The biggest challenges in the tech world right now are regulations, according to a discussion during the two-day Atlanta-Israel FinTech Innovation Conference.
Each state has its own regulations for tech companies and non-banking financial services. Those regulations are meant to protect consumers and regulate financial risks, but they can be a hindrance to innovation.
But when facing rules that are old and vary from state to state, companies such as Uber, a ride-sharing app, and Square, a financial technology service that lets merchants take payments from smartphones and tablets, are pushing ahead with multimillion-dollar platforms that could get tangled in red tape. As a result, consumers are not protected, and investors can’t properly assess risks.
“From a U.S. perspective, the regularity landscape is a disaster,” Fornaris said Tuesday, May 23. “All 50 states have independent licenses to regulate nonbank financial services. You have a hodgepodge of state regulatory systems.”
A FinTech firm that wants to do business in multiple states must apply for licenses in every state. Companies that suffered through this process, such as PayPal, now have a competitive advantage, but fledging companies face a daunting task, complete with lawyers and consultants to figure out what should be done.
If the company is already operating when regulatory changes are made or an audit is conducted, the process to comply is overwhelming, said Mary Kopczynski, the CEO of 8 of 9.
“The problem is, when things get audited and the question of ‘Why did you do this?’ comes up, you have to go back through thousands of pages in SharePoint documents,” Kopczynski. “We need a lighter version of documenting processes.”
There are about 17,000 rules for different states, and many firms must check with lawyers just to code software.
First Data, an Atlanta-based corporation that provides companies with solutions for commercial transactions, has regulators in the office 100 percent of the time. Barry McCarthy, the executive vice president of network and security solutions at First Data, said companies must adapt and respond to change.
Many FinTech companies have great ideas, but then realize they’re operating as banks. Being able to understand the regulatory landscape and navigate around regulatory holes can lead to success, McCarthy said.
“They want to disrupt the ecosystem but find out it’s the law,” he said. “Many companies think of regulations as a hindrance, and they can be, but it can create opportunity.”
Kopczynski said her “disruption of the ecosystem is to accept laws are going to change” instead of hoping for a uniform set of laws, something she doesn’t think will happen.
The tech world is fighting the notion of constant change to regulations in response to the constant change in products and services.
The Office of the Comptroller of the Currency, the federal agency that regulates national bank and trust companies, put out a draft charter last month for a uniform license manual for non-banking special services. The OCC’s intent is to create a one-stop license that applies to FinTech companies throughout the country.
“It’s one examiner, one auditor and one set of rules to make the system for FinTech more efficient,” Fornaris said. “It’s a proposal, but it’s controversial because it puts a lot of state regulators out of business.”
The OCC is being sued by the Conference of State Bank Supervisors on the grounds that the OCC lacks authority to issue such charters. During Vision 20/20, the Conference of State Bank Supervisors, state officials said they want to create a uniform examination standard for all 50 states by 2020.
“They realize they can’t play with 50 sets of rules and try to be more modern and efficient,” Fornaris said.
Despite the lawsuit, the OCC is still accepting proposals from FinTech firms.
Though the OCC proposal is appealing to many FinTech businesses, Bob Mark, the CEO and managing partner of
, said the charter poses challenges that regulators are not ready to address.
A huge chunk of regulating is monitoring the risks involved with lending. Mortgages and commercial loans have two ways of looking at risks, and now that institutions are moving into FinTech mortgages, a way is needed to secure reputation risks and uncover blind spots.
“FinTech mortgages are not on the books, and no one knows what keeping some of the risk looks like,” Mark said. “After all, it’s about assigned capital, and too much is not worth taking, and too little does not level the playing field.”
Under the federal Patriot Act, it is a felony to operate a FinTech company without knowledge of licensing. Uber and Square are examples of companies that asked for forgiveness rather than permission for violating regulations, then were hit with millions of dollars in fines. Such rapidly growing companies would rather pay fines, seeing them as speed bumps on the road to success, then halt their growth and wait for the rules to catch up.
One risk with complicated regulations is that many companies choose to take the hit, in anticipation of high demand and speedy growth.
For companies determined to abide by the rules, the slow regulatory process can stall technology that could benefit consumers and be profitable.
“It’s slowing a lot of people down,” Fornaris said. “Regulators are relying on antiquated rules meant for older services. I think the Treasury Department will suggest to Congress some kind of national licensing be set up.”