FTT Guest Essay: Hummingbird CEO on Compliance & Fintech Partnerships

Hey everyone! Ian here. Julie and I are super excited to have an incredible guest columnist for today’s FTT—Joe Robinson, cofounder & co-CEO of Hummingbird, an anti-money laundering startup that works Stripe, Brex, Etsy, Hatch Bank, and many more.

This is a major topic in the news right now: Buzzfeed last week published a treasure trove of suspicious activity filing that have led to money laundering that’s been ignored by banks like JPMorgan, Deuschte Bank, and plenty others for years. Investors have noticed—HSBC’s stock hit its lowest price since 1995 (you may not have been born by then.)

Joe’s company, Hummingbird, makes AML compliance a lot easier for compliance officers. Full disclaimer—I’m a small investor in Hummingbird’s $8.2 million Series A round led by Flourish Ventures though my syndicate with Nik Milanovic. But that’s because we’re hyped about the company: Hummingbird has a unique opportunity to solve a lot of issue that, finally, people are taking seriously. Joe’s also a deep subject matter expert on the compliance space, and has worked at companies like Circle and Square in the past.

Recently, I wrote about limitations in fintech partnerships, and Joe had some thoughts about how the compliance layer adds some more complexity into those relationships.

We also have free invites to an awesome compliance webinar tomorrow for FTT subscribers—just hit the link below. The topic is on how to build the best fincrime program at your fintech company, and features a great lineup:

  • Ben Gray, Chief Compliance Officer at Square

  • Sarah Elliott, Chief Compliance Officer at One

  • Matt Van Buskirk, co-CEO at Hummingbird

  • Steve Cohen, COO at Basis Technology

Sign Up Here!

Compliance: The Hidden Hurdle With Bank-Fintech Partnerships, by Joe Robinson

Despite billions of dollars of investment in FinTech, and thousands of partnerships with banks, there’s a constant issue that remains overlooked – compliance.

The fintech industry was built on the backbone of partner banks. These banks have the licensing and charters required to take deposits, issue cards and lend money. Tech companies partner with them to create new products and services from these capabilities, often providing them to the underbanked, ultimately improving financial inclusion across the globe. 

While the interest level in partnerships has increased tremendously due to rapid digital acceleration, compliance remains the iceberg that can sink the ship when bringing new financial services to market via partnerships. The fundamental issue is that banks cannot legally pass their compliance obligations to a third party. 

Sure, there are all sorts of technology and service providers that help with compliance obligations – after all, it’s a $100B a year industry in the US alone. But the legal ramifications of the failure to remain compliant fall to the banks alone. So once a bank onboards a new FinTech partner, their prioritized wishlist for the partnership tends to look something like this:

  1. Compliance

  2. Compliance

  3. Compliance

  4. Everything else

That’s why, as the fintech industry has grown alongside the willingness of banks to partner, the issue of compliance remains front and center to banks and a thorn in the side to partners who might not consider this issue at the outset. Even fraud concerns pale compared to concerns surrounding compliance as banks generally know fraud losses will be paid out of the fintech partners’ pocket. Not so with compliance issues – these losses land squarely on the bank’s shoulders.

Why is this such an issue for banks? Because the very nature of being a bank requires being compliant with regulations. That’s how banks become banks – they agree to provide financial services according to the rules set forth by policymakers and enforced by regulators. If they don’t agree to these rules, or at any point stop minding them, they quickly lose their ability to be a bank. And while compliance has many arms, it can generally be bucketed into two primary objectives:

  1. Preventing criminals from using our financial system to enable very bad things.

  2. Protecting people from harmful or predatory financial services.

To meet these two critically important objectives, banks practice compliance through different means. These include identity verification, activity monitoring, conducting investigations, and writing reports, to name a few of their responsibilities.

If these responsibilities sound like a lot to keep track of, that’s because they are. As a fintech partner, you can help your bank partner by practicing strong compliance. To do this, be supportive throughout the compliance process, providing help and assistance during investigations whenever possible. Be diligent about correlating identity with activity, and deliver the most thorough referrals you can to your bank partner.

Being a good fintech partner means considering and being supportive of your bank partner’s compliance efforts. By ensuring they’re protected from the ramifications of being found non-compliant, you’re strengthening your fintech position in the industry, avoiding issues down the road, and ensuring a long-lasting relationship that provides the expected level of support to consumers.