The digital transformation of the financial industry is advancing at breakneck pace. Marcus – Goldman Sachs' new online lending business – just recently announced that it already hit a $1 billion milestone within less than a year of existence. P2P lender SoFi revealed its plans to apply for a bank charter, just as Swedish payment provider Klarna secured its banking license. Baidu (a Chinese tech giant) is moving into the consumer loans business, Uber into auto financing, and Amazon is lending to small businesses, in a direct challenge to more established institutions.
These financial services all rely heavily on the use of more data to make faster decisions about customers they will never meet in person. Banks are making headway in their digital strategies, becoming 100% digital, opening innovation labs to modernize their technology infrastructure, or closing local branches. DemystData, itself part of the FinTech Innovation Lab of 2017, heard first hand from dozens of participating financial institutions how using more data is a key driver of customer acquisition on online platforms.
Ways to compliantly use and access that data nevertheless remain unclear under current regulations. Much of the regulatory framework is outdated and does not contemplate the technologies and information available to today’s banking institutions. Guidelines that claim to support responsible innovation in the banking system are proving to be more of a barrier to innovation to FinTech companies and financial institutions on issues such as third-party vendor management.
For example, insured financial institutions are required under the Bank Service Company Act to notify their appropriate federal banking agency in writing of contracts or relationships with third parties that provide certain services to the institution. Understanding this obligation, and how to comply with it, can be daunting for any institution; and is particularly challenging for FinTech companies that provide valuable products and services but operate with limited resources.
The lack of clear and concise regulatory guidelines is making it difficult for the financial services industry to mobilize the data they need.
And while regulators are attempting to keep up with the demand for advanced regulations, they are being outpaced by the speed in which the online lending space is evolving. The pattern here is pretty clear.
As part of this year’s FinTech Innovation Lab, DemystData recently traveled to D.C. to meet with key regulatory agencies and was encouraged to see that progress is being made to support emerging trends in financial technology. The Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) have begun holding office hours for FinTech in cities such as New York and San Francisco. They have also taken on new staff to focus on nurturing their engagement with the FinTech community. The Commodity Futures Trading Commission (CFTC) and the OCC have also created innovation labs and set single entry points to make this dialogue easier.
While such initiatives are indicative of a shift in the right direction, they still fail to meet the needs of the industry. Some simple steps, however, could go a long way.
1. Regulators could seek more regular iterations of industry standards to make sure that they align with the realities of a rapidly evolving market. In DemystData’s field, for instance, the explosion of data has led to the proliferation of niche data vendors. There are more sources and avenues to acquire customer data than ever before. Regulators need to guide financial institutions on appropriate methods of engagement with those new, non-traditional data providers to ensure that data is being leveraged to serve more customers in a compliant manner.
2. Agencies should strive to provide an overarching framework for regulations. Currently, each agency puts forward its own set of rules and standards, which fails to deliver a consistent and consolidated regulatory approach. This framework should also be simplified to the extent possible. This would allow smaller startups that do not necessarily have the legal expertise in-house to navigate those important regulatory requirements to operate in compliance.
3. Regulators should work side by side with innovators – beyond occasional office hours – to develop a deeper understanding of new technologies and what they seek to achieve. Countries like Singapore offer an interesting model of how regulators have successfully created enabling conditions – such as friendly “regulatory sandbox” for small-scale experiments – for stirring FinTech innovation in support of the banking community.
Naturally, regulators and FinTechs maintain their own perspectives on finding the appropriate balance between supporting emerging technologies and protecting the banking system.