Can financial technology help consumers overcome economic struggles? The answer to this question is buried within the constant friction between traditional financial institutions, fintech startups, regulators, and consumers. To start with, a Fintech company broadly refers to any technology, startup or company that offers financial services. It is no longer news that hundreds of Fintech companies are setting up the stage for the disruption of the financial industry; yet, government operators are making it difficult to change a financial industry that is overdue for a change.
Regulators have good intentions with unintended consequences
Regulators are saddled with the responsibility of ensuring that financial services providers operate under the coverage of the law and ensure that consumers are getting the best possible value from services being rendered.
For instance, the U.S. Treasury Department recently issued the Request for Information (RFI) for online marketplaces. The policymakers noted that the reason for issuing the RFI is to "allow policymakers to study the various business models and products offered by online marketplace lenders, the potential for online marketing lending to expand access to credit to historically underserved borrowers, and how the financial regulatory framework should evolve to support the safe growth of this industry." However, it remains to be seen if the RFI will help or hurt consumers.
Some of the actions taken to regulate fintech companies often have a number of unintended consequences. The Dodd-Frank Act is a great example of well-meaning regulation gone wrong. Congressman Jeb Hensarling, from Texas, noted that "what is most disturbing about Dodd-Frank is the authority it gives bureaucrats to control huge swaths of the economy. The director of the Consumer Financial Protection Bureau, an agency created by Dodd-Frank, can declare any consumer-credit product "unfair" or "abusive" and outlaw it".
More so, some regulatory policies often slow down innovation that could make life easier for consumers. For instance, many small business owners were not able to obtain loans from banks during the last economic recession and many of them would have been out of business if they were not able to access much-needed credit from alternative sources such as Lending Club. However, many other fintech products that could have served borrowers that were neglected by banks didn't make it to the market because regulators deemed them "unsafe".
Traditional financial firms trying to slow fintech down
Nonetheless, the unintended consequences of such regulations tend to benefit traditional financial institutions even if the regulations make life difficult for fintech firms and consumers. Fintech is growing very fast and a thriving fintech sector could be an end to the reign and dominance of traditional financial firms. To start with, fintech firms mostly adopt a mobile-first strategy focused on meeting the needs in the last mile of financial services. More so, Fintech startups are often small and nimble; hence, they are able to offer "personalized" financial services to consumers with a wide range of needs.
Traditional financial institutions and government politics have a ready ally in regulatory bodies and they are pushing back against fintech firms. Traditional systems deploy considerable resources in Washington to influence policymakers to make policies that protect the status quo in the financial sector.
It's an uphill task for fintech firms
For Fintech companies, getting a toehold in the financial industry is a daunting task because of the regulatory hurdles that they must overcome. Passing regulatory requirements is often a long and painfully slow process. In fact, navigating regulations is time-consuming and it could eat up a great deal of seed funding.
One of the biggest challenges facing fintech firms apart for regulatory issues has to do with scaling out from being startups into becoming major players in the industry. Traditional systems have large scale on their side but startups often find it hard to get the trust of consumers. However, the first-mover advantage in the tech industry doesn't always go to the first firm that launches - the first firm that scales out often has the best chances of getting the first-mover advantage.
Hence, banks are now offering fintech services such as mobile banking and internet banking, even though they might be a bit behind, they don't need to worry about getting people to sign up since they already have a critical mass - millions of users who already have bank accounts.
Interestingly, traditional financial institutions might have the scale and deep pockets, but their size doesn't necessarily mean that they will be ahead of pure tech companies as the financial technology industry starts to mature. Giant tech firms such as Google and Apple have equally deep pockets and an ecosystem with billions of users to boot. If a firm such as Google or Apple makes a serious push to disrupt the fintech industry, it is doubtful that traditional finance houses could do much to prevent the onslaught - sadly, the big tech firms have not paid more than a passing glance at fintech.
Not much is likely to change in the financial landscape going forward unless government operators create an enabling framework that could help fintech to grow and thrive. For instance, the government gave life to the eCommerce industry in the U.S. by refusing to impose the sales tax on online transactions in order to make it easier and cheaper for online retailers to do business. Traditional financial institutions are behind the times and they are practically incapable of meeting the needs of a dynamic populace; government operators and regulators must step in to bring clarity of purpose into the fintech industry instead of stifling growth with heavy regulations.