ITIF released a report discussing how technological innovation is affecting the financial services sector, its impact on consumers and business, and the principles that should guide policymakers as they seek to encourage innovation in financial services. ITIF hosted an event to present the new report and discuss its recommendations with a panel of experts.
While the financial services industry has long been an early adopter of technology, recent trends—especially the growth of mobile, artificial intelligence, and data analytics—have unlocked a new wave of opportunities for the financial services industry to innovate by combining technology with new business models. The companies leading this transformation, collectively referred to as fintech, promise increased productivity throughout the financial-services industry, improved quality, greater ease and lower prices for consumers, and greater access to those now underserved by financial services providers. However, many of these companies face complex, uncertain, and outdated regulations that stand in the way of greater innovation, and threaten to hold back U.S. adoption of these technologies.
For fintech leaders in both the traditional and startup communities, the overlapping and conflicting jurisdiction of various regulators poses a major challenge. Brian Peters, executive director of Financial Innovation Now—a public policy coalition comprised of Amazon, Apple, Google, Intuit, and PayPal—said there is “a positive role for regulators to play in this space,” but the sheer number of regulators and respective jurisdictional prerogatives at play today presents logistical challenges that can hinder innovation. He hopes to see a streamlining effort for centralized, coordinated regulation.
Margaret Liu, senior vice president and deputy general counsel at the Conference of State Bank Supervisors, explained the role of states in financial regulation, saying that state banking regulators are often closer to the consumer and the problem. To overcome the patchwork of differing state legislation, Liu pointed to the Nationwide Multistate Licensing System & Registry (NMLS), which has helped with coordination across states when it comes to mortgage licensing. Alan McQuinn, ITIF research analyst, was quick to point out though that this system only covers mortgages, and it does not address the slow state licensing process for other financial services like payments or insurance.
Sam Taussig, head of government relations and community banking at fintech company Kabbage, explained that regulators are assessing new fintech products in innovation “sandboxes” to better understand them. For example, in the United Kingdom, fintech companies work directly with regulators to offer new services to educate regulators so that they can understand the new offering and companies do not have to fear regulatory action. But while regulators like the Consumer Financial Protection Bureau weigh the strengths and weaknesses of regulatory sandboxes, Taussig pointed to another option on the table: The Office of the Comptroller of Currency is considering whether to offer a limited charter to fintech companies, which could help streamline regulation for this burgeoning industry.
Both regulators on the panel—Liu and Helen Wong, an attorney in the division of financial practices at the Federal Trade Commission (FTC)—agreed that while these fintech tools are allowing consumers to do new things they could not before, fintech services are not inherently different than traditional financial services. Wong emphasized that the FTC’s main focus will continue to be on assessing if there is consumer harm and intervening at that point. “When companies make promises to customers, they should keep them,” she said. And while some panelists pushed for greater coordination between regulators, Liu suggested that in this post-Dodd-Frank era—the federal law signed in response to the 2008 financial crisis that created significant changes to financial regulation in the United States—coordination is better than ever, and that the current system provides important checks and balances across different entities.
The panelists agreed that one of the foremost challenges facing fintech is cybersecurity. Bobby Thomson, head of U.S. government relations at Visa, said Congress must push to reach some sort of consensus on data security in order to realize the private and public sector benefits of growth in these technology-enabled financial services. In addition, he spoke of the need for a collaborative public-private push for improved cybersecurity regulation and practice to ensure the security of these new services, a sentiment echoed by fellow panelists.
Finally, the panel discussed how fintech offers solutions to those currently underserved by financial services. Peters stated that for those who are currently un- or under-banked, having access to financial tools outside of banking hours is critical. Thomson also pointed out how the government has helped drive change in this area, moving many government payments from check to electronic, thereby increasing the speed of payments, which is particularly important to the financially underserved.
Overall the discussion concluded that growth in fintech has the profound ability to make financial services and subsequent socioeconomic improvement more accessible, efficient, and transparent for many people.