Regulation and Fintech: A Match Made of Questions
Regulators are usually one step behind innovation. Mostly, it goes like this.
- Innovators create something new that doesn’t fit into any regulatory boxes.
- New thing operates for a while while regulators gear up for action.
- Regulators shove it into a box or create a new box for it. Sometimes, ill-fitting regulations have the power to halt innovation or even stifle it altogether.
That approach usually works with most innovations. But what about financial technology (fintech)?
While fintech is not a new phenomenon (strictly speaking, ATMs and credit card reading machines are products of fintech, too), today, the term is mostly used for the rapid financial innovations of the past decade.
Fintech companies revolutionize payments, lending, accounting, and many other aspects of finance. Businesses and consumers alike can benefit from faster, easier, and safer financial applications.
That’s all good, you may ask, but why is it a problem for regulators?
Fintech vs. Regulators
The point of any regulation is to ensure equal treatment and safety for all parties concerned. In the world of finance, regulations safeguard the interests of consumers, businesses, and the national economy.
Despite several more or less successful attempts to create legally binding international financial regulations, finance is an area where each nation insists on having their own, at least when it comes to governing financial services on their own territory.
From a regulatory point of view, there are two major problems with fintech: its speed and its scope.
Speed of Innovation
New and revolutionary fintech apps are born almost every day. Regulators can barely keep up; by the time they’d “reigned in” an application, ten others have emerged on the market.
Regulatory bodies are often plagued by slow-moving bureaucratic procedures that are no match for the speed the fintech scene keeps changing. However, this mismatched speed may drive regulators to rash decisions as they try to anticipate the direction innovations will take.
Sometimes, the result is a too strict and overreaching regulation that nips innovation in the bud.
Scope of Services
Imagine a pub keeping tabs. Theoretically, those tabs represent money and a line of credit. This sounds like the typical line of business for a bank. Financial regulators don’t really care if local establishments do it with their local clients.
But thanks to fintech, these types of tabs have quickly become a global phenomenon. Why is it a problem?
Regulatory bodies are often accused of having tunnel vision. For example, there are regulations governing the operation of banks, while others are aimed at coffee shops. And a coffee shop can’t also operate as a bank.
But what if it does?
Starbucks, for example, allows customers to pay for their coffee through the Starbucks app. This leads to faster service and more convenient payment. Everybody is happy, even regulators grabbing their morning caramel macchiato.
The problem is that Starbucks is storing money and offering payments through an app. How are regulators supposed to treat this phenomenon (where coffee shops act like banks, or at least payments providers) across their states, or across the nation?
And that’s just a theoretical country. In the US, the situation is even worse.
US Regulators
In the US, there are both state and national level regulations banks and financial services have to adhere to.
Several bodies are responsible for regulating various aspects of financial services. For example, the Office of the Comptroller of the Currency (OCC) supervises national banks, the Securities and Exchange Commission (SEC) oversees securities and commodities, while the National Credit Union Administration regulates credit unions. The Consumer Financial Protection Bureau (CFPB) also has some authority about several financial products like payday loans.
And these are just a couple of the national regulators. In each state, there are further bodies that all have a say in financial matters. In case of mobile payments, for example, eight federal and fifty state regulators have jurisdiction.
It’s easy to see why regulation moves slowly when so many regulatory bodies have to work together on each single case. Understandable, but less and less acceptable.
Because while US regulators talk amongst each other on how to regulate fintech, the industry doesn’t stop evolving. And neither does the rest of the world.
Investors can sense the lack of consensus. According to a recent report by the Pew Charitable Trusts, the US needs a clear regulation strategy unless it wants to lose its position in the global fintech market.
This much is already visible. Lately, fintech investments in the US hit a lull, while Asian and European investments are on the rise.
Fintech is too big of an opportunity to miss. If we want the US to lead the industry that could very well shape our century, our regulators need to get their act together pretty soon.
