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The world is evolving at a pace unimaginable a few decades ago. Doing business has become easy; all one needs is to make a few clicks. But the overall thinking of how to successfully run a company hasn’t undergone a rapid transformation. The notion of sales and revenue above anything else continues to prevail. Yet good compliance is now a must and it’s about much more than just avoiding lawsuits. It’s the key to growth and gaining a competitive edge.
According to Navex Global's 2023 Definitive Risk & Compliance Benchmark Report, 83% of risk and compliance professionals emphasized that compliance with all relevant laws and regulations was a critical factor in an organization’s decision-making processes.
Without good compliance, expect a knock on the door from regulatory bodies. Even if everything seems to be running smoothly, the lack of focus on compliance can cost millions of dollars.
That’s especially the case in the financial sector. For instance, 2023 marked one of the largest crackdowns on digital payment platforms in history. The FCA imposed fines totaling £52.8 million in 2023.
Businesses that want to be profitable, get a steady flow of clients, acquire long-term partnerships and scale must take compliance seriously. In addition to the obvious risks of fines and penalties, here’s a look at just 4 of the hidden costs of compliance failures.
4 Hidden Costs of Noncompliance
- Reputational Damage
The advent of the Internet and social media made reputation an invaluable asset to any company, regardless of the industry. It significantly affects customers’ decisions and is essential for establishing trust. A business’s reputation can impact how likely other companies are to partner with or invest in your company. Before signing anything, investors, customers, or partners will analyze your company, and if their due diligence and market research reveal an untowardly history, the business can greatly suffer. To have a good reputation one must have good compliance. Without it, the damage is imminent.
Companies in fintech have famously been hit by reputational damage multiple times. For instance, in 2023, Coinbase reached an $100 million settlement for non-compliance with anti-money laundering (AML) regulations. The fine drained the firm’s capital reserves and slashed its market share. Coinbase also lost clients and suffered distrust from investors, hampering its ability to raise money.
- Customer Churn
One of the key metrics determining success is a customers’ lifetime value. If a business has good compliance and a good reputation, clients are more likely to stay for years providing a continuous cash flow and leading to the possibility of market expansion. It’s vital to protect customers’ interests to maintain such a status quo.
Good compliance is key here. It’s simply a matter of time before problems arise if an organization takes compliance lightly - and numbers do paint a picture. For example, as data breaches became common, a 2022 survey by McKinsey found that 40% of all respondents would stop working with a company when it violated digital trust and 46% would consider switching brands if a company’s data practices were unclear. Consumers are educated - and concerned - and they’re looking for companies with a strong approach to compliance and security.
- Employee Morale and Retention
For a business to function properly, its employees must have high morale and confidence. With bad compliance, the risks are higher and can translate into anxiety and stress among team members. If issues come one after another, the company can endure high turnover rates.
In 2023, Wells Fargo found itself in a scandal as the firm was caught creating millions of fake accounts. This has led to fines and greatly affected employee morale as many felt pressured to meet unrealistic expectations and feared forced resignations. As a result, the firm experienced a high employee turnover rate.
- Lost Business Opportunities
Suppose a company had struggled in the past but now has good compliance. Learning from mistakes is always beneficial in the long term but in the age where information flows freely and never disappears, the past is impossible to hide. With bad compliance early on, a business can struggle to rebuild their brand.
In 2023, the crypto platforms suffered a huge blow in the UK - 75% of license applications were refused due to compliance failures. Good compliance is not just a complementary practice but a mandatory one. It builds a foundation so a company can capitalize on every opportunity as they grow.
Avoid the Hidden Costs of Compliance Failures
In today’s world, things are high-paced, and every person and company live under a microscope. No stone goes untouched and (almost) no infractions go undiscovered. To compete, businesses must understand that they’ll get caught sooner or later for cutting corners, blurring the rules or not staying on top of rapidly changing regulations. Because the risks are so high, the only choice is to invest in air-tight compliance. Failure to comply results in fines and penalties in addition to the more hidden costs discussed here such as reputational damage, customer churn, and high employee turnover.
Good compliance, on the other hand, gives you a competitive edge. It safeguards the healthy state of operations and makes sure the firm has everything in order to ensure it can succeed and scale. As competition intensifies worldwide, it’s important to remember that respect for regulations drives business growth and makes scalability an effortless endeavor.
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