Fintech Regulation in The United States

Introduction to FinTech

Financial technology, or “FinTech,” refers to the use of technology to facilitate financial services. This industry has seen an explosive proliferation of high technology in recent times, with tech-centric companies seeking to disrupt the traditional ways of transaction processing in areas as diverse as investment, retail payments, and the very nature of money itself. However, many financial institutions and fintech companies are being discouraged from innovation and entrepreneurship due to the time and cost associated with registering and complying with regulations.

Overview of FinTech Regulation in the United States

Fintech is a broad term, encompassing cryptocurrencies, blockchain technologies, online lending, mobile banking, and more. As these new technologies develop, market participants, lawmakers, and regulators grapple with updating a legal framework for financial issues largely established before the advent of computers. Lobbying disclosures from the first quarter of 2019 show a wide range of industries and advocacy groups focusing on financial technology issues, including the Association of National Advertisers, Intuit, Mastercard, Alibaba, FreedomWorks, IBM, the Entertainment Software Association, and the U.S. Public Interest Research Group (U.S. Public Interest Research Group, 2019).

Federal and State Regulatory Landscape

In the U.S., the regulation of financial transactions is mainly exercised at the federal or state level. Each of the 50 state governments, as well as the governments of the District of Columbia and various U.S. territories, has the authority to regulate markets within its jurisdiction, but no legal authority to regulate beyond that jurisdiction. Several federal and state authorities that may regulate fintech products and services include:

• Federal Deposit Insurance Corporation (FDIC): Federally insured depository institutions and the primary regulator of state banks that are not members of the Federal Reserve System.
• Federal Reserve: Bank holding companies and certain subsidiaries, financial holding companies, and more. It is the primary regulator of state banks that are members of the Federal Reserve System (Board of Governors of the Federal Reserve System, 2023).
• Office of the Comptroller of the Currency (OCC): National banks, U.S. federal branches of foreign banks, and federally chartered thrift institutions.
• National Credit Union Administration (NCUA): Federally chartered or federally insured credit unions.
• Federal Housing Finance Agency (FHFA): Oversees Fannie Mae, Freddie Mac, and Federal Home Loan Banks.
• Securities and Exchange Commission (SEC): Securities exchanges, broker-dealers, clearing and settlement agencies, and more.
• Consumer Financial Protection Bureau (CFPB): Nonbank mortgage-related firms, private student lenders, and payday lenders.

At the state level, relevant regulators usually include state banking departments, consumer protection agencies, secretaries of state, and state securities commissions.

Judicial Impact on FinTech Access

A ruling by a federal judge in October 2019 impacted FinTech’s access to traditional banking. The New York judge ruled that the Office of the Comptroller of the Currency (OCC), the regulator issuing the charters, did not have the authority to create a special charter for non-bank fintech companies. This ruling slowed the ability of technology start-ups to become banks, pushing them to take a more traditional route (U.S. District Court, Southern District of New York, 2019).

Challenges and Opportunities for FinTech Regulation

The Financial Services Innovation Act of 2016, which did not reach a vote, would have created a system to reduce regulatory barriers to new products. While regulators abroad have found ways to promote innovation through nationally coordinated strategies prioritizing consumer protection, the U.S. has fragmented institutional frameworks. This fragmentation does not adequately establish regulatory priorities or address consumer needs across the financial system. This situation should change in the United States (Financial Services Innovation Act, 2016).

Recommendations for FinTech Firms

Fintech companies should actively lobby the federal government to create laws that encourage innovation and competitiveness, allowing the industry to grow and be competitive in domestic and global markets. In the domestic market, complying with multiple states’ laws can be an uphill battle, especially for startups and smaller companies lacking resources to achieve or maintain the required compliance. This situation may lead companies to structure activities to alter their regulatory profiles, which may not be beneficial to the business or the industry.

While there are advantages to multiple regulators, such as competition among regulators to develop better regulations, transparency, and broader democratic engagement, the disadvantages often cripple the industry. Inconsistent philosophy or methods applied by each state, uncertainty, and control by the most restrictive regulator are main issues to be addressed by technology companies and new entrants.

Conclusion

Who regulates an industry can be as important as what the regulation is or how it is put together. It will also change as innovation occurs, often depending on weighing competing values. Given the diversity and scope of FinTech’s impact, the following recommendations should be considered by startups, technology firms, and regulators to remain competent and relevant in the growing landscape of global fintech:

• Technology firms should form successful coalitions and persuade or lobby state legislators to understand that government regulation is not always necessary.
• Where government regulation is necessary, structure it to consider the best interests of the industry and pass interstate policies instead of local state policies.
• Self-regulatory organizations should quickly respond to emerging issues in a market but should be regulated to prevent them from becoming tools for incumbents to stifle innovation.
• Lobby legislators with information about how regulation is preventing entry to new competitors who could improve service for consumers.
• Take actions to lobby federal legislators to indicate any current divisions of regulation between states and the national government, or between national law that impedes consumer protection and industry growth.
• Technology firms should take extra care to avoid being scrutinized by lawmakers. They should have government relations organizations or multiple coalitions within the industry and actively maintain government relations to avoid situations like that of Facebook's Libra (Kharif, 2019).

Regardless of the approach fintech companies take to regulated markets, they can increase their potential for success by having solid risk management controls in place. Increased regulatory attention and controls that allow transparency in the best interest of consumers and clients of a firm might help these firms to be successful.