The U.S. Government Accountability Office (GAO) recently released a report on the regulation of financial technology. The report, “Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight,” fulfills a request from Congress to provide details and recommendations on how to modernize the financial regulatory environment for technology in the United States. The GAO’s findings focus on four areas of financial technology: payments, lending, wealth management and financial advice, and distributed ledger technology. The report discussed several key findings, including that the U.S. regulatory structure poses some challenges to financial technology firms. It also found that financial technologies provide benefits to consumers, leaving them more satisfied than services offered by traditional providers. Below are three key takeaways:
Fintech payment services provide increased security for users. Mobile devices contain additional security features, like fingerprint readers, facial recognition, and additional password requirements. These features make it increasingly difficult for bad actors to obtain consumers’ financial information. If nefarious actors do gain access to a device, there is the option to remotely disable that device and prevent personal information from being manipulated. Furthermore, as noted in the report, while credit and debit transactions have traditionally “transmitted sensitive information that can be hacked and used to make fraudulent transfers, fintech providers’ mobile wallets generally replace this sensitive information with randomly generated numbers that mitigate the risk that transaction information can be used fraudulently (tokenization)” (pages 14 and 15).
Convenience and Consumer Satisfaction
While improved security may be the largest incentive for using digital payments, the convenience factor cannot be ignored. Non-bank digital payments allow users to easily and quickly transfer money, make payments, obtain loans, and access information from all of their financial accounts on one dashboard. Traditional banking systems tend to operate within a limited time frame, but digital options operate 24/7 in real-time making them more accessible to users (page 13).
Payment innovations not only provide convenience for consumers, but also save them money. The report details several ways in which fintech providers are lowering costs for consumers, including that many providers are not charging fees for payments (page 13).
Users’ overall satisfaction with new payment technologies is demonstrated by the available regulatory data. Compared to traditional providers, consumer complaints against fintech firms is modest. The GAO’s analysis of the CFPB’s consumer complaint database showed that “the number of published complaints submitted against several prominent fintech firms from April 2012 through September 2017 included in this database was generally low, when compared to select large financial institutions” (page 39).
The state-by-state regulatory approach for money transmission is harming innovation and slowing access to new payment services. As the report notes, “complying with fragmented state licensing and reporting requirements can be expensive and time-consuming for mobile payment providers and fintech lenders” (page 45). Due to this regulatory barrier, fintech innovators are avoiding the U.S. and taking their business elsewhere. GAO cites one example of a fintech startup that “spent half of the venture capital funds it had raised obtaining state licenses,” and “that some firms may choose not to operate in the United States.” Furthermore, firms have commented that “identifying the applicable laws and how their activities will be regulated can be difficult” (page 45).
Meanwhile, as the report explains, “regulators abroad have taken various approaches to encourage fintech innovation….establishing innovation offices to help fintech firms understand applicable regulations and foster regulatory interactions. Some use “regulatory sandboxes” that allow fintech firms to offer products on a limited scale and provide valuable knowledge about products and risks to both firms and regulators” (page 50). The report demonstrates that the U.S. needs more proactive leadership from policymakers to encourage and attract innovation.
Notably, the report does suggest that “specialized operating charters offered by federal and state banking regulators may help fintech firms more easily operate nationwide…” but state regulators are blocking these pathways to the market (page 47).
As the GAO report concludes, the emergence of financial technologies has provided numerous benefits to consumers, including the convenience of reliable financial services.