As financial technology (fintech) startups enhance collaboration with traditional financial institutions to diversify and modernize financial services, a better understanding of how the regulatory environment impacts a company’s operations is becoming increasingly critical.
The FinTech Innovation Lab’s (FIL) new regulator-in-residence, former Deputy Assistant Secretary of Treasury Jonah Crane, is attempting to answer these questions for the FIL cohort. Crane’s expertise enables companies in the lab to identify and develop strategies to address potential regulatory and policy issues.
Recently, Crane organized a day of meetings in Washington, D.C., for the FIL class to meet with key regulatory agencies: the Consumer Financial Protection Bureau (CFPB), the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).
The FIL also hosted a recent event where Christopher Giancarlo, acting chairman of the Commodity Futures Trading Commission (CFTC), announced LabCFTC, which will be headquartered in New York City.
Innovators from the finance community walked away with several key takeaways from their pow wow with U.S. regulators:
Two-way conversations: Regulators have set up new initiatives to allow them to engage directly with fintechs. Many of the regulators have designated a single entry point to make it easier for fintechs to open a dialogue. LabCFTC, for example, will partner on research with the fintech sector, increase engagement with fintechs across the country and work to ensure that responsible innovation is not unduly impeded by the CFTC.
Both the CFPB and OCC have begun holding office hours for fintechs in New York and elsewhere and have dedicated personnel to fostering engagement with fintechs.
Dissemination of information: The regulators are interested in learning about new technologies to ensure that information about emerging technology is spread throughout and between agencies. In addition, most agencies are starting to look for new technology that can be used in carrying out their supervision and oversight activities.
Clear expectations: Regulators are focused on potential operational risks associated with the use of novel technologies and expect financial institutions to meet high standards for the due diligence and monitoring of their third-party service providers, especially around cybersecurity and data security.
This factors into how bank compliance officers evaluate potential partnerships with fintechs. The more effectively fintechs can address the exposure financial institutions face when introducing new technologies, the more successful their business development efforts will be.
No silver bullet: The regulatory landscape in financial services is complex, and there is no silver bullet for the adoption of new technologies. Regulators will not become arbiters of what is and is not acceptable new technology. That will continue to require fintechs and their partner financial institutions to make the case to the regulators about the benefits and soundness of new technologies.
Discussions such as those had by our FIL class are part of the need for ongoing and consistent dialogue. A strong feedback loop between innovators, their financial institution partners and the regulators tasked with keeping our financial system sound and fair will help accelerate the adoption of new technologies, creating a more resilient and responsive financial services industry.
Maria Gotsch is president and CEO of the Partnership Fund for New York City, which has invested funds in excess of $150 million into New York-based ventures since its inception in 1996 with the aim of boosting business creation. Robert Gach is the managing director of Accenture Strategy Capital Markets, which provides its clients with insight on how technology will impact future business models. Together, Gotsch and Gach co-founded the FinTech Innovation Lab.
The views expressed by contributors are their own and not the views of The Hill.