Limiting Regulations to Facilitate Fintech Innovation

Banking CIO Outlook | Friday, September 28, 2018

The topic of regulation has divided people into two groups, while there are some who believe that it is not required, others feel that no amount of regulation is enough. Similarly, when it comes to financial technology (fintech) there lies a dilemma wherein some users want their money to be secured by stringent regulations but others want access to new technological tools, which is only possible with the laws that do not curtail innovation. According to a report by the Department of Treasury, fintechs may be getting regulatory relief due to the withdrawal of laws that impose unnecessary restrictions on finctech providers. The report stated the development of specialized bank charters that focused on fintech firms, along with the establishment of “regulatory sandboxes” that would prevent fintech startups from facing difficulty with certain consumer protection laws.

The Center for Responsible Lending (CRL) notes that the U.S. Department of Treasury has endorsed the repeal of the “Payday Rule” and that this may have grave consequences for the public. The rule is aimed at stopping payment debt traps by requiring lenders to determine beforehand whether a borrower is able to afford to repay their loans or not. The rule will also limit lenders’ repeated attempts to debit payments from a borrower’s bank account, thus ending a practice that leads to compounded fees and account closure. The CRL is concerned that these steps intend to ultimately override state-level protective measures. Scott Astrada, federal advocacy director for the CRL states, “If the Department of Treasury’s recommendations are adopted, more Americans would be pulled into deceptive, 100 percent APR loans with high default rates. These fintech products have allowed lender profits to soar as the borrower is pulled down into a financial free fall often resulting in involuntary bank account closure, a ruined credit score, and bankruptcy.”

However, the problem with CRL’s assertions is that they do not consider some key points. Exempting startups from certain consumer protection laws is not an outlandish idea; it offers them protection from lawsuits, since they do not have the resources to fight legal battles with customers. Moreover, overriding state laws with the universal federal law will help fintechs avoid structuring their operations differently, according to different state legislations.

Sometimes it is beneficial to limit regulations so that innovation can rise freely from the excessive demands of law. When it comes to startups specifically fintechs, relaxing regulations might be worth considering. 

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