product: If you’re a founder or CEO, when should you hire your first full-time compliance person? The earlier, the better.

If you can afford to bring in a compliance leader early, even if they’re not full-time, that person can do two critical things: 

That first point is key. A good compliance leader should help you build the product in a way that reduces your regulatory debt down the line. (Regulatory debt, like technical debt, always compounds over time). 

They should understand how bank partners think, what regulators care about, and how auditors evaluate risk controls. They should speak the language of compliance and translate it into product and engineering terms. 

With this framing, they can help you figure out where to push the envelope and where to hold back.

If you can’t hire, solve for risk fluency on your founding team: If you’re not ready for someone full-time dedicated to compliance, someone on your founding team should have a legal, compliance, or operational background. If no one on your early team knows what AML stands for, you’re going to have problems.

Especially if you’re working with a bank partner, someone on your team needs to be able to sit across from your partner’s BSA Officer or compliance lead and have a real conversation about controls, onboarding flows, or transaction monitoring logic. If you can’t meet your counterparts where they are, they’ll form an early impression of you that will impact the relationship when you need them to be flexible on something.

Enter the fractional compliance officer: One of the best trends in fintech risk over the last few years is the rise of the fractional CCO. These are experienced compliance leaders who work with multiple start-ups at once. They can stand up your initial policies and risk framework, interface with bank partners and vendors, and if they’re good, they can talk to you about your product.

They’re a great fit if you’re still pre-Series A or trying to manage burn carefully. You don’t need to pay them benefits or employee equity and you get access to senior-level thinking without overextending your budget.

Here’s a simple distinction to follow: Legal figures out the rules, compliance implements them. You should have both bases covered and understand the distinction. 

For example, legal (e.g., your outside law firm if you have one, your friend who is an experienced fintech lawyer) might decide what regulations apply to your fintech. 

Compliance’s job is to then ensure that those rules are being followed in your product design, through your disclosures, and weaved into your operations. 

Legal and compliance can be the same person in the beginning but, as you mature, the roles should be separated. There should be a healthy bit of tension between the two functions. Legal’s job is to minimize liability, often by outlining every single way to comply. Compliance’s job is to make those rules work in practice. That might mean prioritizing the most critical requirements first and building toward full implementation as the business scales.

One of the most common mistakes fintechs make is over-engineering their policies and procedures.

A policy is not meant to restate the law or act as a textbook to every possible scenario. Instead, it should describe how your company approaches a given risk area and how it operates in practice.

If you write something down, you will be judged later on whether you are doing it.

This is where companies get into trouble. They adopt policies that are too detailed or not aligned with how the business actually operates. Or worse, they copy and paste policies without understanding what’s in them (Pro tip: don’t use AI to write your policies unless you really know what you’re doing). Over time, a gap forms between what is written and what is happening in practice, and that gap becomes a source of audit risk.

A shorter, simpler policy that accurately describes your processes is far more valuable than a longer policy that is not followed. Not every regulation needs to be fully captured in a policy, and not every edge case needs to be addressed on day one.

As your business grows, your policies can evolve. But early on, the goal is not completeness. It is to ensure that what is written down aligns with what your team is actually doing.

If you're building or scaling a fintech company, compliance will inevitably become a topic in nearly every strategic conversation. Bank partners want to review your policies, test your controls, and assess your risk program. Enterprise customers will send you a long due diligence questionnaire on compliance practices. 

Your venture capital investors may not care about compliance but your potential acquirers will (and then, out of the blue, so will your investors!). 

Your ability to move quickly often depends on how confident others are in your ability to manage risk. A well-run compliance program gives you leverage in all of these situations. It lets you move faster through negotiations because compliance is removed as a showstopper. It reduces friction in deals. 

And internally, it makes your team more efficient because you’re not constantly running around fixing issues after they break. You’re anticipating them, documenting them, and systematizing your responses so that you're a fast, well-oiled machine.

That all said, it is impossible to get a 100% on compliance. In fact, if you’re aiming for perfection, you are likely reaching a point of diminishing returns. No fintech gets compliance 100% right from day one, and nor should they try. The goal is strategic prioritization, applying the 80/20 rule: identify which controls and risks matter most right now, and allocate resources accordingly, and then move onto the next one as you grow. Know where to be strong, where to be flexible, and what to ignore for now. 

That is the difference between fixing doorknobs and building something that actually holds.

Disclaimer: While this article clearly doesn’t shy away from providing practical and operator friendly advice, please don’t take anything written here as legal advice. You should do your own homework to figure out what works best for your company.