Innovating in a highly regulated industry

Seeking balance among customer experience, regulatory burden, and long-term flexibility


You always hear about how innovating in a highly regulated industry like Financial Services (or healthcare, or energy, etc.) is hard. At Gathering, we are experiencing firsthand just how hard it actually is.

Part of the difficulty in Finance is due to the increased compliance burden that requires us to basically log and track everything we ever do, but that’s not so bad once you get the right systems in place. The bigger difficulty comes from the unwanted constraints that stem from regulations designed for an earlier era.


We just can’t make certain aspects of our product as simple as we would like because doing so would violate some regulation.
It’s really frustrating at times.

This is likely the first of a couple blog posts that we’ll write about this topic because it impacts almost everything we do. To start, below is an excerpt from an investor update that I wrote back in July. It details a key decision regarding which type of partner we should work with to safely hold our customers’ hard-earned savings. Surprise, surprise, regulatory concerns turned out to be a key factor.

From the Gathering July Investor Update:

Choosing a partner

Gathering occupies a fascinating position between Saving and Investing. On the saving side you usually have banks; on the investing side you have brokerages. To our customers (and us), it’s all just money, but to the Financial Services industry, these are two completely different worlds: they have different business models, they involve different companies, and most importantly, they are regulated differently. In choosing a partner to work with, we have to choose between these two worlds.

It’s not an easy choice. We spent much of the last 2 months talking to lots and lots of potential partners in both the bank and brokerage camps, and it’s been fascinating to learn about their different points of view. We’ve generated a lot of excitement on both sides of this fence because we are a unique animal in each world, and all of them like our vision of building a long-term relationship with a customer early in their financial lives.

We have some good options on both sides, but putting aside differences in economic terms and some softer considerations like general rapport, it’s become clear that regulatory and compliance matters actually drive much of this decision. These worlds are so separate from a regulatory and compliance point of view that our business will have some fundamental differences depending on which side we choose, and those differences impact not only our back office operations but also the actual customer experience and value.

Option A: Bank

On the bank side we have developed a somewhat proprietary legal structure that would allow us to minimize the amount of sensitive personal information we need to get from a customer, allowing for a very simple and clean signup process. The downside is that in this structure we cannot pay interest to our customers. Also, this is new legal technology; it doesn’t push the envelope in a dangerous way, but it does require us to do a lot of educating with our potential partners who can be pretty old-school.

Option B: Brokerage

If we go the brokerage route, we have to get more personal information from a customer to satisfy the regulatory requirements for opening a brokerage account. This makes for a more burdensome signup process. It also means that Gathering will be regulated as a Registered Investment Advisor from the get-go (even if we’re not really playing in the investing world when we launch). The upside is that we can start getting our customers some yield on their cash balances immediately, and as we expand our functionality, our customers don’t have to open up additional accounts.

Looking for balance

It’s frustrating because we can’t actually build the precise product we want to that provides both a simple and intuitive user experience and maximum value for our customers. We have to compromise somewhere, and we’re trying to figure out the right balance among customer experience, regulatory burden, and long-term flexibility.

We get why these regulations exist: regulators are trying to protect consumers and prevent fraud. We startups hate regulation because it provides unwanted constraints. (Though if you want an example of why startups need regulation too, check out this astounding story about a startup called Sand Hill Exchange. They did pretty much everything wrong from a regulatory standpoint and found themselves barred and fined by the SEC within a matter of months).

The regulatory challenges we face in Finance are much different than those faced by companies like Uber or Airbnb that operate in industries primarily regulated city-by-city. Multiple small jurisdictions means they can openly challenge outdated regulations on a case-by-case basis without putting their whole company at risk (obviously, it also helps to have a couple billion dollars in the bank!).


In Finance, the combination of national and state-level regulation means taking too many wrong steps can get you shut down everywhere, end of story. So, we have to tread carefully and fully understand the consequences and constraints of each decision we make.

Lessons learned so far

Since I wrote that update, we have made our decision: we will be teaming up with a phenomenal partner on the brokerage side of the world. They give us the best opportunity to achieve our vision for Gathering and the flexibility needed to set us up for future success.

This wasn’t a completely make or break decision — we could find a way to operate in either world — but it was an important one that has major long-term implications for our business, so we took our time to do it right. Here’s what we learned in the process:

1.

Seek advice from experts, but make your own call.

We talked to a ton of experts on both bank and brokerage regulation, but these are such separate worlds in Finance that we never found someone who was expert enough in both that they could definitively tell us which way to go. We had to learn enough to become that expert who could span both worlds before we could confidently choose which one to live in.

2.

Start with the customer, not with the regulations.

Our guiding light throughout this process was our vision for Gathering, which starts with making the product experience as simple and intuitive as possible for our customers. That customer-centric vision gave us a standard to measure by, and allowed us to find ways to work with the regulatory constraints while still achieving our goal of creating a fabulous product. If instead we had started with the regulations and then tried to come up with a vision that fit within them, we would be tearing our hair out with frustration while building an uninspiring product.

Gathering empowers young people to meet life’s goals and challenges through smart money decisions. We are on a mission to make money work for all of us.
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About the author

Justin is the Co-Founder and CEO at Gathering.