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In FinTech, The Regulators Cometh

Innovation is the lifeblood of finance, and especially in FinTech. But innovation left wholly unchecked can have disastrous unintended consequences. How to navigate the razor’s edge between encouraging transformation or stifling it?

The movement toward FinTech is not without its detractors.  Or, if not detractors, then wary supporters.

News late last month that there may be rules looming from global regulators (that would be the Financial Stability Board tied to the G20) that would prevent the innovations tied to FinTech from opening a Pandora’s Box of unintended consequences – perhaps destabilizing the financial system at large begs the question: How much innovation is too much?

The issue is under discussion, to be tackled by a task force, as so many issues are, with findings to come.  And as Reuters noted at the time, the question is how far reaching innovations may be viewed as being for good or ill.  The directive was disclosed in a letter that FSB Chairman Mark Carney sent to several central bankers and finance ministers earlier this year.

The most interesting wrinkle may be that, as the newswire remarked, this “marks the first time that regulators at the global level have begun scrutinizing” FinTech, which of course includes the inevitable watchfulness over blockchain and bitcoin, but so many other avenues as well.  The sea change in payments themselves — say through distributed ledgers and other new rails — may indeed merit watchfulness.

But flip that coin on its side and look at the other side.  The market conditions for transformation in the traditional banking system is moving ever closer to working with FinTech in a collaborative effort, at least here and there, most notably through accelerator programs.  The key acknowledgement, implicit at least, is that banks are adjusting to a new normal, in which growth may be altered to reside not in the previous meat and potatoes of interest rates and spreads, but in latching onto business that is more service oriented, personalized, and anticipatory of what people and businesses need, and when they need it.  Liquidity can be improved not just in markets, but in the capital that flows to, and among, businesses.

The focus, of course, shifts from payments themselves to a more gestalt view – and that’s good.

Carney’s letter makes specific mention of “operational disruptions to core financial institutions” and also infrastructure. Without much more explicit detail, might we assume that there’s some worry over security – and terrorism can extend beyond bullets and bombs to embrace bits and bytes. Or there is the errant “fat finger” that triggers a cascade of bad events without failsafe. Or there is the simple failure of technology – the actual functioning of it – to do what it needs to do.  All of these are ponderables.

In the United States, the tack is a different one.   FinTech tends to be relegated to silos – such as, say, money transmitters.  Or payday lenders, or consumer loan firms.  Other regions have outpaced the U.S. in terms of forward thinking on FinTech and regulation thereof, with focus and dialogue – witness the U.K.’s push toward working with startups that want to function within the confines of banking.  The G20 letter may be a little bit of a push toward some sort of international dialogue (which may lead to a framework), but it’s a start to try to ensure that FinTech governance is not so patch quilt as to become a Tower of Babel.

In a truly global marketplace – in finance and just about everywhere else – a Tower of Babel may in fact be the biggest hindrance to a good balance between innovation and regulation.

At a panel discussion held just recently as part of PYMNTS’ Innovation Project, the tricky tightrope is one where disparate regulations are the hallmarks of today’s FinTech landscape. One panelist expressed frustration with the fact that his company could be, and in fact is, in full compliance with the rules and regulations in place in one country – but out of sync with the compliance mandates in another country in which he wanted to conduct business.

There’s no clear answer just yet.  A global framework such as the one that seems to be taking baby steps via the G20 letter may be well intentioned.  But rules upon rules, with input from each of those countries, may in fact add up to dollars, manpower, and initiative spent in service to checking off compliance boxes rather than truly bearing down on innovation and problem-solving.


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