Regulatory Stack

Executive Summary

The Regulatory Stack refers to the multi-layered set of laws, regulations, and compliance standards that govern financial services and payment-related businesses.
It encompasses everything from licensing and AML/KYC to data protection, cybersecurity, and consumer protection.
Essential for ensuring legal operation, reducing risk, and maintaining regulatory integrity in banking, payments, MSBs, and fintech sectors.
Non-compliance can result in fines, license revocation, reputational damage, and even criminal prosecution.
Staying up-to-date with the evolving regulatory landscape is crucial for ongoing compliance and operational success.

Definition of Regulatory Stack

The Regulatory Stack is a conceptual framework representing the complete set of regulatory requirements that a financial institution, fintech, or payment provider must comply with to operate legally. It includes laws, guidelines, supervisory expectations, and standards from both national and international regulatory bodies. These obligations span multiple domains such as:

Licensing and registration
anti-money laundering (AML), and know your customer (KYC)
Data protection and privacy (e.g., GDPR)
Consumer protection
Cybersecurity
Transaction monitoring and reporting

This layered approach ensures that businesses mitigate operational, legal, reputational, and financial risks while maintaining the trust of regulators, partners, and customers.

Building a robust regulatory stack involves establishing policies, procedures, and internal controls to meet regulatory requirements. It also involves conducting ongoing monitoring, audits, and reporting to demonstrate compliance with regulatory authorities. Non-compliance with the regulatory stack can lead to penalties, fines, reputational damage, and potential loss of licenses or permits.

Background / Backstory on Regulatory Stack

As the financial ecosystem became more digitized and interconnected, a single set of rules was no longer sufficient to address all the risks and operational requirements in banking and payments. Governments and regulatory authorities began introducing complementary and overlapping layers of rules—thus giving rise to the modern-day regulatory stack.

Institutions now must navigate not only national regulations (e.g., the USA PATRIOT Act or BSA in the U.S.) but also international frameworks like the GDPR or FATF’s AML recommendations. This complexity has led to the rise of compliance technology (RegTech), dedicated compliance officers, and a strong emphasis on internal governance structures to ensure that each layer of the stack is continuously monitored and implemented.

Key Layers of the Regulatory Stack

Here’s how the regulatory stack typically unfolds across the industry:

1. Licensing and Registration Layer

Money Transmitter Licenses (state-by-state in the U.S.)
FinCEN registration for MSBs
PSD2 compliance for European Payment Institutions
SEC or CFTC registration for capital markets participants

2. AML/KYC Compliance Layer

Bank Secrecy Act (BSA)
USA PATRIOT Act
FATF Recommendations
Transaction monitoring systems
Sanctions screening (OFAC, UN lists)

3. Data Protection and Privacy Layer

GDPR (Europe)
CCPA (California)
GLBA (U.S. financial institutions)
Secure storage, consent-based data use, and right-to-forget mechanisms

4. Consumer Protection Layer

CFPB (U.S.)
Dodd-Frank Act provisions
Electronic Fund Transfer Act (EFTA)
Transparent disclosures, dispute resolution, and fraud liability frameworks

5. Cybersecurity and Operational Risk Layer

FFIEC cybersecurity assessments
NIST framework adoption
Real-time fraud detection and infrastructure penetration testing

6. Reporting and Audit Layer

Suspicious Activity Reports (SARs)
Currency Transaction Reports (CTRs)
Regulatory audit trails
Periodic license renewal filings

How It Works (With Two Examples)

Example 1: U.S. MSB (Money Services Business)

Registers with FinCEN and applies for state-level money transmitter licenses.
Implements an AML program per BSA requirements.
Integrates an identity verification system for KYC onboarding.
Encrypts customer data to comply with data privacy laws.
Reports large or suspicious transactions to FinCEN and applicable state agencies.

Example 2: EU-based Fintech App

Obtains a Payment Institution license under PSD2.
Conducts eKYC onboarding in compliance with 4th and 5th AML Directives.
Ensures GDPR compliance in user consent, data processing, and cross-border storage.
Adheres to open banking API standards.
Undergoes audits and reports to the local Financial Supervisory Authority.

Simple Analogy

Think of the regulatory stack like a multi-layered security system in a building. The front door lock is your business license. Inside, you have security cameras (AML/KYC), fire alarms (data protection), and emergency exits (consumer protection). Each layer exists to ensure that the building (your business) is safe, legal, and trustworthy.

ELI5 (Explain Like I’m 5)

Imagine a big checklist you need to finish before opening a lemonade stand. You need permission from your parents (license), you have to keep your lemonade clean (safety), write down who buys it (record-keeping), and make sure you don’t share your friend’s names without asking (privacy). All these rules together are your “regulatory stack.”

Why It Matters

A complete and well-managed regulatory stack helps institutions:

Avoid fines, lawsuits, and reputational damage
Build scalable and trustworthy financial products
Operate in multiple jurisdictions legally
Attract banking partners and investors
Respond quickly to regulatory changes and audits

Pros & Cons

Pros:

Provides a framework for compliant growth
Encourages transparency and trust
Enables access to global markets
Reduces systemic financial risks

Cons:

High compliance costs, especially for startups
Requires constant updates and legal oversight
Fragmentation across regions can create complexity
Overlapping rules can slow down innovation if poorly managed

Future Outlook

The regulatory stack will continue to evolve in response to:

Emerging financial products (e.g., DeFi, embedded finance)
Cross-border data sharing and standardization
AI and machine learning applications in compliance
Regulatory harmonization across jurisdictions

RegTech tools and modular compliance platforms are expected to play a larger role in automating the monitoring, reporting, and implementation of regulatory layers.