Block Inc., formerly known as Square Inc., has come under fire recently following a two-year investigation by the investment firm Hindenburg Research. The research concluded that Block’s business model was not based on disruptive innovation, but instead on taking advantage of those they claimed to be empowering: the unbanked and underbanked. This raises questions about the company’s compliance with proper regulations, as well as what other companies in the Fintech industry can do to avoid making the same mistakes.
Block’s Compliance Failures
The research conducted by Hindenberg Research revealed that Block had failed to comply with a number of regulations, including facilitating fraud against consumers and government agencies, avoiding regulation, disguising predatory loans and fees as revolutionary technology, and inflating metrics for investors. These are all clear examples of non-compliance with regulatory requirements. In addition, they created an environment where it was difficult for customers to trust their services or products, which is essential when dealing with financial transactions.
How Financial Technology Companies Can Avoid the Same Fate
In order to avoid making the same compliance failures that Block did, companies in the Fintech industry must take steps to ensure their products and services are compliant with any applicable regulations. This includes conducting thorough due diligence into any potential partners or vendors before entering into a relationship with them, ensuring that all products or services comply with applicable laws and regulations before launching them in the market, training employees on compliance requirements (including whistleblower protection), monitoring customer behavior for suspicious activity, and implementing an effective know-your-customer program. Additionally, companies should have a robust risk management system in place that monitors for any potential compliance issues or risks on an ongoing basis. Finally, it is important for companies to have effective communication channels between different departments (i.e., legal/compliance/risk) so that potential issues can be identified quickly and addressed appropriately.
The failure of Block to comply with proper regulatory requirements serves as an example of how non-compliant practices can lead to serious consequences both financially and reputationally for a company in the fintech industry. To avoid making similar mistakes and potentially facing similar repercussions down the line, companies should take steps such as conducting due diligence into vendors/partners prior to engaging them, training employees on compliance requirements regularly, monitoring customer behavior proactively, having effective communication channels between departments (legal/compliance/risk), and implementing an effective know-your-customer program among others. Doing so will help ensure your company remains compliant moving forward while also helping build trust amongst your customers – which is essential when dealing with financial transactions.
