Fintech challenge for regulators: Evolution or revolution?

Thomson Reuters Regulatory Intelligence - Banks are vulnerable to challenges posed by a new breed of competitors in the form of technology-driven nonbank companies that have grown rapidly as regulators in the United States and around the world begin to deliberate between revolutionary and evolutionary approaches to fintech regulation.

An illustration picture shows a projection of binary code around the shadow of a man holding a laptop computer in an office in Warsaw June 24, 2013.

A recent global risk management survey conducted by Deloitte (here) cites the disruptive emergence of "fintech" firms as one of the key risk-management challenges facing the industry.


“Fintech companies pose a strategic threat by potentially disrupting the financial sectors and services, in particular in the areas such as lending, payments, wealth management, and property and casualty products,” Edward Hida, a partner at Deloitte Advisory told Regulatory Intelligence.

Indeed, partly due to a regulatory void in which they have operated until recently, and the lackluster innovative adaptability by traditional banks, fintech companies have quickly moved on from their initially modest offerings in back office operations into areas such as trading, investment, retail banking, thus emerging as direct competitors in the industry.

Large financial institutions across the world could lose 24 percent of their revenues to financial technology companies over the next three to five years, according to a new study by PricewaterhouseCoopers. In banking specifically, consumer services such as personal loans, were seen as most at risk.

Fintech firms accounted for almost a third of shadow bank loan origination in 2015, partially benefiting from their online origination technology, according to the National Bureau of Economic Research ( Typically, the origination process takes place nearly entirely online, providing greater convenience for borrowers.

Most notably, some fintech firms have blended big data and technology to to meet the modern challenges faced small investors by providing crowd-funding investment capabilities for small enterprises.

Investment in fintech has grown from $1.8 billion in 2010 to $19 billion in 2015, and in 2015, its estimated market worth was about $4.7 trillion, according to Goldman Sachs research cited by Deloitte.


Regulators have mulled how to tackle the “fintech revolution” for the last few years.

It seems there are two schools of thought: one evolutionary, and the other revolutionary.

While the banking industry put pressure on regulators to hold fintech companies to the same standards of banking regulations, Patrick McHenry, vice chairman of the U.S. House of Representatives Financial Services Committee, urged rule-making bodies to follow the UK's example (here) of adopting a regulatory approach that could be considered revolutionary in its emphasis on spurring innovation.

The Financial Services Innovation Act proposed by McHenry would create a government-wide fintech oversight regime, within which regulators would adopt a mandate to encourage innovation in the financial industry through the creation of Financial Services Innovation Offices (“FSIOs”).

These offices would better coordinate the regulation of companies seeking to bring new and innovative financial technologies to market.

Accordingly, fintech companies providing banking services would not be forced into the same mold as traditional banks, which may stifle innovative capacity of small businesses. Instead, the Act would allow “regulatory beta testing,” for a period time, during which new types of regulation, new openings for innovation, and the measurement tools --backed up with facts and data, would be test-driven, and customized before being adopted.

While the bill awaits consideration in Congress, however, regulators have chosen a more evolutionary path, considering fintech companies on par with, and requiring of them the same regulatory standards as traditional banks.


The Office of the Comptroller of the Currency (OCC) has spearheaded efforts to bring fintech to the financial regulatory fold in a number of steps (here). It has endorsed what it calls "responsible innovation", an approach that aims to meet customer needs consistent with sound risk management and aligned with company's overall business strategy.

The agency's examination of fintech issues and discussions with fintech firms have yielded a set of principles (here) for the responsible innovation concept and the establishment last year of an Office of Innovation.

More recently, the OCC has announced (here) that fintech companies applying for special purpose national bank charters are to be held to the same high standards of safety and soundness, fair access, and fair treatment of customers that all federally chartered institutions must meet.

This in effect means that fintech companies offering bank-like products and services must comply with laws that apply to national banks as well as consumer protection regulations overseen by the Consumer Financial Protection Bureau and the Federal Trade Commission.

The OCC expects that the application of a uniform supervision and regulatory framework will promote consistency, and enhance the safety and soundness of the financial system.


While banks eye fintech companies warily, it is ultimately up to them to turn this challenge into an opportunity where both groups could benefit from a possible synergy.

Indeed, there already exists some level of cooperation. In 2015, JPMorgan Chase announced that it would make small business loans through OnDeck Capital, a fintech lending platform.

Other financial institutions are seeking to adopt the entrepreneurial ways of the fintech firms within their own organizations, by creating online wealth management applications to compete with the new fintech players. This type of competition could lead to some fintech companies merging with the banking industry, the Deloitte report said.

The Deloitte survey noted an evolution in risk management practices that could assist in this transformation. It noted that firms have almost uniformly established a chief risk officer position and shown more active participation by the board and various risk committees in enterprise risk management.

However, it noted, adoption was less widespread when it came to risk management involvement in new products and strategic decisions. Even while firms watch for the regulatory path to clarify, integrating risk management in their approach to fintech could help potential synergies take hold.

(Bora Yagiz, FRM is a New York-based Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence, specializing in risk. He is a certified Financial Risk Manager. Mr. Yagiz has held positions as a bank examiner for the Federal Reserve Bank of New York, as senior consultant with Ernst & Young and vice president at Morgan Stanley. Follow Bora on Twitter @Bora_Yagiz. Email Bora at