Emily Shaw is the founder of DocFly.
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It’s easy to assume that most fintech businesses have gone fully digital, at least when it comes to document handling.
B2BE’s research, in fact, suggests that around half of all businesses they surveyed still rely on manual document processing. There are a few reasons why that might be the case, but what’s most concerning is the potential for breaching compliance by relying on traditional paper trails.
Before we discuss these compliance factors, however, let’s first explore why so many companies still rely on manual documentation.
Why Manual Document Processes Still Persist in Fintech
Let’s be completely clear - many fintech firms are fully embracing digitalization (which includes document digitization) with research claiming that up to 90% of fintech companies are using artificial intelligence to some degree.
That, of course, means there is still 10% that isn’t embracing fintech AI – but at the same time, there is nothing to suggest many of these companies don’t still use manual documentation to some extent.
For many fintech firms, manual document processing is highly desirable because it’s a cost-effective way to create and handle data. There’s no need to invest in new programs or to train employees on how to manage digital documents, and paper trails can be shared with a limited number of people.
There’s even an argument that manual document processing is more secure than handling digitized copies. That’s purely because if it’s on paper, and not on a server or database, there’s no way for hackers to get at it.
But, there’s a counterpoint that makes this moot. It’s still possible for bad actors to commit fraud with physical documents – for example, through sensitive data left idle on printers and copying machines. What’s more, somewhat concerningly, document fraud has accounted for around three-quarters of all fraud within fintech at any one time.
Beyond the security argument, many fintech firms still rely on manual document processing to avoid delegating sensitive financial data to automated processes. Some professionals feel that human oversight is still necessary to ensure client financials are processed accurately and securely, and that can mean retaining paper documents.
The counterpoint here – and we’ll explore this a little more shortly – is that you can still apply human oversight to digital document handling. Moreover, avoiding digitization increases your chances of human error, putting you at the mercy of compliance issues.
Finally, while some business owners fear the complexity or cost, digitizing important documents is often simpler than expected. Doing so not only improves access and backup but also strengthens compliance efforts across the board.
Key Compliance Risks Linked to Paper-Based Workflows
Fintech companies must abide by several compliance standards to keep financial information and identifiable data safe.
For example, they must follow anti-money laundering and know-your-customer processes, and protect any data they handle in line with regulations set by the GDPR (General Data Protection Regulation) in the European Union, and the CCPA (California Consumer Privacy Act) in the US.
As it happens, manual document handling can trigger several compliance concerns – and therefore heavy fines and reputational damage – for fintech firms of all sizes.
Potential issues include:
- An increased risk of human error and incorrect record-keeping
- Access delays for paper records (for financial data and otherwise) during compliance audits
- Lost or stolen documentation
- Zero backups (physical or digital) for sensitive data
- High consumption of paper (potentially violating environmental compliance for certain fintech companies)
- Lack of defined auditing/document trails and processes
Handling fintech documents entirely manually can also reduce the positive effects of cybersecurity auditing such as penetration testing, which is useful for preparing firms for compliance audits.
If all a company’s documents are held physically instead of digitally, there is only so much that cybersecurity experts can do to help.
How Manual Errors Can Trigger Regulatory Issues
Human errors in data entry range as much as 5%, and while that may sound relatively low, it’s not insignificant as far as fintech regulatory compliance is concerned.
Incorrect financial reporting, for example, can lead to serious budgeting mistakes and incorrect transaction recording. An accidental, extra zero can completely transform certain financial analytics. Producing inaccurate and misleading figures through any kind of compliance audit immediately suggests your company is not taking data handling seriously.
Manual errors, such as losing or accidentally destroying paper documents, can also create black holes in auditing processes. Let’s assume a fintech company is being audited for anti-money laundering. If financial records suggest a certain amount of income for Q3, and the company doesn’t have the receipts to back up where the money came from, compliance won’t look kindly on the oversight.
What’s more, for all manual documentation creates literal paper trails, that doesn’t make them foolproof or easy to follow. Again, losing, destroying, or accidentally editing documents can completely throw off auditing processes.
That, ultimately, can lead to penalties, loss of business, and reputational damage.
What Modern Compliance Standards Expect
Modern compliance standards are thorough, but reasonable, when it comes to how fintech firms manage their sensitive data.
They expect:
- Complete transparency with regard to financial products, data handling, and fee structures
- Regular cybersecurity audits and implementation of best practices
- Due diligence re: customer interactions and data handling
- Proactive fraud reporting
- Robust data trails, including secure backups
- Disaster recovery processes to restore information in the event of an attack
- Responsible, complete record keeping
- Fair treatment of customers and adherence to consumer rights
- Prompt, proactive responses to compliance auditing requests
Much of the above is, inarguably, made easier with well-protected, accessible, digital document trails. It’s not so simple, however, to maintain the same standards with a purely physical paper trail.
Moving Forward: Steps to Reduce Risk Through Digitization
Digitization looks different for every fintech company. And yet, it stands to reason that any company working within a technology sphere has little excuse not to embrace digital documents over manual handling.
Fintech firms can take immediate steps to reduce compliance risk by transferring any physical documents to digital storage through various software, and by building clear data hierarchies and storage so information is always easy to access.
Business owners should also take the time to research and embrace automation tools and artificial intelligence, which are only improving at handling complex data and reducing entry errors.
Ultimately, the cost risks of violating compliance will far outweigh the initial costs of investing in digitization software. A relatively small upfront cost now is a drop in the ocean compared to potentially firm-ending penalties later on.
