Is The Regulatory Environment Stifling Financial Innovation?

Financial regulatory oversight in the United States is complex and fragmented, with different rules across multiple regulators at both the federal and state level. And, while this is true for all financial institutions, new entrants known as financial technology (fintech) firms noted additional difficulty identifying the applicable laws and how their activities will be regulated.

Today’s WatchBlog explores our latest fintech report, particularly how the government oversees these products and services.  Listen to our podcast, then read on for more.

How do agencies regulate fintech?

Fintech refers to the use of technology and innovation to provide financial products and services—including payments, lending, wealth management, and distributed ledger technology. We’ve looked at benefits, risks, and protections for fintech users. And when it comes to oversight, fintech firms—often technology companies that aren’t financial firms—are regulated based on the types of activities they conduct. For example:

  • Robo-advisers (firms offering low cost investment advice provided solely by algorithms instead of people) are generally subject to the same federal oversight as traditional investment advisers.
  • Fintech firms that partner with banks and credit unions may be subject to indirect or limited federal oversight.
  • Some fintech firms may be subject to routine oversight by the Consumer Financial Protection Bureau, and Treasury’s Financial Crimes Enforcement Network (FinCEN) has authority to examine any fintech firms conducting money transmission.
  • Some fintech firms, such as certain payments providers, may not be subject to federal financial oversight if they do not meet the definition of a regulated business.

However, fintech firms that are not subject to routine federal oversight are generally subject to state oversight, such as licensing requirements and examinations of licensed payments and lending firms or other fintech firms that partner with banks. Also, federal regulators have taken enforcement actions against fintech firms that violate specific laws and regulations within their jurisdictions.

Does regulation pose challenges to fintech firms?

Fintech firms told us that complying with U.S. regulations is time-consuming and expensive, which can be a big burden for new firms. According to these firms, learning which laws and regulations apply can be difficult. Fintech payment services and lending firms also told us that they have to obtain licenses in each state in which they operate, which may cost $1 million to $30 million, and often cooperate with state regulators on multiple state exams per year.

Although these challenges are not unique to fintech firms, they may be more significant. Some existing regulations were developed before the types of products and services fintech firms now offer existed, which makes interpreting how regulations apply to fintech firms more challenging. Further, fintech firms generally seek to operate nationwide from their inception, which immediately requires licenses in all states and generates higher up-front compliance costs that may strain limited venture capital funding.

How can regulators help?

Federal and state regulators are taking steps to address these concerns. For example, federal regulators have issued rules and guidance to clarify requirements for fintech providers, the Office of the Comptroller of the Currency is considering a special purpose national charter for fintech firms, and state regulators are taking steps to standardize and coordinate oversight.

However, many market participants and observers think that better federal interagency collaboration could further improve fintech regulation and encourage innovation. Federal agencies collaborate on a variety of efforts to address fintech generally, as well as on specific topics like payments, lending, and account aggregation.

But these collaborative efforts do not always follow leading practices that can make them more effective. We recommended that federal agencies include all relevant participants, define desired outcomes, and clarify agency roles and responsibilities as they collaborate on regulating fintech.

To learn more, check out our full report, as well as our prior blog posts on fintech and small businesses, and virtual currencies.


  • Questions on the content of this post? Contact Lawrance L. Evans, Jr. at evansl@gao.gov.
  • Comments on GAO’s WatchBlog? Contact blog@gao.gov.
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