A coalition of major technology companies are drawing attention to the regulatory challenges faced by emerging financial services startups ahead of a key congressional hearing.
Financial Innovation Now released a report Monday evening detailing how new financial technology (“FinTech”) companies struggle with a patchwork system of state laws and federal laws geared toward traditional institutions.
Those regulations don’t account for the unique reach and services FinTech companies provide, says the coalition. The group includes Google, Amazon, Apple, Intuit and PayPal and is run through Franklin Square Group, a lobbying firm that represents a slew of Silicon Valley titans.
“Although well intended, the underlying laws, regulations and regulatory interpretations are often slow to adapt to technological change, creating barriers to innovators who wish to bring new products and services to market,” the report reads.
The report explains how two theoretical FinTech companies--a lending company and a payments processing company--could struggle to comply with decades of regulations geared toward traditional banks.
This, the report argues, poses a major obstacle to FinTech companies trying to get off the ground.
“Everyone in this sector, old and new, must run a gauntlet of legal duties,” said Brian Peters, the coalition’s executive vice president and partner at Franklin Square. “But these compliance requirements constitute a significant market barrier, particularly for new entrants, and can sometimes serve to protect incumbent providers from new competition.”
“Our hope is that this report helps policymakers understand the regulatory landscape for financial technology,” said Peters.
Congress on Tuesday will take a crack at understanding the landscape for marketplace lending companies with a House Financial Services Subcommittee hearing.
Marketplace lending companies aim to offer cheaper loans to small business through underwriting algorithms that reduce the cost for lenders. Because the costs of underwriting smaller and larger loans are similar for banks, marketplace lending companies look to reduce fees for smaller scale clients.
The smaller scale cuts both ways for marketplace lenders, the report argues, because those companies often struggle to get off the ground and comply with federal and state laws.
Those include Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, Treasury Department and Federal Trade Commission rules that traditional banks have the resources and experience to handle.
The report also tries to tamp down on cybersecurity concerns by boasting financial technology companies’ knowledge and capability with modern tech security features. The report argues FinTech companies are better equipped and more experienced to handle threats than traditional institutions.
“Anecdotal breaches will always occur at technology companies just as at other businesses,” the report reads. But “they pale into insignificance compared to the breaches at banks and major retailers.”