Alloy shared with QA Financial that the New York City-based digital identity risk management firm has launched a new software product for banks, BaaS providers, and fintech firms to identify and manage identity risks and thereby minimise compliance risks.
Most banks currently take on all compliance responsibilities, which means they often force their fintech partners into a one-size-fits-all approach to compliance. However, this regularly does not suit fintechs’ evolving risk needs.
As a result, this adds unnecessary friction to their user experiences, explained Tommy Nicholas, CEO and co-founder of Alloy, which says to serve close to 600 banks and fintech companies, mostly in the U.S.
No proper oversight
Many banks have acknowledged not to have sufficient oversight or control over whether their fintech partners adhere to the banks’ government-mandated compliance requirements.
“We work to solve these challenges,” Nicholas claimed, adding that his company’s new platform – Alloy for Embedded Finance – should help banks to “stay ahead of regulatory requirements,” as he put it.
“The new product leverages the strength of Alloy’s existing platform while introducing a new parent/child account configuration,” Nicholas elaborated.
He added: “Sponsor banks, or ‘parent accounts’, have the ability to designate different levels of autonomy and guardrails for each of their fintech partners, or ‘child accounts’, depending on how mature the fintech is, how much of the process the fintech wishes to own, and the risk appetites of both parties.”
With this construct, sponsor banks can build compliance policies, then issue and enforce them to each of their fintech partners all at once, Nicholas continued.
In addition, “more mature or ‘autonomous’ fintechs can customise their controls on top of these baseline policies, giving them the flexibility to tailor risk measures that don’t add unnecessary friction for end users.”
“Regardless of the autonomy level a fintech partner has, the bank retains total oversight of their policies to ensure they are fully compliant,” he claimed.
Embedded finance space
Alloy’s launch comes at a time the embedded finance space is experiencing significant growth.
Professional services giant EY recently predicted in a new report that the global embedded finance market is likely to swell to $606 billion by next year.
However, the industry has been plagued by compliance challenges, with regulators increasing pressure on sponsor banks to ensure their third-party partners meet compliance requirements.
According to data from advisory firm Klaros Group, sponsor banks drew one-third of all formal enforcement orders by federal banking agencies in the fourth quarter of 2023.
With regulatory attention unlikely to slow down, watchdogs and other actors are urging banks and their fintech partners to work together to meet compliance requirements.
In fact, banks can currently not operate without controlling the CIP/KYC and AML/BSA policies of the fintechs in their program.
“Recent enforcement actions make this clear,” Nicholas pointed out.
“At the same time, risk programs that are ‘one size fits all’ result in terrible user experiences for fintechs that pride themselves on providing a frictionless interface. Alloy for Embedded Finance solves both sides of this problem,” he concluded.
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