It’s easy to understand why customers embrace fintech products. They simply offer a degree of convenience that traditional financial institutions can’t match. However, that doesn’t mean fintech companies never encounter roadblocks when trying to bring their products to the market. When you offer a financial service, you must navigate a regulatory landscape that is often complex.
Many experts believe the United States has actually lagged in the fintech sector because our regulations have failed to catch up with the times. Many other developed countries outperform the U.S. in fintech because they have developed regulatory frameworks that allow fintech companies to innovate and thrive, while still protecting consumers.
There are certain key issues that must be addressed before the fintech industry can reach its full potential in this country. The following are essential areas policymakers should address:
A lack of any real plan has been one of the main reasons it’s been difficult to regulate fintech. For example, eight separate federal agencies are currently tasked with regulating and monitoring the mobile payments industry. Thus, it’s a challenge for every agency to come together and establish clear guidelines that support innovation while also protecting fintech customers.
Agencies will have to coordinate with each other to determine how they plan on regulating fintech efficiently. Doing so will make it much easier for companies to plan for the future and grow.
In a recent Pew report, the author points out that fintech has thrived internationally more than it has in the U.S. because many other countries take a regulatory approach that involves encouraging and facilitating innovation. U.S. regulators, on the other hand, have not made the same effort to reach out to fintech companies and establish a working relationship. A few random state and federal programs have been implemented, but we’ve yet to see a concrete and organized plan for removing some of the regulatory barriers that are preventing companies from developing better alternatives to traditional financial services. Studying the way other countries have supported fintech can help regulators in the U.S. better understand what steps they should take to achieve similar results.
Clarifying Which Agencies Have Authority
One of the reasons it’s been difficult to properly regulate fintech may be somewhat easy to address. Essentially, regulatory agencies often struggle to determine which agency has the authority to regulate fintech companies, because their scope of authority was established before many financial technologies existed. Thus, it may be necessary to amend this scope in order to properly determine regulatory roles and jurisdiction.
State & Federal Cooperation
Fintech companies in the U.S. are at a disadvantage due to the fact that they must contend with both federal and state regulations—not to mention the fact that there are 50 states, each with different legal frameworks when it comes to fintech. Thus, it’s necessary for both state and federal regulators to work together and establish regulations that are consistent, not contradictory. This will make it easier for companies to understand the regulations that affect them, and plan for growth. It’s hard to offer a financial service to customers throughout the U.S. when different state regulations force companies to drastically adjust the way they serve customers, depending on where those customers are based geographically.
As this blog has pointed out in the past, one way that banks and other traditional financial institutions can survive the fintech revolution is to partner with startups. The bank can leverage the innovation a startup offers, while the startup can leverage the bank’s scale of operations as well as its greater understanding of regulatory compliance issues.
This can also help regulators clarify certain topics. For example, if a fintech company partners with a bank, the same regulations that apply to the bank can also apply to the fintech company.
Granted, this strategy will not entirely solve the regulatory problem that is hindering the growth of fintech in the U.S. After all, not every company will want or be able to partner with a traditional financial institution. However, allowing those that do to be regulated in the same manner as their partner banking institution will provide some degree of clarity.
Attitude & Perspective Shifts
Regulators aim to protect investors and customers, promote financial stability, and ensure that markets operate efficiently and with fairness. Regulatory bodies play a critical, necessary role in the finance and banking industries. Due to their goals, regulators tend to have a more conservative mindset that can lead to mistrust of new technologies. This can end up hurting consumers, however. Regulators must understand that fintech offers tremendous benefits to consumers.
The U.S. and state governments can work with the fintech industry to build greater understanding; with a better relationship, smarter regulations are possible. This is perhaps the key to establishing regulations that both protect the public and allow fintech companies to create new innovations that can bolster our economy.