Fintech Needs Regulation By Steve Viuker
Say the word regulation to someone in financial services and the cringe factor is immediate – it brings to mind reams of rules, including Dodd-Frank. Indeed, Donald Trump has proposed gutting much of the Dodd-Frank Act, but bringing back Glass-Steagall.
Regulatory oversight of fintech startups is tightening, according to a report from PwC. The report noted that 86 percent of financial services CEOs are worried about the impact of being too heavily regulated. However, Stephen Sheinbaum, founder of Bizfi, is an advocate of regulation. Sheinbaum said that fintech is a fairly young industry and should have transparency. He also points out the difference between firms that lend to business and those to consumers and how vastly different they are, as are their governing rules and regulations. Sheinbaum also sees potential for more cooperation between banks and fintech firms as banks seek a new lending client base.
But there is regulatory confusion. For customers, a loan is a loan and a payment is a payment. As Slate reported, customers of the peer-to-peer payment company Venmo have found themselves subject to lapses in data security and transparency that a bank regulator would never allow.
The Treasury Department has published research and recommendations regarding marketplace lending. The Consumer Financial Protection Bureau has discussed business practices with fintech companies, including companies’ origination fees. The Federal Trade Commission is seeking input with consumer advocates and law enforcement to weigh fintech’s implications for consumers. Said SoFi general counsel Rob Lavet, “Regulatory agencies want to ensure that consumers receive all required disclosures and that the product will not harm consumers.”
Adding to the mix is the fact that investor interest in fintech companies looks to have stagnated. After hitting an all-time high last year, the first quarter of investing in the space shows a 41 percent decline compared to the first quarter of 2015, the PwC report noted.
As fintech companies mature, some have taken to adding ex-regulators in senior roles, CNBC reported. Former FDIC chair Sheila Bair joined lender Avant’s board of directors. Last year, lender SoFi brought former Securities and Exchange Commission chairman Arthur Levitt on as an advisor. Startups are looking to bolster credibility with Beltway veterans, at a time when regulators are seeking to address a gap in regulation between large, traditional financial institutions and startups.
American Banker magazine reports some banks have created innovation labs to develop new apps and technologies. And it’s not just big banks – Eastern Bank, a nearly 200-year-old, $9.5 billion-asset mutual institution in Boston, has its own lab to incubate promising new solutions and to partner with fintech companies, for example.
Rob Nichols, president and CEO of the American Bankers Association, has said that banks are eager to work with fintech providers. He explains that some banks license person-to-person payment platforms. Other banks refer borrowers to online marketplace lenders, collaborate in originating loans or purchase completed loans.
Nichols concludes that the two industries aren’t interested in mutual destruction but are looking for regulatory certainty.