Instagram app. Credit by PixieMe/Shutterstock.com Instagram app. Credit by PixieMe/Shutterstock.com

Instagram is the latest social media platform to offer financial services, announcing plans for a “checkout” feature on the app Tuesday.

It's far from the only tech platform to add financial services. Parent company Facebook and competitor Snapchat already allow users to transfer money on their apps. Instagram's new service, set to roll out over the coming weeks, will allow users to purchase products from a brand's post on the platform “without leaving Instagram.”

“I think it's a huge value add because it makes for your product to be more of a one-stop shop. It also drives traffic, if you have everything available and you can check out,” said Barrie VanBrackle, a partner at Orrick, Herrington & Sutcliffe who co-leads the firm's financial technology team. Behnam Dayanim, a partner at Paul Hastings, said offering fintech services can help companies monetize users and keep them engaged.

But the move from a social media platform just selling ads to a revenue model that includes financial services is a big transition from a regulatory and cultural standpoint, lawyers said. Tech companies used to fast-paced business changes may have to slow down, they said.

While social media companies already face regulations, it's a different compliance landscape than the finance industry. In-house counsel should alert their other company leaders that offering financial services means they'll likely need to increase compliance resources, Dayanim said.

“The idea of 'move fast and break things' doesn't work as well when you're in a highly regulated [industry],” said Rebecca Simmons, a partner in Sullivan & Cromwell's financial services and capital markets groups. “So we do see people sometimes surprised at the amount of time it takes.”

That's especially true if companies choose not to partner with a bank or other established payment processing system. In most cases, that means companies must become a licensed money transmitter, which Dayanim notes “is not a small undertaking” for tech companies whose fast-paced decisions “are not the typically characteristics of a licensed transmitter.”

He said social media platforms entering the financial services market should ask, “What are we trying to achieve here?” From there, executives can determine whether having a partnership or becoming a licensed transmitter better suits their needs.

“Always look at the money flow,” VanBrackle said. “If you're touching money, you have to figure out, am I just a merchant? Do I just need to find a payment processor, because I'm just selling things? Or do I actually want to move money?”

She added companies seeking “total autonomy” over their platform's financial transactions may choose the second route. That can also lead to higher returns, Dayanim noted, as there's no need to pay third-party transaction fees. But they'll need to get a license in 49 U.S. states, Washington, D.C., and the Virgin Islands, VanBrackle said, and comply with a patchwork of laws subject to change.

Companies unsure if they need licensure should check with experts, Dayanim said, because he's seen platforms believe they're compliant when they're not “and they're engaged in a federal crime.” Common mistakes he's seen include using “for the benefit of” accounts alone to avoid licensing requirements. While this can be part of a strategy that doesn't require a license, he said, it's not enough on its own.

It's easier to build a financial services program or partnership that's compliant from the start rather than fix legal issues after design, Simmons said. Lawyers should be in the room from day one, and work out compliance issues with design teams and those with a strong background in fintech.

“Do it early enough that you can integrate it into your design and your approach, so that you don't have to undo the work you've already done. You can design it in from the beginning,” Simmons said.