June 23, 2016
Despite the obstacles that young entrepreneurs might appear to face because of regulation, they serve an important goal – to ensure positive outcomes for society in the long-term. Without regulations, modern businesses wouldn’t be able to exist as the resulting chaotic environment would destroy them.
Regulations allow to balance the power distribution and create legitimate opportunities for everyone, they protect financial institutions and lenders from untrustworthy borrowers, create a transparent environment for businesses to operate and make sure that businesses understand the necessity to consider the outcome of their actions and the way they affect the market.
Although there is a generally recognized necessity to improve the international regulatory environment, there is also a lot to be done by the majority of the governments to establish a fertile ground for the business to prosper in their countries. And, fortunately, a range of governments have been taking actions to ease the way of international companies (FinTech, in particular) into their economies through government-powered regulatory sandboxes. Moreover, every now and then, companies and governments collaborate to launch innovation labs and accelerators to allow young businesses to seamlessly integrate into the ecosystem.
While some regulatory activities are aimed to play a supportive role for the startup ecosystem to grow, others are developed in response to negative outcomes or pessimistic expectations.
As David Postings, CEO of Bibby Financial Services, commented to the FT, We are seeing signs of overheating in the small- and medium-sized business lending market. Credit terms are stretched and pricing is down. It has all the hallmarks of what happened to personal credit pre-2007. He also added that sooner or later, there will be a market crash.
A range of other financial industry professionals have expressed concerns over the growing market power of FinTech startups with unproven models or negative impact on the whole system, calling regulators to tighten the screws on rebels.
The call for regulation, however, can have different grounds. Less than a week ago, Bank of Canada Senior Deputy Governor Carolyn Wilkins expressed a desire to help companies develop new technologies and ensure they meet tough standards to protect consumers and avoid market crashes.
As Wilkins commented, Authorities should support innovation, but the bar will be high, especially for core financial services. I worry that players not covered currently by regulation could become important to the system even if they never take on bank-like risks.
The Governor also added, While it is important to filter out the hype surrounding FinTech, I am convinced that it could have a net positive impact on the financial system.
Even certain insiders believe that regulation is good for the financial technology ecosystem. Interesting examples were brought up by the WSJ, among which is Circle Internet Financial, a digital payments company.
As reported by the publication, Circle believes that licensing would make it easier to do business. And although additional requirements would add scrutiny but they would also make it easier to do business nationally. Circle’s Mr. Allaire added, We think the FinTech industry could benefit from different forms of national charters for online banking activities.
Among the important issues that regulation could solve for the FinTech community, Circle emphasizes the regulatory scrutiny of a FinTech firm’s business plan as well as requirements to comply with certain federal banking laws.
Moreover, referring to the proposition of a federal full-service bank charter, Circle mentions the opportunity for FinTech companies to collect government-insured deposits and make sure they don’t run afoul of rules go through the process of getting licensed by each state to perform services like making loans or transmitting money.
Another industry professional, Ann Barefoot, a former Deputy Comptroller and now a Senior Fellow at Harvard University’s John F. Kennedy School of Government, commented that A FinTech charter would help solve the trouble that innovators have had in partnering with banks, the WSJ reports.
Widely discussed recently, Lending Club, appeared to be in support of appropriate regulation.
"As technology-based third-party relationships have taken an increasingly significant role for banks, the need for focused regulatory guidance has increased," said Richard Neiman, Head of Regulatory and Government Affairs of the Lending Club, in the white paper published on OCC’s website.
Neiman also added, Currently banks considering responsible innovation through an arrangement with a marketplace lending platform must make significant assumptions about the expectations of regulators. Auditors, and perhaps even examiners themselves, share the same problem.
As reported by CNBC, Heather Cox, Citi FinTech CEO, told regulators in a letter to the OCC that the bank wants "greater weight for alternative delivery systems if they are effective in providing needed services to low- and moderate-income individuals."
Opinions on the regulatory environment may differ, but there is a golden mean explored by the governments that we have mentioned previously. An incubation time and a chance to adapt is necessary for newcomers to be able to succeed. Regulatory sandboxes at the moment could represent a consensus and the best option to maintain balance and protect balance in the banking system while bringing in innovation.