Fintech Regulation in The United States

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 the recent times and tech-centric companies are seeking to disrupt the ways of transaction processing in areas as far-ranging as investment and retail payments, and the very nature of money itself. However, many financial institutions and fintech companies are being discouraged from innovation and entrepreneurship by the time and cost of registering and complying with regulations.

Understanding Fintech's Broad Scope

Fintech is a broad term, encompassing cryptocurrencies, blockchain technologies, online lending, mobile banking and more. As the new technologies develop, market participants, lawmakers and regulators are grappling with how to update a legal framework for financial issues largely erected before there were computers. Lobbying disclosures for the first quarter of 2019 show a wide swath 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 U.S. Public Interest Research Group.

Regulatory Landscape at Federal and State Levels

In the U.S. 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 US territories, has equal authority to regulate markets within its jurisdiction, and no legal authority to regulate it beyond that jurisdiction. Several federal and state authorities that may regulate fintech products and services is substantial. Some regulators include:

• Federal Deposit Insurance Corporation (FDIC): Federally insured depository institutions Primary regulator of state banks that are not members of the Federal Reserve System and state-chartered thrift institutions
• Federal Reserve: Bank holding companies and certain subsidiaries (e.g., foreign subsidiaries), financial holding companies, securities holding companies, and savings and loan holding companies Primary regulator of state banks that are members of the Federal Reserve System, foreign banking organizations operating in the United States, Edge Corporations, and any firm or payment system designated as systemically significant by the FSOC
• 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): Fannie Mae, Freddie Mac, and Federal Home Loan Banks
• Federal Financial Institutions Examination Council
• Financial Crimes Enforcement Network
• SEC: Securities exchanges, broker-dealers; clearing and settlement agencies; investment funds, including mutual funds; investment advisers, including hedge funds with assets over $150 million; and investment companies
• Consumer Financial Protection Bureau (CFPB): Nonbank mortgage-related firms, private student lenders, payday lenders, and larger “consumer financial entities” determined by the CFPB
• Commodity Futures Trading Commission .

State level, relevant regulators usually include:

• State banking departments;
• Consumer protection agencies;
• Secretaries of state; and
• State securities commissions.

The Impact of Recent Legal Rulings 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, didn’t have the authority to create a special charter for non-bank fintech companies. The OCC first proposed the charted in 2015 as a possible avenue for fintech firms to access the nationwide financial system without having to be licensed in all 50 states. Technology start-up trying to become banks, with this ruling will take a slower and more traditional route to become banks. The “Fintech Charter” looked to expedite the process by allowing a start-up to offer lending or payments products without having to accept FDIC insurance or complying with banking regulations state-by-state. This “Fintech Charter” would have increased competition by allowing new entrants to the financial system. This ruling was a win for state regulators which want to block fintechs and were probably supported by larger banks. While OCC does not have statutory authority to issue federal banking charters to nonbanks only Congress can make such a decision especially as the charter creates public policy implications that must be debated in Congress.

The Need for Legislative Reforms in Fintech Regulation

The Financial Services Innovation Act of 2016 which did not reach a vote and has not been reintroduced later 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 that prioritize protecting consumers U.S has fragmented institutional frameworks that do not adequately establish regulator priorities or address consumer needs across the financial system. This should change in United States. Fintech companies should actively lobby federal government to create laws that encourage innovation and competitiveness thereby allowing industry to grow and be competitive in domestic as well as global markets.

Navigating State Regulations: Challenges for Startups

In domestic market complying with multiple states’ laws can be an uphill battle especially for startups and smaller companies that lack resources to achieve or maintain required compliance. It may also lead companies to structure activities to alter their regulatory profiles that may or may not really be beneficial to business as well as industry. Some non-bank lenders for example partner with banks to originate loans in order to avoid having to register with and adhere to lending law requirements of every state. This arrangement is an artificiality has little competitive benefit beyond easing regulatory compliance.Exhibit 1 provides share regulatory issues for community banks working with fintechs and cost regulatory actions involving fintechs in 2017.

The Balance Between Multiple Regulators: Pros and Cons

While there are advantages multiple regulators like Competition among regulators come up better regulations transparency broader democratic engagement it is disadvantages that cripple industry whole. Inconsistent philosophy methods applied each state uncertainty Control most restrictive regulator are main issues be addressed technology companies new entrants.Exhibit 2 provides picture overlapping regulatory burdens specifically significant players impact industry.

The Importance of Industry Communication with Regulators

Who regulates industry can be as important what regulation is how it put together? It will also change innovation occurs will often depend weighing competing values.Given diversity scope FinTech’s impact following recommendations should be considered startups technology firms regulators competent relevant growing landscape global fintech.
Technology firms should have successful coalitions persuade lobby state legislators understand government regulation not always necessary.If market competitors global compliance standards sufficiently police market participants government action may not needed.Where government regulation necessary try structure way best interest industry considered interstate policies passed instead local only state policies.Self-regulatory organizations can quickly respond emerging issues market but should regulated prevent them becoming tools incumbents stifling innovation.Lobby legislators information about how regulation preventing entry new competitors could improve service consumers.It is highly likely some consumer-protection regulations counterproductive consumers better served having more options instead.Take actions lobby federal legislators indicate any current divisions regulation between states national government or between national law impedes consumer protection industry growth.Technology firms should take extra care avoid scrutinized lawmakers.U.S lawmakers troubled Facebook’s Libra due pattern failing keep consumer data private.Technology firms should proactive should have government relations organizations multiple coalitions other companies within industry actively maintain government relations avoid situations like Facebook.Firms should know what happening Washington well as industry.Asset managers need fully informed about fintech innovations regulators current thinking order make important decisions about systems processes throughout business model.This includes investigating technological capabilities security policies governance not only outsourced service providers also suppliers’ suppliers any risks affect these downstream providers ultimately impact firm.Communication between fintech firms regulators help these firms better understand how regulators view developing technology potential regulatory concerns upfront before turning major issues.Communications also helps make regulators aware new fintech innovations when developing new interpreting existing regulations.Regard approach fintech companies take regulated markets can increase potential success having solid risk management controls place.Having increased regulatory attention controls allow transparency best interest consumers clients firm might help these firms successful.