The American financial system is unique in its scale and complexity: the sheer size of the country and the autonomy given to individual states have left it with a web of regulations and deeply entrenched banks.
2023 was meant to be the year things changed. US Fintechs had been lining up to push for a more progressive regulatory agenda that would make the sector more dynamic, innovative, and competitive.
Then Silicon Valley Bank (SVB) reminded us all of another unique feature of America’s banking system: its ability to utterly terrify the world when things go wrong. The response to the crisis has pushed US Fintech reform down the Government’s priority list, but the two aren’t mutually exclusive.
Regulators pulled into the spotlight
SVB’s demise was in large part due to bad investments. As has already been well documented, the bank’s exposure to poorly performing long-term Government bonds fatally undermined faith in its ability to pay out to depositors.
Some have asked why regulators failed to prevent such a crisis at a bank critical to the entire venture capital (VC) industry. This has pressured policymakers to look more closely at the rules of the US financial system. 13 years after Dodd-Frank was meant to have cleaned things up, financial regulators once again stand accused of falling asleep at the wheel.
Clearly, this isn’t an ideal environment for Fintech to advocate for looser rules. The political calculus has changed. At best, risk averse policymakers will take far longer to ruminate on even straightforward proposals. At worst, the Fintech industry could be portrayed as recklessly dismantling much needed consumer and business protections.
A more careful approach is needed.
Getting the story straight
Many of the stars of the US Fintech industry were founded on the premise of bringing greater simplicity and transparency to the financial sector.
That cause, that truth, remains valid, and the case for reform remains strong as well. The American financial system is overly complex and it does hold back innovation. For example, getting a banking charter can still take many years depending on the type of license and where it’s obtained. Simply sending money abroad can take days and the money seems to go into a black box until it hopefully reappears at its intended destination. Complex and often conflicting compliance obligations can come to dominate the year and take up time that should be spent running a successful business.
Securing regulatory approval for building and creating new products or services is difficult enough, but then comes the harder challenge of keeping the programs you have built alive and compliant over time. When you factor in the overlap between different states and various federal agencies, it can soon feel like there’s an obstacle around every corner.
Some will say that it’s regulations that protect us from crises - which, of course, well-designed ones do. But overly complex regulations make the financial system opaque and unaccountable to everyone except deep-pocketed incumbents. This reduces competition and risk diversification, and arguably makes serious crises more likely.
The risks of hyper-complexity can be seen throughout recent financial crises: from the securitisation of junk mortgage debt in 2008 to how SVB skirted the usual regulatory rigor in part due to the ‘uniqueness’ of its depositor-base. Regulations only make us safer if they’re clear, fair, and properly enforced.
Signs of life
There have been some small, but not inconsequential, success stories. For example, remittance firms used to be subject to an examination by every state in which they held a Money Service Business (MSB) license every few years. This meant up to 50 licenses were necessary in order to do business across the country and a Fintech company having regulators in its office pretty much all year long - a huge administrative burden.
Recently, this has been streamlined somewhat, allowing nationwide remittance or payments firms to go through one comprehensive exam that satisfies the various states’ requirements.
There has also been word of the Office of the Comptroller of the Currency (OCC) giving Fintechs federal licensing rather than going through the states, but nothing’s happened on that front yet.
What little momentum the industry has mustn’t be lost. Fintech has a strong and compelling case for simplifying the rules of our financial system and making them more transparent and accountable.
A legislative agenda for competition-friendly regulation at the federal level would make the financial sector more diverse and dynamic. It would also reinvigorate Fintech, which has taken a beating in terms of market valuations yet employs hundreds of thousands, is a huge contributor to the economy and provides real world benefit to consumers and businesses around the world.
Perhaps most importantly of all, it would give regulators an opportunity to push out bad actors once and for all, rather than let them fester quietly in the background and relying on the industry to figure it out. When it comes to reforming finance, instead of policymakers viewing Fintech as part of the problem, it should view it as part of the solution.
