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Financial technology matures as government steps in

TechCrunch TechCrunch 19/06/2016 Caitlin Klevorick and Zachary Townsend

You would be hard pressed to read the news and not know that fintech is seemingly at a crossroads — from Lending Club‘s CEO resigning to reports of other peer-to-peer lending platforms reducing their workforce to headlines that state that, after a boom in funding, venture capitalists are looking to other sectors out of fear.

Indeed, some are already declaring financial technology dead as a space for the near-term.

Not so fast.

Here’s what we know. These signals are actually the chaotic realities of a space that is maturing. Yes, government regulation is on its way, but that doesn’t mean the sky is falling.

Compliance and transparency within markets are good things. Consumer protections are good things. So while many have focused on the role that regulations may play in the industry — with clear fears that government may stifle innovation in the face of this turmoil — the truth is much more complicated.

At heart, the competitive advantages in fintech are the same as the rest of the startup world, with the same power and purpose of “disruption” — better technology, faster iteration and more empathy for users. Regulatory arbitrage, if it ever truly existed within finance, is not a defensible business strategy: product quality, customer outreach and lower cost structures are.

Clear, more specific regulations are forthcoming, but to think it will be the downfall of the industry is naïve. In fact, there are many companies in the fintech space that will have champions on both sides of the aisle in Washington, DC.

Some are already declaring financial technology dead as a space.

As a category, fintech has more than 60 million users. Many startups are focusing on millennials; with 60 percent thinking big banks are not designed to serve their generation, it is not surprising that 73 percent are more likely to be excited by a new financial service from a tech company than a nationwide bank. Simplicity, transparency and consumer-focused experiences are key.

Many companies have taken advantage of this opportunity, helping to make financial services more accessible — ranging from payments to student loans and savings to remittances. These are the companies government regulations need to help protect and in which they should encourage greater investment. Doing so not only benefits the consumer, but also the market.

The government has shown willingness to support continued innovation in the space, including the Office of the Comptroller of the Currency, the Consumer Finance Protection Board and the Treasury Department. The increased scrutiny by the political establishment and the press needs to focus on more than the headlines and questionable actors. Recent trouble at some of the larger companies should not taint the government’s view on all fintech companies.

The future of our vibrant economy and the reformation of the financial services industry depends on striking a balance between growth and citizen protection. How do we find the path forward (and upward)? And how do we make sure the path does not simply focus on the big banks, but understands the importance and value of newer and more specialized companies?

Regulators can start by being more open to experimentation and alternative business models. And open to coordinating among themselves. Too often guidance from a department will clash with a project in another part of the government. The end result tends to be a fractured, unnecessarily complex and (likely) unintentional hampering of innovation.

Talking about problems without identifying possible solutions or processes that can lead to concrete ideas is too often the bureaucratic death of a shared conclusion. So what can be done?

It might help to look at how other countries are not just allowing fintech companies to explore new areas, but are encouraging and helping fund them.

Simplicity, transparency and consumer-focused experiences are key.

Several countries have created a regulatory sandbox. The purpose is to let companies push the boundaries of the current regulations in pursuit of new ways of doing business. It is not about circumventing rules, but rather acknowledging that it is impossible to know what could be done if we box companies in and hold them accountable for rules that never contemplated new technologies. This is what the CFPB is aiming to do through Project Catalyst. While not perfect, in part because of the limited authorities granted to the bureau, the protection is rather thin, but it is a positive and perhaps aspirational step.

The U.K., through the Financial Conduct Authority (FCA), provides an array of tax incentives for innovation in fintech, including R&D tax credits, the Patent Box (a way for companies to pay a lower rate of corporation tax on profits earned from patented inventions) and more under their Project Innovate.

In India, with the goal of increasing financial inclusion, the Reserve Bank of India established two new categories of banks: “small” and “payment.” For example, payment banks can issue debit cards, but cannot issue credit cards because they are not licensed to carry out lending activities. Payment banks are particularly beneficial to low-income households and small businesses. They also launched a contest to find solutions to prevent financial fraud, reduce the cost of transactions and develop an e-payment infrastructure.

By comparison, America is a bit behind. It was somewhat inevitable. The government is simply not built for the dynamics of fintech. Instead of years perfecting a system of moveable parts, now it can take only days to upend established business practices. And when innovators, engineers and investors do not take the time to help the public, and especially the policy makers, understand new products and developments, it becomes even harder for them to catch up. That seems to be one of the issues emerging in fintech.

The policy makers, whether on the Hill or in an agency, are continuing a status quo that discourages innovation in some areas that could benefit the underserved. Conversations should be informative and collaborative. They can’t play out on a stage that only produces political division. Not only because it is not productive, but also because many of these companies, like Acorns, Betterment, Square, Bond Street and Earnest, make financial services easier to understand and engage.

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