WASHINGTON—The so-called “fintech” revolution is upon us, but it will not live up to its transformative potential for the economy and society unless policymakers take the right approach to enabling it, a new report from the Information Technology and Innovation Foundation (ITIF) finds.
ITIF, a leading tech policy think tank, details the innovative ways that established and upstart financial service providers are using information technology to develop new services that promise to improve productivity in the financial services industry while providing greater value at lower prices for consumers and businesses. But given the complex technical and regulatory issues involved, there is a risk that policymakers will not adapt fast enough. To bridge this gap, the ITIF report outlines a set of principles for policymakers to spur further innovation and accelerate adoption of fintech.
“Fintech is poised to radically improve how consumers and businesses transfer money, make payments, save and invest, borrow, and insure themselves against risk,” said Daniel Castro, ITIF vice president and co-author of the report. “These companies are experimenting with new business models that improve quality, reduce costs, and expand access to financial services for people who have been underserved in the past.”
“The financial services industry is at an inflection point,” said Castro. “When compared to other information industries, technology has enabled only incremental changes in financial services up until now. The industry is poised to take a more transformative leap. But in order to achieve that, the industry will need buy in from policymakers.”
In the new report, Castro and co-authors Alan McQuinn and Grace Guo explore how different technologies, trends, and new business models are making it easier and cheaper for customers to do business, move money, seek financial advice, give and get funding, and get insured.
However, the report outlines a number of challenges confronting the development and adoption of fintech. Fintech companies face a complex regulatory environment from different national and subnational governments that was designed for older business models and is often slow to adopt change. As fintech firms operate internationally, they must also contend with restrictions on where they can store and transmit data and with regulations designed to explicitly protect domestic incumbents. Meanwhile, the broader financial services sector continues to face a number of evolving security threats, from data breaches to large scale theft and fraud.
Castro and his co-authors urge policymakers to shift their regulatory approach to address these challenges with policies that enable fintech transformation, instead of inhibiting it. They outline a set of principles for policymakers, all with the goal of creating a system that both upholds consumer protections and is more supportive of financial services innovation, including:
- Supporting fintech through federal government adoption and funding for fintech R&D.
- Ensuring regulations balance risks associated with fintech with its potential for productivity-enhancing disruption.
- Removing duplicative requirements and regulations for financial services to reduce the regulatory burden on financial institutions.
- Regulating fintech businesses at the national level where possible to remove unnecessary and unreasonable compliance costs and improve the viability of a national market for fintech.
- Using regulatory enforcement to create incentives for financial services companies to protect consumers by basing penalties on harm and intent.
- Creating rules that neither favor nor disadvantage any particular fintech application, so as to create a level playing field for innovation.
- Encouraging a level playing field between incumbents and new entrants in fintech.
- Focusing on improving cybersecurity in fintech through purchasing, regulation, and oversight.
- Supporting standards development and financial data interoperability to encourage data sharing.
- Promoting international harmonization efforts for financial service regulation.
“The financial services sector is a highly regulated and complex industry,” said Castro. “In order to capture the true benefits of technology for this industry, policymakers should actively focus their efforts toward speeding fintech transformation.”