There's a growing chorus of regulators and politicians who say it's time for financial technology, or "fintech," companies to be regulated more like traditional banks and lenders.
As these companies, ranging from mobile payments providers like Venmo to peer-to-peer lenders like Prosper, continue to take an increasing share of Americans' wallets, the stakes for consumers are rising.
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A familiar cycle
What we're seeing play out between some fintech companies and regulators is the same process that has played out many times with tech companies from Uber to Airbnb to Theranos, and it goes something like this:
- A tech company comes online to provide a product or service that's long been offered by a heavily-regulated industry, but in a new way.
- The tech company grows like crazy, in part because it uses technology to make that service substantially more convenient and user-friendly than the old industry players (and also to get around the regulations that contribute to the old players' lack of convenience and user-friendliness).
- The tech company gets big enough to really start eating into the old players' profits, and they cry foul: Why should they have all this red tape the tech company doesn't have?
- A combination of real-world problems stemming from the lack of regulation (and political pressure applied by the old players) drives regulators and elected officials to try and bring the tech company to heel, with varying degrees of success.
Wash, rinse, repeat.
Next up: Fintech
It looks like we're well on our way to step 4 when it comes to fintech, but so far regulators have applied a relatively light hand.
Just last month, the Consumer Financial Protection Bureau released a policy paper defining how it will deal with new financial products that are just getting started, offering to hold off on scrutinizing them too closely until they get off the ground.
But the CFPB has also hit fintech companies with penalties. This month, it announced a settlement with Iowa-based digital payments company Dwolla over allegations concerning how the company protected customers' data. And the agency is currently investigating prepaid debit card provider RushCard over a major breakdown in services that happened last year.
Other regulators are getting into the act as well, including the Office of the Comptroller of the Currency, or OCC. Last August, Comptroller of the Currency Thomas J. Curry gave a speech in which he talked about the importance of supervising the new players in the finance space, comparing their products to the risky investments that helped cause the financial crisis.
Then yesterday, the chief counsel for the OCC, Amy Friend, told a fintech conference that the agency is preparing a report on financial technology that could set the stage for bringing fintech companies more in line with their old-school peers, according to a report by American Banker:
"We thought … we could really start looking at this a little more deeply," she said. The goal of the OCC, she added, is to make sure the banking industry remains a "stable and sound resource for the communities" while ensuring that it doesn't "become so risk-averse that it has become calcified."
Political pressure may also be a factor. Several prominent politicians have expressed concern over the safety and soundness of fintech lenders. Sen. Jeff Merkley (D-Ore.), Sen. Sherrod Brown (D-Ohio) and Sen. Jeanne Shaheen (D-N.H.) sent a letter late last year asking Treasury Secretary Jack Lew and Small Business Administrator Maria Contreras-Sweet to provide more information on fintech lending, especially to small businesses.
Fintech joins forces with banks
Tech companies haven't sat idle during this process. Realizing that the lobbying organizations for legacy financial institutions probably don't exactly align with theirs, the fintech industry established its own lobbying group, Financial Innovation Now, in November last year.
Fintech companies also have sought to outsource some of their regulatory burden to banks through partnerships for financial services. Such partnerships aren't new; fintech companies have long signed agreements with banks to do things like issue debit cards. And banks have certainly bought their fair share of fintech companies to head off competition and get an edge over their rivals.
Some fintech companies may even try to get ahead of the curve by buying banks to help them play nice with regulators. PayPal CFO John Rainey was asked recently whether the company would purchase a bank, and he refused to rule it out, according to a report in Quartz.
And at least 1 fintech company has applied to the OCC to be regulated as a national bank, according to the American Banker report.
What it means for you
As fintech companies grow in popularity and more Americans are willing to entrust more and more of their financial lives to them, their ability to harm consumers and the economy at large if they should make a major misstep is increasing. Should regulators wait too long to impose rules on fintech companies, or be too circumspect in enforcing them -- well, we've seen this movie before.
On the other hand, if they push too hard, they could end up squelching needed alternatives to the financial services offered by banks, which have their own issues.
What do you think? How hard should regulators push to get fintech providers under control? Do you use any products that might be affected?
Follow me on Twitter: @claesbell.