Getting bogged down in a maze or taking unnecessary risks — the current climate for FinTech in the United States often leaves players with only those two stark choices, according to Bruce Parker, founder and CEO of Modo, which describes itself as a “cloud-based utility” that enables payment system interoperability.
In the wake of this week’s release of a U.S. Department of the Treasury report on how to encourage more FinTech, payments executives were mulling over the report, wondering if it would lead to any concrete improvements and giving their ideas to PYMNTS about how to best improve payments innovation and entrepreneurship.
The report, released in support of President Trump’s call to regulate the U.S. financial system around a set of core principles, offered guidance and recommendations that have long bounced around the FinTech space, and which no doubt already command the support of many executives. In general, the department proposed to fuel more FinTech activity in the United States by loosening federal regulations, enacting national data breach protections and drafting “model laws” at the state level to reduce overlapping red tape.
Additionally, the report calls upon the U.S. Office of the Comptroller of the Currency (OCC) to allow FinTech companies to operate in all states, according to the same standards as banks — a move that would require the office to issue special charters to those younger payment and financial technology firms.
The report’s treatment of artificial intelligence (AI) offers a typical prescription for such a FinTech future. Federal summits and interagency efforts centered around AI would help promote the technology, which is increasingly finding use in payments and commerce. In addition, the avoidance of “unnecessary burden[s] or obstacles” on companies developing AI and machine learning technology, especially in regards to testing, would serve to speed up AI advancements.
FinTech executives are eager for such moves.
“It's about time to re-examine the trade-offs between innovation, competition and regulation in FinTech,” Parker said. Calling the state-by-state FinTech regulatory model “absurd,” he said that, for FinTech firms, “the journey to a regulatory, compliant business model goes through a maddening number of twists and turns of conflicting legal opinions — confusing agency interactions — and colossal red tape.”
Those are, of course, familiar and long-standing complaints, but the world in which FinTech must compete and thrive is changing. Europe’s PSD2 is providing opportunities for financial technology upstarts to more efficiently access data that is vital to their visions and operations. Also, regulators around the world are warming up to the idea of FinTech “sandboxes” — a concept the Treasury Department treated warmly in its report, and which allows for the relatively quick testing of new FinTech products under loosened regulations.
A FinTech charter might go a long way toward putting U.S. firms on a better level with their peers and competitors in Europe and Asia, Parker said.
FinTech Helping Itself
Other executives agreed, at least on the general point of introducing more common standards to the wider FinTech sector in the United States. In addition, the Treasury Department’s theme in the report of balancing security and convenience — as demonstrated in pages dealing with data security and consumer access to better services — appeals to people within the industry.
“The sweet spot for FinTech firms is finding the nexus between security and convenience — creating faster, easier and more personalized transactions for consumers while making the whole ecosystem more secure,” said Mike Orlando, CEO of FitPay, a startup technology platform that adds contactless payment capabilities to wearable and Internet of Things (IoT) devices. “A regulatory environment that supports and encourages innovation toward meeting these goals is good for consumers and for the industry.”
Orlando said the industry needs to do its own lifting as well and, in his words, “embrace change.” Not everything that challenges efforts at innovation can be blamed on governments and regulators. “The legacy systems and business rules within the ecosystem that are slow to evolve,” he said. “Ultimately, a regulatory environment and an industry mindset that supports breaking new ground is positive for everyone."
It is unclear what happens now with the Treasury Department report. Will it serve as the foundation for actual policy change or simply provide fodder for parlor talk? No matter what impact it has, the report drove home the stakes involved with FinTech: Between 2010 and late 2017, more than 3,330 new technology-based firms serving the financial services industry have been founded, it said, and FinTech financing hit $22 billion globally in 2017.
Judging by those trends, it is hard to imagine that the pressure to reform FinTech policy will subside anytime soon.