Data residency for financial services companies

Alona Chumak

Do you know that over 135 countries have introduced data localization laws, requiring companies to store and process data within their borders? The financial services sector, in particular, is often required to manage data locally. With vast amounts of sensitive financial data being exchanged daily, data residency for financial services has become a major mandate for global financial institutions.

Context of data residency in financial companies

Data residency—the requirement that data be stored in a specific location, often within the borders of a particular country has become a critical topic for financial institutions; here’s why;

In 2024, the average cost of a data breach in the financial services sector reached $6.08 million per incident, reflecting a 3% increase from the previous year. These numbers highlight the growing risk and financial toll that poor data management can take on businesses in this sector.

Beyond the financial toll, financial institutions are grappling with complex regulatory frameworks that dictate how and where they can store their data. 

Countries around the world have enacted laws to control the movement of data across borders, partly to curb breaches. For instance, more than 135 countries have introduced data localization laws, and violations can lead to severe financial penalties.

For financial companies, this presents a significant challenge, as they often operate across multiple jurisdictions, each with its own set of data residency requirements. This fragmented regulatory environment means that institutions must be hyper-aware of local laws, especially as they pertain to cross-border data transfers.

Financial institutions need to stay informed and adapt to this regulatory patchwork, as non-compliance can result in both operational disruptions and significant financial losses.

Why is financial data residency important?

So, why is there an emphasis on financial data residency? Why does it matter where data is stored, as long as it’s secure? Well, for financial services companies, it’s not just about security—it’s about trust, compliance, and keeping operations running smoothly. Let’s break it down:

  1. Regulatory compliance: Many countries require that certain types of data, especially sensitive financial information, be stored locally to ensure they have control over it. Non-compliance with these laws is no joke, as ignoring financial services compliance regulations can result in severe fines and reputational damage
  2. Security: Storing data within a specific geographic region can significantly enhance security by aligning it with local data protection standards, ensuring compliance with stringent regulations. This localized approach helps safeguard sensitive information and strengthens data protection in the banking industry, reducing the risk of breaches and ensuring that data handling practices meet or exceed regulatory expectations.
  3. Customer trust: For many financial companies, especially those handling cross-border payments and personal financial data, complying with financial services data residency laws is essential for maintaining customer trust and securing their business operations.
  4. Operational efficiency: Complying with financial data residency laws doesn’t just safeguard a company’s data; it can also enhance operations. By implementing clear data management policies based on local regulations, financial institutions know exactly where their data is stored, how it’s being managed, and who has access to it. This transparency is not only beneficial for compliance but also for boosting overall operational efficiency.

Financial data residency laws and regulations

Financial data residency refers to regulations that require companies—especially in industries like finance and fintech to store data within a specific country or region. This means that any data residency financial services company must ensure their customer and transaction data isn’t just floating around the globe, but stored in compliance with local regulations.

However, When it comes to financial data residency, regulations are no one-size-fits-all, they vary significantly from country to country. 

For instance, While the GDPR requires that data related to EU citizens be stored within the European Economic Area (EEA), nations like Russia and China have introduced strict data localization laws, requiring personal and financial data to be stored within their borders.

In the next section, we’ll look at some important financial data residency laws in a few countries.

Financial data residency requirements by country

Here’s a detailed look at the financial data residency requirements in different countries and regions:

European Union (GDPR)

General framework: The GDPR does not mandate data residency within the EU. However, it imposes strict regulations on the transfer of personal data, including financial data, outside the European Economic Area (EEA).
Cross-border data transfers: Financial data can only be transferred to countries that offer an adequate level of protection, as determined by the European Commission. For transfers to other countries, organizations must implement safeguards like Standard Contractual Clauses (SCCs) or Binding Corporate Rules (BCRs), or rely on specific derogations such as explicit customer consent.

United States (GLBA)

General framework: The Gramm-Leach-Bliley Act (GLBA) requires financial institutions to protect the confidentiality of customer data but does not enforce strict data residency rules.
Cross-border data transfers: Financial institutions are allowed to transfer data internationally but must ensure that third-party service providers, including those in other countries, meet GLBA standards for data protection. The emphasis is on maintaining secure practices rather than local storage.

Canada (PIPEDA)

General framework: Canada’s PIPEDA does not specifically require data residency within the country but demands that organizations take adequate precautions to protect personal information, regardless of where it is stored.
Cross-border data transfers: Financial institutions can transfer data internationally as long as the receiving country has adequate protection standards. Customers must be informed if their personal financial data is being transferred to a different jurisdiction.

Brazil (LGPD)

General framework: Brazil’s LGPD does not require financial data to be stored within the country but imposes strict requirements for protecting personal data.
Cross-border data transfers: Data can be transferred internationally if the destination country provides adequate data protection, or if the organization implements safeguards like contractual agreements. Similar to GDPR, Brazil’s LGPD emphasizes protection over local storage.

China (Cybersecurity Law)

General framework: China’s Cybersecurity Law mandates that personal and critical business data collected within China must be stored domestically. This law has significant implications for financial institutions and fintech companies.
Cross-border data transfers: Transfers of financial data outside China require government approval and must meet strict security assessments. The government closely monitors data flows, particularly for financial companies.

Brazil (LGPD)

General framework: Brazil’s LGPD, like GDPR, does not mandate local storage but enforces strong data protection rules.
Cross-border data transfers: Financial institutions can transfer data internationally only if the receiving country offers adequate protection or if specific safeguards like standard contractual clauses are in place.

Australia (Privacy Act)

General framework: Australia’s Privacy Act allows financial data to be stored abroad, but financial institutions must take reasonable steps to ensure that the data will be protected in foreign jurisdictions.
Cross-border data transfers: Data transfers are permitted, provided that companies ensure the destination country upholds privacy standards comparable to those in Australia. Financial institutions are also required to inform customers if their personal data will be transferred overseas.

Main challenges regarding financial data residency

Complying with financial data residency requirements is not without its challenges. Companies must tackle several key issues which may include;

Different countries have varying regulations regarding data residency. While some mandate strict data localization, others allow cross-border transfers with safeguards. This creates complexity for multinational organizations that must comply with multiple, sometimes conflicting laws.

Financial data transfer across borders is often restricted unless certain conditions are met, such as adequacy decisions (GDPR) or government security assessments (PIPL in China). Navigating these regulations can delay operations and require organizations to set up additional legal and technical measures.

Maintaining financial data compliance often requires investment in local infrastructure, such as setting up regional data centers or local cloud services. This is costly and increases the complexity of managing financial data across different regions.

Data residency and privacy laws are constantly evolving. Regulatory changes, such as those seen with Brexit or the Schrems II ruling that invalidated the EU-U.S. Privacy Shield, can cause major disruptions in how financial data is stored and transferred internationally.

How InCountry helps financial companies stay compliant with data residency laws

InCountry offers solutions to help financial companies store, process, and protect data across multiple jurisdictions without investing in expensive infrastructure.

By offering local storage and compliance solutions tailored to specific regulatory requirements, we enable businesses to expand into new markets while staying compliant with financial data residency regulations. 

Whether you’re dealing with cross-border payments, fintech services, or banking transactions, our Data Residency as a Service solution equips you with the tools and infrastructure needed to manage financial data in line with local regulations securely. These solutions simplify compliance with data residency financial services laws, allowing you to focus on growing your business.

To learn more about how InCountry can help you comply with financial data compliance or gain insights into specific data residency for financial services, get in touch now!