Fintech companies have proven adept at exploiting niches that banks have not served adequately — offering the promise of expanded access to financial services on fairer, more transparent terms. As a result, consumers and small businesses are finding attractive alternatives to traditional banking services, and a number of banks have taken notice, stepping up their game through partnerships with fintechs or developing their own innovative approaches.
We are not alone in our enthusiasm for the promise of fintech — investors have poured over $100 billion into this sector over the last five years, while financial regulators have established, or are in the process of establishing, innovation offices and labs across the globe.
But alongside opportunities, barriers to innovation continue to exist, including regulatory obstacles.
The U.S. financial regulatory structure is uniquely fragmented, meaning that no single agency can provide a comprehensive road map when it comes to financial innovation. By comparison, the Financial Conduct Authority in the U.K., with its overarching jurisdiction, has been providing helpful guidance regarding innovation for years, inviting experimentation within regulatory sandboxes.
But this leaves the U.S. at a disadvantage. While we have been on opposite sides of the state-federal regulatory divide, we agree on the need for regulators and fintechs to take steps to spur beneficial innovation, particularly through education and information sharing. Too often there is little knowledge transfer — either because there is no mechanism for sharing this type of information, the information is trapped in silos or there is no desire to share it. This is true for information that could be shared between fintechs and regulators as well as between state and federal regulators.
Efforts to launch innovation and fintech initiatives are a good start. We applaud the Consumer Financial Protection Bureau for its work on Project Catalyst (now the Office of Innovation) and the Office of the Comptroller of the Currency for being the first prudential regulator to recognize the importance of fintech innovation for the banking system. At the same time, the states launched “Vision 2020” through the Conference of State Bank Supervisors to streamline and harmonize the licensing and supervision of nonbank licensees.
Each of these agencies has augmented their initial actions. The OCC recently proposed a pilot program in which banks can seek regulatory input during the testing phase of a new and innovative product or service. Other regulators have further sought to understand and support responsible innovation, including the Federal Deposit Insurance Corp., through its recently oversubscribed research and policy-based fintech conference.
Going forward, regulators can leverage these efforts and enhance their knowledge by learning from fintechs and from each other in a more coordinated and sustained way. We offer several recommendations for how to do this.
Coordinated “office hours” and pilots. The OCC has been thoughtful in holding “office hours” around the country. These meetings allow banks and fintechs to present and ask questions, thus learning about the OCC’s thinking on innovation. The states have held several similar sessions, and the various federal and state financial regulators should consider conducting joint office hours. This would allow fintechs to get a more fulsome understanding of the regulatory landscape, and it likewise would provide regulators with an opportunity to learn about industry developments and regulatory barriers. Joint meetings wouldn’t preclude agencies from conducting their own sessions as they see fit.
This same logic applies to joint pilots or sandboxes. Rules of regulatory engagement for multi-agency participation would have to be fleshed out, but the benefits to the regulators and innovators are clear — regulators would get a window into new uses of technology, thus heightening their understanding of potentially significant developments in financial services, and innovators would get input from an array of regulators that could have an impact on their activities.
Demo days. Agency staff would benefit greatly from seeing firsthand how innovators are working to improve the customer experience. Attending in-person demonstrations would allow the regulators to see how emerging technologies are changing financial services, from artificial intelligence to machine learning to blockchain. Without experiencing these technologies and understanding their impact on consumers, regulators will make less informed supervisory and policy judgments.
Educating policymakers. Fintechs should not be afraid of educating Washington officials and state policymakers. With so many fintech advances and few governing rules, now is the perfect time to meet with regulators to enhance their understanding of the ways that fintechs are changing the financial services landscape. Visits to Congress and state legislatures are also a way for fintechs to educate decision-makers and, in turn, learn about their issues. Establishing relationships when there is no particular legislative “ask” paves the way for future conversations. And it is an opportunity for a firm to tell its own story, helping lawmakers understand the products their constituents may be using. Demonstrating that a company is innovating responsibly or can offer constructive recommendations about best practices or effective regulation can assuage concerns.
While regulatory authority and jurisdiction remain stratified, there are opportunities for regulators — in conjunction with fintechs — to bridge the information gap and benefit from a diversity of views. This is crucial for ensuring that responsible innovation continues.
