Activity in Washington, D.C., in recent months has ignited hopes that policymakers may implement reforms that will better accommodate financial technology companies.
Businesses that provide technology and software-enabled financial services have grown rapidly in recent years. Between 2012 and 2018, global investment in fintech companies rose from $16 billion to $146 billion, according to PitchBook. As fintech companies have drawn investor interest and expanded into nearly every corner of the financial services industry—including payment processing, investing, lending and advising—they have drawn the attention of lawmakers who say they want to place safeguards on the fastevolving technology.
“The velocity of this change is immense and unprecedented, and we need to encourage responsible innovation,” said Rep. Stephen Lynch, D-Mass., during the inaugural hearing of the House Committee on Financial Services’ Fintech Task Force, which was created to monitor developments in financial technology and inform policy changes.
Lynch is one of many members of Congress concerned that current laws don’t adequately address the risks posed by fintech, such as data privacy or predatory lending. That sentiment helped drive the creation of the task force in May.
Many of the laws regulating the financial services industry are nearly a decade old, and they’re not aging well. The last major round of financial reform came in the aftermath of the Financial Crisis when lawmakers passed the Dodd-Frank Act in 2010, before many of today’s young fintech companies were founded.
But lawmakers are seeking more than consumer protections. Despite the proliferation in fintech businesses in recent years, their executives say current laws present a major hurdle to their growth.
Historically, financial legislation, including Dodd-Frank, has been designed for traditional financial institutions, not the growing number of entities leveraging technology and data analysis to provide financial services to individuals and businesses. Currently, no laws and few regulations directly address financial technology. As a result, fintech companies must adhere to the same legal framework as large, established firms. Failing to comply with these rules can result in costly enforcement actions, including fines and litigation.
“The federal government is not moving at the pace it should be,” says Amy Zirkle, interim CEO of the Electronic Transactions Association, a trade organization representing more than 500 payments technology companies.
To address some of these challenges, Reps. David Scott, D-Ga., and Barry Loudermilk, R-Ga.—the co-chairs of a House Financial Services subcommittee focused on financial and payments technology— introduced new legislation in March. If passed, the so-called Fintech Act would require federal financial regulators to develop a uniform set of rules for fintech companies while eliminating duplicative or conflicting regulations. The bill also mandates the creation of a council that would screen new fintech services before they come to market and implement other safeguards.
The bill has received bipartisan support and is under review in multiple subcommittees as of August.
Solutions from Regulators
Federal agencies have also acknowledged that the regulatory environment is too complex for fintech providers to flourish. Oversight responsibilities often overlap across multiple regulatory bodies, creating confusion that can hinder company growth.
“It’s vast,” Zirkle says. “There are different regulators that own a different piece of the pie.”
In the United States, different rules apply depending on a fintech company’s line of business. Those that offer lending services or engage in other bank-like activities can face the steepest requirements. According to a 2016 Government Accountability Office report, banking institutions have to abide by the rules of at least five federal agencies, in addition to bank regulators in each of the states in which they operate. If a fintech company engaged in banking activity, it would have to abide by the same framework that applies to traditional banks.
“THE VELOCITY OF THIS CHANGE IS IMMENSE AND UNPRECEDENTED, AND WE NEED TO ENCOURAGE RESPONSIBLE INNOVATION.”
Rep. Stephen Lynch
This can be difficult for small and medium-sized companies that lack the resources to interpret the rules of multiple agencies, but there are real costs for failing to comply.
In 2018, the Financial Industry Regulatory Authority levied a $400,000 fine on Betterment, a provider of online investment services, for improper bookkeeping. In April of this year, peer-to-peer lender Prosper agreed to pay a $3 million penalty for miscalculating returns in reports to stakeholders, according to the SEC.
To help fintech organizations comply with regulations, federal agencies have taken steps to relieve some of the compliance burden and provide resources for companies. Over the last year, the SEC and the Consumer Financial Protection Bureau have each opened offices that provide support for financial technology businesses on their compliance efforts.
To address the multiple layers of regulation, in July 2018 the Office of the Comptroller of the Currency, the primary regulator of national banks, began offering a special-purpose national bank charter that would help fintech companies avoid some statelevel regulations on lending, money transfers and virtual currencies and make it easier for them to expand nationally.
Additionally, the Federal Reserve proposed a new rule in April that would ease restrictions on banks that want to invest in or acquire fintech companies without triggering additional oversight from the Fed and other agencies.
When it comes to monitoring the fintech industry, policymakers aren’t all on the same page. There appears to be a divide between elected officials in Congress who support a legislative solution that provides wide-ranging relief for fintech companies, and appointed regulators who want to tweak existing regulations without fundamentally altering the landscape.
Yet both groups seem to agree the country needs an updated framework tailored for the new class of tech-enabled financial services providers.
“I think some minimal law is out there, and we have a wide range of issues that would need to be dealt with,” said Rep. Warren Davidson, R-Ohio, during the Fintech Task Force’s June meeting. “As we would potentially say in Ohio, the field has been plowed. We’re ready to plant.”
This story originally appeared in the September/October print edition of Middle Market Growth magazine. Read the full issue in the archive.
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Benjamin Glick is ACG Global’s marketing and communications associate.