Why Startups Should Leverage Compliance

Business Insider recently reported that “The Clearing House, an advocacy group owned by the world’s largest commercial banks, is gunning for payment startups.”

Not surprisingly, the banks don’t enjoy being the only ones told to play by the rules. More to the point, though, forcing Wall Street regulations onto Silicon Valley is their approach to dealing with the threat of technology firms coming to eat their lunch.

Though this particular measure focuses on payments, the same dynamic can be seen at play in other innovative sectors. During the last several months, Uber has been battling regulators both here in the United States and in many countries abroad, often because of aggravation by taxi unions. What these incidents highlight is the unsurprising fact that if you want to eat the established players’ lunches, you probably have to take their pills too.

Despite the many upstarts who decry the stifling effects of regulation, governments have signaled repeatedly that they have no intention of backing down. The proper response from the technology industry is not to bemoan the state of affairs, but to recognize the opportunity to leverage compliance against their competitors.

It might not seem obvious, but startups have one significant competitive advantage over established firms when it comes to compliance. Regulations change, and they have changed more rapidly in tandem with the rapidity of technological innovation. Compliance under these conditions requires good internal systems for both governance and reporting, which favors more adaptive, lean and technologically capable companies.

Tech writers, for example, have spilled a lot of ink over the atrocious IT structure underlying banks. It costs more in both human effort and in computing power to wrangle the necessary reports from these systems to be compliant. Data is a mess, and getting anything meaningful from it is more difficult as a result.

Building compliance into the fabric of a company positions it to deal effectively with the regulatory and competitive challenges of growth.

A startup, on the other hand, can build a product with the needed capabilities in mind at the outset. Factoring nimble compliance into product design will attract savvy investors and, perhaps more importantly, smooth entry into established markets.

Failure to take this approach can be crippling or even fatal. It’s a near certainty, for example, that the recent FinCEN action against Ripple Labs scared away plenty of good money. Startups that cross regulators are vulnerable to similarly damaging enforcement actions. But even those companies that avoid the doomsday scenario risk being victims of their own success.

An expanding business spends much more money on an unforeseen problem than it does on one for which it has prepared. Building compliance into the fabric of a company positions it to deal effectively with the regulatory and competitive challenges of growth. Doing so will provide technology companies with another edge over the businesses they hope to usurp.