The financial technology (more commonly referred to as fintech) industry has created new opportunities for consumers and businesses alike over the past decade. Automation, advanced analytics, and increased internet access have made low-cost financial products more accessible for millions of people. Faced with the promise of continued benefits, and some unique challenges, lawmakers are taking a closer look at how to ensure responsible innovation within fintech.
On September 12, 2017, I got the chance to view this process first-hand as an expert witness in front of the Senate Committee on Banking, Housing, and Urban Affairs. During the hearing, titled “Examining the Fintech Landscape,” senators were eager to learn more about the benefits fintech can offer the public while keeping an eye on potential risks created by new technologies.
In sketching out the landscape, I testified alongside Mr. Lawrance Evans, Financial Markets Director at the U.S. Government Accountability Office; and Mr. Frank Pasquale, a professor at the University of Maryland Francis King Carey School of Law. During my testimony, I broke down the fintech industry into key areas including digital lending, mobile payments, digital investment management, insurance technology, and distributed ledger technology, which includes blockchain.
Part of the discussion focused on increased financial services access and lower costs provided by fintech platforms. According to S&P Global Market Intelligence estimates, 13 of the largest U.S. digital lenders originated $28.39 billion in loans during 2016, expanding credit access for consumers and small businesses. Automation helps lenders deliver loans faster, and sometimes for less than a traditional loan product or credit card. Mobile payments have become popular primarily with millennials, or people under 35 years old, but also with consumers making less than $75,000 per year, according to a survey fielded by S&P Global Market Intelligence. These products allow millions of users to save money and reduce complications when paying for goods or sending money to others.
Digital investment management involves algorithmically-driven platforms, often called robo-advisors, which offer low-cost investments with little to no minimum investment amount. S&P Global Market Intelligence estimates that these advisors will manage more than $450 billion by 2021, a fourfold increase from where the industry stood at the end of 2016. Insurance technology, or insurtech, similarly allows for savings and increased access to insurance products.
One of the newest areas of fintech, and a technology that could revolutionize many areas of financial services, is distributed ledger technology. Through these new networks, users can transact directly with each other, removing the need for a third-party processor while increasing trust and transparency. Areas such as payments and capital markets will be able to realize tremendous efficiencies in cost and time.
There's more to fintech than benefits, though, and real questions remain. I noted at the hearing that the lack of a clear regulatory framework is the most pressing issue for the industry, along with concerns that permeate our financial system, such as cybersecurity and data ownership. Fintech companies have been one of the most vocal groups when it comes to regulation as they are now trying to fit themselves into a system that was not created for them.
The committee was especially interested in cybersecurity in the wake of a recent data breach at credit bureau Equifax. This is an area where fintech companies, with a strong culture of technology and sophisticated infrastructure, could potentially be at an advantage compared to traditional financial institutions. Along those lines, the committee echoed our question of who owns financial data. This is an area where blockchain technology, and attached digital identities, could provide a real solution.
These applications would allow consumers to control who has access to their information while removing centralized repositories of data. In order to better understand how to address these challenges, committee members discussed the idea of a regulatory “sandbox” and innovation lab. These focus on increasing communication between lawmakers, regulators, and fintech companies in order to build reasonable rules for the industry. This would be an important step in creating a solid regulatory framework for fintech companies.
For now, the focus appears to be on broader issues, such as achieving cybersecurity regulation and a national set of standards. Fintech specific regulation could follow, but more hearings will have to be held before then. Wherever things head, it is good to hear thoughtful conversation around allowing consumers to realize the benefits of fintech with reasonable safeguards in place.