The financial services industry has long been invaded by all types of influencers aside from banks. Tech companies, in particular, have shown a passionate interest in the startup ecosystem through their venture arms and even launch of proprietary financial solutions.
On the quest to overturn the traditional state of things in finances, the largest tech companies (Amazon, Apple, Google, Intuit and PayPal) even formed a consortium – Financial Innovation Now – an alliance working to modernize the way consumers and businesses manage money and conduct commerce. Regardless of the financial power and manpower at the disposal of the largest tech companies, the regulatory environment is believed to be a burden for FinTech innovation even by the strongest players.
It is worth mentioning that there are regulatory authorities doing fairly well in FinTech and a range of countries nowadays was able to build an environment supportive of new ventures. However, as startups and the tech world often claim, the regulatory environment for FinTech in the US requires attention. In fact, this July, the Financial Innovation Now (FIN) has published a paper addressing regulatory challenges for FinTech in the US with a call to find a balance between the security measures and barriers for innovation.
The consortium presented an extensive list of regulations that are blocking innovative potential in the country. With emphasis on the payments technology and alternative small business lending services, the alliance of tech leaders calls to overview the barriers built for innovation in those areas.
“Regulation impacts every aspect of the online lending process, from customer acquisition and disclosures to data security, underwriting and debt collection. <...> Likewise, regulation is ubiquitous for payment processors; affecting their onboarding of merchants, their protection of the data they transmit, their monitoring of transactions and chargebacks and numerous other aspects of their operations.”
Alternative lenders and payments companies are of a significant benefit to the ecosystem
Alternative lending is one of the hottest FinTech segments along with payments. Tech-powered solutions in lending have been able to fundamentally transform processes that have been established decades ago by traditional financial institutions. Among the benefits brought by alternative lenders, FIN emphasizes:
- Reduced transaction costs
- Improvement of speed and convenience
- Increased competition, consumer choice and transparency
- Access to reasonably priced credit to consumers and businesses that have not been served adequately by traditional financial institutions
“However, the regulatory and legal barriers to entering the lending business in the United States are very high,” tech giants suggest.
As for new payments technology, it undeniably forever changed consumer expectations and the way people pay for products/service and transfer funds to each other. Banking apps immediately became obsolete and irrelevant for P2P transfers once Venmo, PayPal and others demonstrated the capabilities of technology in fostering seamless payments experience that can be reached with the proper application of technology.
“Recent technological advancements have had a profound impact on the payments industry, providing consumers ever more convenient and secure means to pay for goods and services and enabling businesses to accept a variety of payment technologies while giving them almost instant access to the payments.”
Among the important benefits brought by payments technology companies, FIN lists:
- Consumers can pay directly from mobile wallets using their smartphone at the touch of a single button
- Merchants can handle transactions directly from a tablet or other mobile device, reducing lines at cash registers, speeding up commerce and giving them more payment options
- Merchants participating in these programs receive payments in their accounts quickly while consumers can check their credit card and bank account balances knowing that even transactions made a few seconds earlier are likely to be reflected
- Consumers’ payment account information is protected with encryption and a variety of security measures and merchants can trust that customers are verified and authenticated through dozens of techniques
- These improvements in convenience and security are available in brick and mortar commerce and the online and mobile commerce environments
The “large ecosystem of payments providers is part of the vital financial infrastructure of the nation and, in fact, the world. For this reason, protection of the data that flows through the payments system is essential to the safe functioning of the economy. Due to its importance, the payments system provides a ripe target for theft, fraud, cyber-attack and other criminal activities. Because of these risks, companies and products in the payments system are heavily regulated…”
To be fair, tech companies do not suggest to shed barriers, but to adjust regulations appropriately in order to find a balance between security and appropriate freedom of innovation in the financial services industry.
As Brian Peters, Executive Director and Financial Innovation Now and Partner at Franklin Square Group, concludes, “Like banks, these companies [online lenders and new payment processors] are heavily regulated within their respective business lines. They are, in fact, subject to the same regulations as banks and are subject to extensive oversight by government agencies, bank customers, card brands and their insurance companies. For any new entrant, these regulatory burdens constitute a significant barrier to entry that requires millions in compliance costs, staffing and significant delays in time to market.”
Nonetheless, tech companies have been able to manage meeting the requirements, although at substantial costs and efforts. It is understandable why tech companies are pushing the regulatory ease agenda, and also understandable why banks have been calling to toughen up on FinTech. At the end, it is an indicator of increasing competitive tension in the financial services industry that swelled beyond measure by a large number of old players trying to remain relevant and new entrants trying to steal the show.