Back to the future
While America’s financial technology industry has exploded in recent years, regulators have not kept pace. This is partly because of the country’s outdated patchwork of state rules. The UK and others are further ahead in addressing this emerging sector in a fresh way. Creating a modern, federal regime to oversee these firms is a priority for U.S. policymakers.
Many of the new so-called “fintech” firms fall under the categories of money transmitters or consumer lenders, businesses that require licenses from nearly 50 states, each of which has different standards, not to mention regulatory examiners with varying degrees of sophistication.
That means 165-year-old Western Union is regulated the same way that a bitcoin-based transfer startup with fewer than 50 employees might be. For freshly minted companies in the space, state compliance can be prohibitive, costing more than $1 million annually.
Marketplace lenders that directly provide loans are also under state jurisdiction. Take SoFi, a San Francisco startup, which makes loans. The company led by former Wells Fargo banker Mike Cagney, and which raised $1 billion, has 18 state licenses for consumer lending and nearly 20 more for mortgages.
The Consumer Financial Protection Bureau, which was established after the 2008 financial crisis, is the federal watchdog now looking out for fintech customers, a critical role in a landscape where algorithms have replaced credit scores to determine borrowing.
But the agency’s mandate is limited and doesn’t address risks to the broader financial system. The sector is not large enough to spark those concerns, but it could in the future. Yet it’s not yet clear who at the federal level has jurisdiction. Regulators need to figure this out fast, and account for the different business models many of these firms have from traditional banks.
The Office of the Comptroller of the Currency is looking at ways to evaluate some of the new products. The Federal Reserve could be ideal as it can see the interconnectivity between fintech and the banking sector to assess risks. Banks are partnering with some of these startups and purchasing their loans.
Other countries have already moved forward. This year Britain established a startup unit to help firms thinking of becoming banks, and later will accept proposals for their “regulatory sandbox” program in which companies can test products.
Eventually, an international framework will be needed since many of these enterprises encompass global, borderless businesses. The industry is quickly evolving and regulators need to innovate, too.