Cowboys & sheriffs: why fintech startups must embrace regulation with Charlotte Gounot

Charlotte Gounot, Defacto’s CFO and former Head of Capital Market at the French State Debt Management Office, explores the intricate dance between regulators and financial institutions. She argues that fintechs can’t afford to overlook the power of regulatory alignment, highlighting Defacto’s early decision to secure a financial license as a key advantage in scaling successfully.

Always intrigued by risk 

Financial innovation is a constant balance between limiting risks and encouraging progress. I’ve seen this from several sides: first in earthquake engineering, then at the French Ministry of Finance, and now at Defacto. 

I studied civil earthquake engineering, and really never planned to work in finance. But I took a graduate role at the Ministry of Finance and found that the reasoning in banking is very similar to what I did in earthquake engineering. You have risks, of different magnitude and likelihood, and need to prevent them - but at the right costs. 

You can’t stymie the economy, but you really can’t afford a serious crisis. And globally, we’ve seen plenty of those. 

Now, I manage finance and compliance for a fast-growing startup. And while it might be nice to have fewer rules and restrictions, we’re proud to be a fully licensed lending institution, with requirements for risk management. We work closely with regulators and supervisors and embrace this dialogue. 

Government vs industry: who’s responsible for innovation?

Many entrepreneurs and business owners get frustrated by the government, viewing its actions as antagonistic and an obstacle to progress. 

But every government is inherently pro-innovation—it really makes no sense for them not to be. Innovation drives progress and competitiveness, leading to stronger SMBs that can expand, contribute more to the market, pay higher wages, and deliver better returns to shareholders. 

This, in turn, supports other policy goals and addresses society’s growing needs. Innovation is key to a green transition, in healthcare, and in designing new social products. 

I found the French government to be pro-innovation, actively building an ecosystem that attracted VCs to Paris and easing the creation of new funds for deep tech investment. 

But this is crucial: it’s not primarily the government’s role to select innovation themselves. That can actually be a bad thing, it risks creating a "technolock," becoming the gatekeeper of new next technologies. It’s better to have new technologies out in the market. 

The role of the government is to enable innovation—allowing entrepreneurs to create, invest, and test new ideas while ensuring large-scale disruptions are managed. They’re better suited to keep the balance in protecting consumers and businesses and maintaining order to create an environment to maximize innovation. 

And then the role of industry is to highlight blockers and suggest solutions. Many people run into roadblocks, but they don’t always communicate these clearly back to the government. It would be really helpful to build relationships and dialogues between industry players and the administration, including at technical level. 

Startups are finding ways to innovate, within and around the regulations, but there will always be chances to improve the regulation. There will be regulations that are unclear or seem pointless, even where companies try in good faith to comprehend them. When this is the case, we don’t want the new regulation to simply add six months before the entry into force, not bringing clarification. This is the kind of feedback the public authorities needs. 

The dialogue exists already, and there is sincere willingness, but we need to work to keep improving and opening up these conversations. 

Examples of innovation in action

It’s hard to see progress when you’re in the middle of it. All you see is the red tape and hurdles that slow you down—the projects that seem to take forever. 

But we’re seeing monumental progress in the financial sector. 

At the European level, the open banking developments nearly 10 years ago were really pivotal. They helped significantly in payments innovation. And they're utterly essential for the embedded lending services we offer at Defacto. I’m looking forward to the new policies and regulations around open finance that are being discussed at the European level. 

At the national level, the different innovation programs—like the innovative French Tech—have been incredibly successful. Not just putting money into the ecosystem, but also simplifying processes and getting more help in the first two years of creating your company. 

In France, we have a good university system, and we produce great engineers. We have a high level in science, and have for a long time. What was missing previously was the entrepreneurial ethos. More and more universities and public schools are incentivizing young students to develop companies and build this spirit. That keeps spurring innovation and birthing new startups. 

Large banks are also very aware that part of their innovation will come through partnerships with startups. So you have the government, the education system, and the established financial players all putting energy and investment into innovation. 

2 innovations I'm proud of

With three of my previous colleagues, I helped create a totally new debt product to be issued by banks: senior non-preferred debt. This product was really important, knowing that bank failures can cause really serious damage to the economy. We had to invent, design, and then convince banks and market participants all over the world to use this product. Since 2016, more than €300 billion have been issued using this debt instrument by all EU banks.

With a small team of just four people, we managed to convince all the parties and write the law in France, and have it adopted by the parliament and then at the European level. 

I also helped lead the French Covid recovery plan. Economists and analysts predicted that post-Covid, France would have an unemployment rate around 25% and we’d be in recession. In fact, the current unemployment rate is below 7%—the lowest in 40 years—and France hasn’t had a recession.

This is thanks to the commitment and involvement of the whole French society—businesses, organizations, and citizens. We’ve managed to face one of our biggest crises collectively. 

How fintechs can embrace regulations

We have strong regulatory requirements in finance, including new rules around data privacy and AI. And innovative startups may find these challenging. 

Don’t avoid these regulations, but try to understand the objectives behind them. Regulatory requirements are usually there for good reasons. They might be too tight or too expensive in some instances, but they mostly prevent real risks. So first understanding the spirit behind them will allow for you to build with the same risk-based approach in mind. 

You can also be a cowboy. Some companies continue to find loopholes to develop business faster without constraints. But cowboys always have to watch out for the sheriff. 

I really don’t see this as a resilient, long-term option. Loopholes always close - the sheriff catches up eventually. And then you may need to rebuild everything. 

Or worse: you cause real harm to society. Before the financial crisis, there was less regulation. We had a significant number of cowboys, including people who didn’t know the risks they were creating. Eventually, we saw phenomenal damage, and practically everyone got hurt. Private people’s savings and assets were needed to rescue banks, to get us out of the global financial crisis. We survived, but the damage was done. 

Cowboys also don’t play well with others. Our financial system is so interconnected and integrated that it’s very hard to go it alone. But responsible partners—and especially banks—care about compliance and will want to see under the hood. If you’re cutting corners, you’ll really struggle to create long-term, mutually beneficial partnerships. 

I’m sure some startups will grow through these loopholes and succeed. Maybe one or two will grow into the biggest fintechs ever. But I don’t think so. For the vast majority, it’s just not a sustainable roadmap. The best approach is to understand the regulations and try to comply with them efficiently. That’s the best way to attract partners, customers, and investors. 

Why Defacto got licensed as early as possible

We applied for a banking license in 2022, becoming the first licensed B2B lending fintech in France. It took more than one year—a huge time investment. So of course there was a question: should we apply now or wait until we have some traction? 

We decided to apply right away. We wanted to know the constraints from day one and integrate them as we built the product and business. There are so many important compliance and risk factors in lending, and we take these very seriously. So there was no thought given to figuring some of them out later on—we needed to be compliant and responsible from day one. 

And right away, the license was an asset that let us grow faster. We can develop products and create new partnerships with other fintechs. We can also partner more easily with traditional banks because we speak the same language, and have the same requirements and restraints. And investors know the base requirements and can see that we’ve achieved these. It’s really reassuring for them. 

But the biggest benefit is that we can remain forward looking. We didn’t want to spend two years building something, only to have to rebuild it two years later because we overlooked a key constraint or regulatory condition. 

We prefer to develop building blocks now that we might not need until a few years down the road. Even if we have to update and maintain them, they’re important to the financial sector so we need to be serious about them. 

And now that we have the license, it’s not actually too much work to maintain it. There is some regulatory oversight to ensure that we’re not backtracking on our obligations. But we’ve built the product and company to remain compliant, and much of the maintenance of this is automated. 

It’s a day-to-day approach built into the journey, and not some extra slice that we have to carve out of our regular workload. 

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About the author

Charlotte Gounot trained as an engineer, with a master’s degree in structural engineering from École Polytechnique, and a master’s degree from UC San Diego. After graduation, she worked for eight years at the Ministry of Finance working on banking affairs and regulations to prevent the next financial crisis and protect the taxpayer from bank failure. 

At the French State Debt Management Office, she issued more than €600 billion of French medium and long-term debts, most notably at the start of the Covid crisis. She then led the post-Covid recovery plan in the office of the Minister of the Economy Finance and Recovery, Bruno Le Maire.

Charlotte joined Defacto in mid-2022 as acting CFO. She led the efforts to have Defacto licensed as a banking institution and handles everything finance- and compliance-related.