How Big Banks Govern FinTech Startup Regulations
Will 2017 be the year regulation links up with FinTech? This is an issue that has been a matter of business debate for quite some time now, with multiple issues being raised about the effects of regulations on startups. After all, the current regulatory system is complex and convoluted (often even the big banks have trouble following these rules) and smaller businesses can’t function under this weight—not to mention the fact that many regulations were written before the rise of the internet and the global economy, making them out of date.
To their credit, the business world has been working on the issue. The problem is finding a solution that works for everyone and is an easy transition from the current regulation system yet fits the needs of the new FinTech reality.
Look at the last major regulation passed: The Dodd-Frank Wall Street Reform and Consumer Protection Act. Passed on July 21, 2010, it was designed to fix the major errors that led to the market crash and the rescuing of the Too Big To Fail corporations. By streamlining the regulatory process and improving supervision, the intent was to make regulation easier while keeping a better eye on the market, all in order to prevent another financial disaster.
This bill was written in a market that was not yet experiencing the surge of startups that would come with the change in market and technology. Written to manage and benefit large financial companies, it fails to address and serve the needs of the startups that are currently in the process of changing our financial world. Startups aiming to comply to these regulations suffer in order to meet unattainable demands.
Another major issue arises when FinTech startups—not quite fully confident in the market and unaware of their regulation limitations—get fined for compliance issues. These fines are enough to sink a fledgling company or at the very least damage their reputation in the market.
To be fair, there are cases where FinTech startups are already successfully managing the regulation system. Any of the partnerships done with the big banks will have included regulatory oversight as big banks already have regulatory restrictions to manage.
Regulation as a concept—if done well and done properly—will not hurt FinTech. After all, these laws are set up to protect businesses and keep their employees safe. But what needs to happen is a situation where current regulation is reworked to better help startups grow. There will be pushback against this notion, as big banks serve to benefit by maintaining the status quo, but a government that wants a thriving economy will want to create a business environment that lets all companies prosper. FinTech needs to work with the government to ensure that changes are made to the regulation system and these changes let the sector thrive.
An interesting perspective and much of it I agree with. However, banking regulation as it exists today can be viewed as a double-edged sword for fintech / start-ups. The reason being that major FIs have far more to lose by being off-side on a regulatory matter. Further, the governance structure within major FIs make it quite difficult (and incredibly slow) for departments or groups to side-step regs and take on significant risk. In contrast, startups have little to lose and can move quickly — as they say, it’s easier to beg for forgiveness than it is to ask for approval.
The notable example here is the launch of Paypal. Visa had aspirations of building a web-based payment platform, but couldn’t get it off the ground fast enough as they were forced to clear various compliance hurdles at state and federal levels. Paypal as a start-up had little to lose, whereas Visa had a Fortune 500 brand and reputation to protect.
With respect to regulatory fines hurting fintechs, there is no shortage of major FIs that have been crippled by fines and reputational damage too. This is not a one-sided situation faced by fintechs. Rather, good businesses — regardless of whether they are start-ups or established banks — know and understand the regulatory environment under which they operate. The growth and success of a business requires leadership teams to understand, manage, and mitigate risk, including regulatory risk. Just look at what has happened at Wells Fargo (money laundering, fake bank accounts) and the scrutiny Canadian banks are now under with the FCAC for branch-level sales tactics. While it is fair to say that some start-ups suffer more as you ‘don’t know what you don’t know’, those that are backed by legit funders often undergo rigorous regulatory scrutiny.
Ultimately I agree that there is need for reform. However, reform that helps start-ups grow may help major FIs too. How regulatory reform plays out will be interesting for everyone involved — customers, banks, entrepreneurs and investors.
Colin, great points and thank you for sharing. Agreed that reform needs to happen and banks will benefit as well, so let’s start now, while balancing the risk and compliance standards that our customers deserve.
This study may come as a threat to big Canadian banks, which are already on the defense against startups challenging their market share.