The U.S. and specifically the Bay Area has long been considered the birth place of fintech giants. However, as the financial services industry continues to rapidly evolve with technology advancements, the U.S. has the potential to fall behind other nations due to the need for our regulatory environment to evolve. While U.S. regulation struggles to keep up, governments in Singapore, Australia and the U.K. are being praised for their regulatory advancements to help nurture fintech innovation while still providing consumer safety nets.
As one of my colleagues recently noted in her piece ‘Checkmate: Collaborate or Die’, fintech regulation is a double-edged sword and in the changing world of financial services, a cornerstone to creating a consistent landscape. The biggest challenge for U.S. regulators has been how to categorize these new fintech companies as many fall under the categories of money transmitters or consumer lenders, both of which require licenses from nearly 50 states. With these categorizations, each state has different standards and varying degrees of sophistication on what constitutes the fintech company.
In an effort to ease this pain point, the Office of the Comptroller of the Currency (OCC) recently announced it would grant limited-purpose bank charters to fintech companies who offer bank products and services to help streamline national standards and provide a single agency to apply to when seeking a license. Additionally, to help control and act as a consumer watchdog, the U.S. Government created the Consumer Financial Protection Bureau(CFPB) to look out for fintech customers. Although the creation of the agency has been a step in the right direction, major road blocks still exist. As noted by the Times “the agency’s mandate is limited and does not address risks to the broader financial system.” In addition to the U.S. government working to create regulation framework, some of the country’s largest fintech companies (PayPal, Apple, Google, Intuit etc.) have begun creating fintech trade associations such as Marketplace Lending Association and the Innovative Lending Platform Alliance in an effort to help recognize and alleviate the pain points of fintech regulation.
Despite these efforts by regulators and leading fintech companies, many have still voiced their frustration that the U.S. lags other nations in encouraging innovation and have suggested the country implements similar “regulatory sandboxes” as seen overseas. The purpose of sandboxes is to provide fintech companies the freedom to try out a new idea without the constraints of ill-fitting regulations. As evidenced in international markets, these sandboxes could be useful to governments to help speed up the fintech learning curve.
Overseas examples of how fintech regulation can successfully benefit everyone
A clear example of a nation implementing this strategy has been Singapore. The country has quickly established itself as a ‘hotbed’ for fintech innovation largely due to its government willingness to provide regulatory flexibility for domestic startups to test and deploy in market with minimal red tape. Yet while Singapore rivals other major fintech hubs such as Silicon Valley and London, Bloomberg notes “it still lags behind” in terms of access to capital for firms. However, Bloomberg added that despite this lag, the nation has been praised for encouraging investment in fintech domestically to boost its role as a regional banking hub. Of note, the Singapore Central Bank has “committed to invest $167 million over five years in fintech projects.” In addition to this backing by the Central Bank, the nation’s government has also recently inked a partnership with the U.K. which has been titled the first “fintech bridge” that would enable the U.K Financial Conduct Authority (FCA) to refer fintech companies to its counterpart in Singapore, and vice versa, making it easier for fintech companies to scale between the two countries without complex regulatory restrictions. This partnership is not only beneficial to foster fintech innovation but also to help both nation’s economies prosper and promote competition and growth in the financial services industry. Additionally, the U.K. has joined forces with the Australian government to undertake a similar co-operation to drive innovation internationally and collaboration between the two nations.
These partnerships are small examples of the U.K.’s ongoing strategy for helping to drive working solutions for fintech regulation. Of note, the FCA has received praise from companies within fintech for its approach to regulation domestically. The Financial Times noted that “the government has encouraged regulatory flexibility for two good reasons. First, the demands of complying with a rule book designed for large financial institutions would crush most start-up companies. Complex regulation is a daunting barrier to entry. Second, it is healthy for regulators to listen to insurgents as well as incumbents if they best wish to serve consumers.” In the same article, EY’s Global Leader for Fintech, Imran Gulamhuseinwala commented that while there are regulators around the world with plenty of funds and resources, it has really only been “the UK financial regulator that has built into its governance a mandate to promote innovation and competition, as well as the traditional mandates of financial stability and consumer protection.”
Considerations to improve fintech regulation within the U.S.
While there remains a level of uncertainty surrounding the impact President-elect Trump will have on expanding regulatory frameworks domestically. American Banker recently noted that, “Republicans in both chambers are already pushing bills to adapt the regulatory structure to help new fintech firms gain ground.” And Trump is unlikely to “derail” efforts and progress made by the CFPB and the OCC.
Overseas examples such as Singapore, the U.K. and Australia, mean the U.S. can learn a lot about how to successfully create an environment where fintech regulation works to both create safety nets for consumers but also give fintech companies the freedom and flexibility to push innovation for the industry. Key aspects of the success other nations have seen are:
As fintech continues to disrupt the financial services industry, regulators need to understand that because of this momentum, fintech companies will continue to expand and will no longer be restricted to one nation. Many are already considered borderless and are available globally. Therefore, the need for regulators to understand and support fintech innovation will only become more important.
Charles Cawte, senior account executive, Corporate & Financial Communications.