Among the efforts are new licensing and regulatory approaches that help fintechs offer new or broader services, including banking. Other moves include advisory services that guide new companies through financial regulations, and “regulatory sandboxes” that let firms test new services with customers before obtaining full regulatory approval.
The initiatives are taking place against a backdrop of rapid fintech growth. There are thousands of fintech startups worldwide, and many have attracted substantial venture funding; a report from KPMG and CB Insights found that global fintech funding reached $19.1 billion in 2015.1
FinTechs Get a License to Bank
Several countries are planning or have already implemented licensing or regulatory changes that enable technology firms to offer broader banking services. The U.K. has actively encouraged new competition in banking, reducing barriers to entry such as banks’ capital requirements.2 As a result, several new digital banks are already offering Internet-based banking services, including online payment solutions, without establishing brick-and-mortar locations.
Another ongoing U.K. initiative designed to enable competition and fintech innovation is the implementation of an open banking standard by 2018, including an open application programming interface (API) that enables development of new applications to access information in customers’ existing accounts at one or more banks. For example, customers might be able to manage all their bank accounts from a single app.3
In the U.S., the Office of the Comptroller of the Currency (OCC), which regulates national banks, said in December 2016 that it planned to make a special-purpose national bank charter available to fintechs. The charter would enable startups that currently offer other financial services, including B2B payments and other online payment solutions, to begin offering at least one of three regulated banking activities: receiving deposits, paying cheques, or lending money.4 This could increase competition in banking and make it easier for technology firms to offer new online payments solutions or other services.5
In a speech, Thomas J. Curry, the OCC’s chief officer, listed three reasons for moving forward with the long-discussed plan to issue a national charter for fintechs. First, it’s in the public interest to make new innovative services available. Second, fintechs should have the opportunity to become national banks if they wish to do so. And third, it helps ensure that all financial institutions operate on a level, nationally regulated playing field. As Curry pointed out, the reality today is that many fintechs are already competing with national and state banks — but “without regard to any of the national bank responsibilities and under a patchwork of supervision”.6 The agency said it would collect public comment before moving farther.
Though many experts agree that the OCC’s move could encourage innovation, some warned that implementing inadequate regulation might weaken consumer protection and even harm small businesses by allowing practices such as predatory lending.7
Stimulating Development of Online Payment Solutions and Other Financial Services
The U.K. has also been encouraging fintechs in other ways, and other countries including Australia and the U.S. are adopting some of the same approaches. For example, the U.K. Financial Conduct Authority (FCA) operates an “innovation hub” designed to help new and established businesses from the U.K and other countries introduce innovative financial services. The hub provides a dedicated team that helps fintechs understand the regulatory regime and apply for authorisation to offer financial services; its role also includes identifying areas where the regulatory framework needs to be adapted to enable further innovation.8
One U.K. innovation is the “regulatory sandbox”, which allows firms to test new financial services in a live environment with real customers, without first obtaining full authorisation to offer the services commercially. The FCA accepts applicant firms based on criteria such as innovativeness, suitability for the U.K. market, and market readiness; it issues a limited, tailored authorisation for the purposes of sandbox testing. The first batch of applicants, accepted in 2016, includes an international online payments solution and a retail payments system based on blockchain technology.9
The EU has also begun an effort to encourage fintech innovation across Europe, establishing a Financial Technology Task Force in 2016. 10
Australia also has set a goal of encouraging fintech innovation, in part to support its financial industry in becoming the leading market in Asia for fintech innovation and investment.11 The government’s involvement includes setting policies that support innovation, and backing local fintech firms. The Australian Securities and Investments Commission (ASIC) established an innovation hub in 2015 to help startups navigate regulations, and has also developed a regulatory sandbox approach that allows companies to test new financial services such as online payments solutions with a limited number of customers.12 ASIC also aims to encourage innovation by quickly approving new financial service licenses, with an average target for approval of 60 days.
The U.S., which is home to some of the world’s biggest fintech companies, is also kicking off innovation initiatives similar in concept to those already up and running in other countries. The OCC plans to establish an Office of Innovation in 2017 to help the agency ensure that financial institutions operate in a regulatory framework that is responsive to financial innovation; its roles will include an outreach and technical assistance program for banks and nonbanks developing financial services.13 In addition, a bill to introduce a regulatory sandbox was introduced in the U.S. Congress in 2016, with the goal of passing enabling legislation in 2017.14
Government initiatives to encourage fintech innovation could help to drive competition among banking and financial services firms and accelerate the availability of new financial services for businesses, including online payment solutions.
- “Fintech funding hits all-time high in 2015, despite pullback in Q4”,KPMG and CB Insights; https://home.kpmg.com/xx/en/home/media/press-releases/2016/03/kpmg-and-cb-insights.html
- "UK grants fintech a banking licence–another tier of regulation?",FinTech Law log; https://www.fintechlawblog.com/2016/08/uk-grants-fintech-a-banking-licence-another-tier-of-regulation/
- "Retail banking market investigation, Competition & Markets Authority; "https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/523755/retail_banking_market_pdr.pdf
- Exploring Special Purpose National Bank Charters for Fintech Companies, Office of the Comptroller of the Currency;https://www.occ.treas.gov/topics/bank-operations/innovation/special-purpose-national-bank-charters-for-fintech.pdf
- "Regulator Will Start Issuing Bank Charters for Fintech Firms",The Wall Street Journal; http://www.wsj.com/articles/regulator-will-start-issuing-bank-charters-for-fintech-firms-1480691712
- Remarks By Thomas J. Curry, Comptroller of the Currency, Regarding Special Purpose National Bank Charters for Fintech Companies, Office of the Comptroller of the Currency;https://www.occ.gov/news-issuances/speeches/2016/pub-speech-2016-152.pdf
- "Sizing Up the Government’s New Fintech Plan",The Wall Street Journal; http://blogs.wsj.com/moneybeat/2016/12/02/sizing-up-the-governments-new-fintech-plan/
- "Project Innovate and Innovation Hub", U.K. Financial Conduct Authority; https://www.fca.org.uk/firms/project-innovate-innovation-hub
- Regulatory sandbox, U.K. Financial Conduct Authority; https://www.fca.org.uk/firms/project-innovate-innovation-hub/regulatory-sandbox#cohort1
- "European Commission sets up an internal Task Force on Financial Technology", European Commission; https://ec.europa.eu/digital-single-market/en/blog/european-commission-sets-internal-task-force-financial-technology
- "Australia’s FinTech priorities";, The Treasury, Australian Government; http://fintech.treasury.gov.au/australias-fintech-priorities/
- "OCC Issues Responsible Innovation Framework", Office of the Comptroller of the Currency; https://www.occ.treas.gov/news-issuances/news-releases/2016/nr-occ-2016-135.html
- "U.S. House Bill Aims to Set Up ‘Sandbox’ for Fintech Innovation", The Wall Street Journal; http://www.wsj.com/articles/u-s-house-bill-aims-to-set-up-sandbox-for-fintech-innovation-1474539893