Post written by
Matthew Digesti
Chief Legal Officer at Bristlecone Holdings, a FinTech startup financing underserved consumers in niche markets.
Innovation in financial technology (fintech) brings risk and reward to consumers. As new technologies are brought to market, however, regulators struggle to keep pace by enforcing antiquated regulations, causing pro-consumer technologies to suffocate.
Current regulatory oversight is both costly and opaque. According to the 2014 ICBA Community Bank Lending Survey, community banks routinely report that regulatory costs have reduced the number of loans and mortgages offered to customers. Forty-three percent of the fintech companies attending last year’s FinTech Mashup said that regulatory issues were the single largest impediment to their growth. And more and more, regulations are forcing the banking industry to consolidate.
That being said, financial regulators do play a critical role. Current regulation offers some structure, but fintech innovation is lapping regulation. When issues arise, scrappy, idealistic entrepreneurs collaborate until they reach solutions. Regulators, on the other hand, all too often resort to costly adversarial interactions. My company Bristlecone Holdings is a great example; we are a scrappy startup providing innovative financing options to consumers that are shut out of traditional financing, but regulators have literally declined our requests to sit down and have discussions.
Like many in our industry, we are eager to develop regulator relationships through communication and transparency and unfortunately, we are finding that regulators do not have the same desire. With fintech innovators thirsty for guidance and in search of a true partner in consumer protection and innovation, what can we do to fix the situation?
A New Regulatory Process
Too often, small companies must choose between allocating resources to regulatory investigations or improving customer products and services. They simply cannot afford to do both. A single regulatory investigation can make a small company unattractive to debt or equity. And when that small company is creating pro-consumer technologies, consumers suffer. This has to change.
Fintech leaders like SoFi and Lending Club provide industry-shifting choices to consumers in a safe and transparent way. These companies were fortunate to grow quickly and accumulate vast resources before regulators came knocking. But what about businesses without millions of dollars budgeted for government investigations?
I believe that better regulation begins with collaboration. When regulators receive complaints, their first reaction is typically to investigate and prepare for potential litigation. The interaction is immediately adversarial and businesses are forced into a bunker mentality.
