Balancing Innovation and Compliance in B2B Financing

By Luke Voiles, CEO, Pipe

There’s no question that small businesses need an easier way to access working capital. It’s crucial for sustainable growth, and provides a buffer against the ups and downs of the business cycle. The question is how to straighten the path to capital access without cutting corners.

As the demand for B2B financing increases, the mantra of “move fast and break things” has been both a driving force for innovation and a source of concern for risk and compliance. It’s this dual accountability to both businesses who need capital and the regulators who ensure capital access is safe that creates the challenge.

Done wrong, innovation could slam the brakes on business funding and make it even harder to access by making it too risky for the capital markets, or too big a regulatory risk for the originator to take. But done right, technology can meet the needs of the small businesses that drive our economic engine, especially those who struggle with financial access. I believe fintech exists to solve this exact problem.

Why Innovation Matters

Traditional funding avenues, such as banks and credit unions, come with complex offline processes and a long list of requirements that can be prohibitive for small business owners. These requirements exclude a large share of SMBs today, who simply don’t fit into this one-size-fits-all model. Innovative financing solutions are critical because business owners are inherently innovative. As they build new and unique businesses to meet consumer needs, they need financing options to meet them where they are. This is the promise of fintech: to provide customers with streamlined applications, quicker approvals, and more flexible terms—in short, accessibility. This accessibility enables entrepreneurs to invest in growth opportunities, manage cash flow, and weather unexpected challenges without the heavy burdens of traditional financing.

Innovation is also about customization. Fintech companies leverage data analytics and machine learning to assess creditworthiness in more nuanced ways, considering factors beyond just credit scores (and in some cases, not considering credit scores at all). This allows them to serve businesses that have been overlooked by traditional lenders, ensuring that a broader array of SMBs can access the capital they need to succeed.

Access is good. Fast access is better. But we need compliance processes in place to ensure bad actors don’t misuse that access.

The Compliance Factor

Unfortunately, some in fintech have tried to shorten the path by cutting corners. While innovation brings immense potential, it also comes with a heavy responsibility—compliance. The regulatory landscape for financial services is complex and continually evolving, posing challenges for fintech companies striving to innovate while adhering to strict compliance standards. Neglecting these regulations can lead to severe consequences, not only for individual companies but for the entire fintech ecosystem. Failure to comply with regulations can result in hefty fines, damaged reputations, and loss of customer trust (not to mention occasional prison time). The ripple effects can be felt industry-wide, creating a chilling effect on innovation as investors become wary of supporting companies that may be at risk. When the market perceives fintechs as risky ventures, access to capital diminishes, further complicating the challenge of providing small businesses with the funding they need.

The Balancing Act

Like I said, I believe fintech exists to solve the problem of financial access, and innovation can thrive within the boundaries of compliance. By embracing a proactive approach to regulatory standards, fintech companies can develop solutions that not only meet compliance requirements but also enhance the customer experience. This balance is crucial, and it leads to a healthier, more sustainable financial ecosystem.

To achieve this, fintechs should invest in compliance technology, engage with regulators to stay ahead of changes, and foster a culture of transparency and accountability. By doing so, they can innovate confidently, providing small businesses with the access to capital they need while ensuring that the fintech industry maintains its credibility and trustworthiness.

Practical Strategies

Collaboration with Regulators

Building relationships with regulatory bodies is crucial for understanding the evolving landscape and ensuring compliance while driving innovation. Organizations like the Financial Technology Association (FTA) play a vital role in this process by providing a platform for fintechs to voice their concerns, share insights, and collaborate on best practices.

By participating in groups like the FTA, fintechs can stay informed about regulatory changes and contribute to the conversation around creating a balanced framework that fosters innovation without compromising compliance. Regular dialogue with regulators helps fintechs anticipate changes in legislation and adjust their operations accordingly, reducing the risk of penalties and enhancing their credibility in the market.

By demonstrating a commitment to compliance, fintechs can cultivate trust with customers and investors, positioning themselves as responsible players in the financial ecosystem.

Tech Solutions for Compliance

By definition, fintechs solve problems through technology, and this problem is no different. And while tech is a powerful tool for building a more frictionless user experience without compromising compliance, that doesn’t mean you need to build the technology yourself.
Fintech companies can leverage advanced compliance technology, known as RegTech, to automate and streamline compliance processes.

Much like embedded finance allows software companies to offer financing without building it from scratch, building the right RegTech stack allows you to build secure, compliant products without committing massive resources to manual processes, building new tools in-house, or needing to hire more compliance experts. Here are a few examples of compliance tools that are making life easier for fintechs and safer for everyone:

Alloy for Fraud Prevention, KYC, and KYB

Alloy’s case management system integrates data from multiple sources to streamline KYC (Know Your Customer) and KYB (Know Your Business) processes, marking any red flags early in the application process. This enables fintech companies to auto-approve many low-risk businesses without manual review, speeding up the onboarding process and reducing operational costs.

By leveraging customized rules to analyze data, Alloy ensures faster, more efficient approvals while maintaining strong compliance standards. Alloy also supports multi-jurisdictional operations by pulling in data via APIs from relevant sources in different regions.

This capability played a key role in facilitating a smooth expansion into the UK that allowed Pipe to be up and running in the new geo in about six weeks.

Sardine for Transaction Monitoring and AML

For transaction monitoring and anti-money laundering (AML) compliance, Sardine offers sophisticated APIs that enable real-time tracking and analysis of financial activities. Fintechs can implement custom rules that adapt to their specific risk profiles, ensuring that potential fraud or AML concerns are flagged immediately. Sardine’s ease of use, combined with its advanced functionality, allows companies to maintain compliance without sacrificing operational efficiency.

Minerva AI for Enhanced Due Diligence

When dealing with higher-risk customers, Minerva AI can be helpful in conducting enhanced due diligence across multiple markets. By pulling data from various sources, Minerva helps fintechs confirm customer details and risk-rate their profiles more effectively. This reduces the need for manual research, speeding up the process while identifying potential issues before they escalate. All of these tools make it possible to maintain rigorous compliance standards at a much faster pace, both reducing the risk of human error and increasing the company’s velocity.

In addition to building the right tech stack, partnerships are also a powerful strategy for streamlining the process. If you and a partner require the same compliance and verification steps, it may be possible to build a flow that allows business owners to complete that check once instead of twice, reducing friction and improving speed. While you still need to take full responsibility for the accuracy of your compliance program, verifying can be much quicker than collecting the information twice and create a much better user experience.

Innovating for underserved SMBs

Underserved small businesses, such as micro-merchants, women-owned, and minority-owned businesses, often face significant barriers when it comes to securing financing. Traditional underwriting methods rely heavily on FICO scores, which can unintentionally exclude these businesses from accessing the capital they need. This is where the balance of innovation and compliance plays a crucial role in opening up financial services to these populations.

One of the most promising innovations in this space is the shift from traditional credit-based underwriting to a more holistic approach based on business data. By leveraging real-time business performance data—such as revenue streams, transaction history, and cash flow patterns—fintechs can make more informed underwriting decisions that reflect the true health and potential of a business, rather than relying solely on credit scores that may not accurately capture the full picture.

For example, micro-merchants and newer businesses may lack the established credit history required to secure a traditional loan, despite demonstrating strong, consistent business performance. Women- and minority-owned businesses, historically underrepresented in traditional lending markets, often face systemic biases in the credit system that limit their access to capital. By focusing on business data instead of credit scores, lenders can bypass these biases and more accurately assess the risk and potential of these businesses.

Ultimately, balancing innovation with compliance isn’t just about adhering to regulations—it’s about creating a more equitable financial ecosystem that serves the needs of all businesses, particularly those that have been overlooked by traditional financing models. Through these innovative approaches, financial institutions can expand their reach, support economic growth, and foster diversity and inclusion within the small business community.

Conclusion

Ultimately, the future of B2B financing depends on the industry’s ability to continue evolving while maintaining the trust and credibility that compliance ensures. By focusing on both innovation and compliance, we can not only meet the immediate needs of small businesses but also lay the groundwork for long-term success and sustainable growth. Fintech, when done right, truly has the power to change the game for small businesses everywhere—especially those who need it the most.