Racing a Formula 1 car is no feat for the weak of heart. One missed instrument scan, the slightest reflex delay, anything less than 1000% concentration, the tiniest of mistakes and you quickly give a new fiery meaning to the expression “a bad day at the office!"
In the startup race, Formula 1 cars are known as Unicorns: hyper-growth businesses valued at over one billion dollars. Some of them, especially in the “gig economy,” have become household names like Uber, Lyft, AirBnB and so many more.
Much like race car drivers, their leaders cannot afford to miss a single beat. The stakes are too high and too important. Yet many Unicorns take their eye off the needle when it comes to regulation. And while cutting compliance corners is foolish enough, doing it to an exponentially-growing business is a risk not worth taking.
Let’s face it: Unicorn or not, Wall Street darling or not, no business can skirt around compliance. It’s not something you can add later when convenient. Compliance is a key component of a solid business. Regulators like the FTC and CFPB don’t discriminate between burgeoning and established businesses. Ignorance is not bliss and there are no second chances. When breaking the rules - knowingly or not - the business and its management always pay the price. The last thing a Unicorn needs is government scrutiny followed by a highly-publicized brand damaging crisis.
And in these days of automated regulatory technology, compliance doesn’t have to mean IT pain with astronomical costs and human resources drain. RegTech is both cost-efficient and able to abstract away most of the traditional challenges involved in managing compliance risk. Not the least of which is growing complexity and constantly changing rules.
Interestingly, the sooner you fireproof a high-growth business at scale, the easier it is to maintain compliance at scale, which makes for a great business case. Particularly affected are “gig economy” businesses where the supply side of their marketplace is in shorter supply than the demand side at scale. Let’s explore this idea a bit more.
Unicorns in the gig economy reach those valuations quickly because of their massive and global Total Addressable Markets. The demand for the services they provide are by their nature, very, very large. It’s hard to imagine a shortage anytime soon of people needing vacation lodging, a ride home from a night out, or someone to walk their pooch! The bigger challenge is having a ready and able supply side of service providers that can meet that massive demand. Layer in the dynamics of a competitive market with more than one large provider, and suddenly recruitment of that supply side gets gnarly. In turn, the cost to acquire suppliers increases, and suppliers jump from platform to platform looking for the highest fees and best terms. Partners are required to continue hitting their supply side acquisition goals, media costs skyrocket, all while suppliers demand more from their gig platforms. These extreme pressures on the business model can inevitably lead to a loosening of the reigns on sales and marketing compliance measures.
In addition, these gig unicorn companies have raised hundreds of millions in outside capital and often generate billions in revenue. Some are getting ready to IPO this year. Deep pockets mean high value targets for regulators and their constituents. It’s not surprising to see the largest regulatory fines have historically been in banking. Will we see that change to tech in the coming years? Quite possibly.
Compliance concerns for gig economy players expand beyond marketing and sales compliance. If consumer safety via employee background checks are not properly or consistently followed, that leads to fines and penalties as ride sharing Unicorn Lyft experienced last year. In such cases, even when the financial loss isn’t astronomical, a brand’s trust and reputation can quickly be tarnished in the public eye indefinitely resulting in lost business and stifled political support for expansion.
So, in this context of ambiguity, it’s particularly critical to cover all possible angles from day one. Something RegTech can help do.
And then you have the FinTechs. These digital financial services startups are disrupting incumbents in banking, investment, insurance and all sorts of B2C personal money management examples.
Many of these new digital ventures start off in Europe under more open and integrated multi-state platform standards like Open Banking APIs. When confronted with the complexity and stringency of the US regulatory system, these FinTechs often attract the unwanted attention of regulators and consumer protection agencies. Something hyper-growth startup Robinhood found out the hard way recently.
Consumer protection laws for financial services in the US are complex and can vary by state, making it even harder to comply via sheer human effort. Their enforcement is relentless and quick in an age of digital public opinion courts. In worst case scenarios, companies have been fined hundreds of millions and outright shut down by the FTC for “misleading consumers” and lack of transparency.
Sadly, all these business nightmares could have been prevented by carefully planning out and deploying a solid global preventative regulatory technology umbrella from day one.
On the high-speed race track of Unicorn building, don’t let compliance shift your eyes off the road for a millisecond. Leverage new automation technologies like PerformLine to monitor and protect against compliance risk in your sector at scale, at anticipated costs. The pain of not doing so from the get-go is simply too high to pay.