Understanding the Challenge
In 2015, Fintech investing hit an all-time high. However, Fintech investing in the first quarter of 2016 dropped 41 percent compared to the first quarter of 2015.
This is primarily due to increased government regulation of the sector.
Government regulation has been starting to expand in Fintech, as regulators work to keep up with the rising tide of innovation. However, although regulators may be trying to protect consumers and prevent the economy from experiencing sudden shocks, regulations can dramatically hinder the progress of industry development.
In fact, one source indicates that roughly 86 percent of CEO’s in financial services are worried about being negatively impacted by regulations. The fact that so many CEO's are concerned about regulations hindering their businesses is a good indication of the pulse of this burgeoning industry.
Fintech: Regulatory Actions
In a recent announcement, the Office of Comptroller of the Currency (OCC) issued a white paper proposing the creation of a national bank charter for Fintech startups. This special purpose bank would look to provide non-deposit banking services.
Also, the Consumer Financial Protection Bureau (CFPB) has begun enforcement actions against Fintech lenders and payment startups.
Now, these aren't necessarily problems; smart common-sense regulation is a good thing. It simply highlights the growing interest by regulators in the Fintech industry.
Fintech: A Broader Perspective
Part of the reason why regulation of American Fintech companies at the state and federal level can be so problematic is that it can lead to America falling behind other nations regarding Fintech growth.
Considering that a number of other regions outside of the U.S. are also experiencing strong Fintech growth, it is entirely possible that America could lose its position as the top Fintech country.
Other nations are starting to compete more heavily with America regarding Fintech development. For example, the U.K., Germany, and Australia are all also becoming Fintech hubs, and have all received hundreds of millions of dollars in Fintech investing.
And there's nothing wrong with a little competition!
This means that if regulators in America make it too difficult to do Fintech business in the U.S., then more and more investment in Fintech could make its way overseas to environments that are less strict and regulation-heavy.
Peter Thiel, a leading U.S. entrepreneur, and Fintech pioneer has already begun investing in European Fintech companies. This could be a sign of a trend forming for American investors to look to invest in Fintech in other countries as opposed to in the U.S.
It is understandable why the government wants to regulate the Fintech industry. After all, America recently experienced a dramatic financial crisis which saw a number of major financial institutions go bankrupt and millions of people lose a substantial amount of wealth.
Also, Fintech companies often are entrusted with incredibly sensitive data and even people’s wealth. So, regulations theoretically make sense. However, if too many of them are used in reality, then it can dramatically slow Fintech progress.
But, despite the increase in regulations, Fintech companies are beginning to adapt to the changing regulatory environment. One creative way that FinTech companies are doing this is by hiring ex-regulators.
For example, lending company Avant, hired former FDIC chair, Sheila Bar, to sit on its board of directors and help the company deal with regulations.
If regulations continue to increase, then Fintech companies will have to continue to adapt to better cope with them. Otherwise, the industry could face further slowdowns.