Why the U.S. Needs Smarter FinTech Regulation To Compete Globally

The United States is lacking when it comes to providing fintech regulation, according to the Government Accountability Office (GAO) and a report from the PEW Trust. The main takeaway from the GAO report was that the U.S. needs a legal framework that can support innovation, as well as protect its consumers, in order to compete globally.

The PEW Trust report reinforced the fact that financial innovation programs require clear goals, teamwork among regulators and strong consumer protection. The mobile payment industry is an example of the current state of affairs in the U.S., with eight federal agencies and 50 states, each with their own set of rules. That’s a lot of fragmentation with no clear vision and a good example of what not to do.

A report from the U.S. Department of the Treasury looked at innovation in terms of global competition, and discovered that parts of the world have improved their ability to create and market innovative new products and services in the financial sector. The report found that countries who lead in financial regulation all have a centralized approach. They provide a clear and predictable framework for their fintech companies and banks. These regulators abroad have found ways to promote innovation using a nationally coordinated strategy, and they’ve put a priority on protecting the consumer. The U.S. has been hindered by a fragmented system that doesn’t establish priorities or address the needs of the customer.

Fortunately, the Treasury Department is starting to see the value of fintech regulation. This is a positive step, since current state and federal initiatives lack a common organizing strategy. This can expose markets to regulatory uncertainty and leaves consumers unprotected from harmful products and services.

The U.S. has made several attempts to provide regulatory guidance, but so far, nothing has taken hold. The Consumer Finance Protection Board (CFPB) has developed a No Action letter against banking institution Upstart Network, Inc to protect consumers because Upstart uses alternative data to make their credit and pricing decisions. The Commodity Futures Trading Commission (CFTC) has formed LabCFTC to start a dialog with people who create products that benefit the commodities marketplace, such as farmers and ranchers. However, only one prominent piece of legislation has ever been put forth by Congress to create a nationally unified regulatory space. The Financial Services Innovation Act of 2016 did not reach a vote and was never reintroduced because it lacked substantial consumer protection.

Bridging the gap between regulators and start-ups is another important factor. Existing financial institutions may have well-established government relationships, but startups need more guidance on how to engage with federal regulators. Offices should be stationed in different parts of the country instead of always requiring companies to come to Washington, because start-up firms often don’t have a lot of money. To that end, the Office of the Comptroller of the Currency (OCC) has opened an Office for Innovation and holds office hours around the country to meet with banks and fintech companies. These meetings are meant to inspire discussions about fintech, explore new products and services and encourage companies to partner with banks or fintech firms.

Financial innovation in the U.S. needs to remove the barriers being faced by new companies trying to enter the market. It also requires outreach programs to help these firms navigate the regulatory landscape, while simultaneously being transparent about new products and services. It has to adapt to emerging automation as well, which can be a challenge for regulators because it requires technical skill to understand both existing and emerging technologies.