During Fortune’s Brainstorm Finance conference in June, my panel was asked whether fintech, as an industry, faces too much or too little regulation. Panelists answered the question differently depending on their product and a common theme emerged: It depends.
Fintech companies face costly compliance with a mountain of financial regulations, most of which describe work we don’t do. Like many technology-driven industries, our regulations are horribly outdated, authored at a time when an app meant fries for the whole table, and spam was just canned meat. Imagine running a business under laws written before your industry or product ever existed. That’s the reality for most fintechs. Congress’s directions for regulators about what “banks” are and do are based on how banking worked in the 1970s.
Regulators and lawmakers we meet with regularly tell us: “We know the laws are outdated and need to be scrapped and rewritten, but it’s just too big, too hard, and too much work.” To some extent, they’re right. Bank board members and federal regulators can’t grasp the scope or pace of change, or possibly keep up if they insist on treating every company like a bank and every loan like a 30-year mortgage.
Banks, as institutions, don’t really exist anymore. Customer activities exist and financial services exist—and they’re part of a complex and perpetually shifting network of problems and solutions.
To keep up, the U.K. takes a novel approach that America should examine. The U.K. regulates services—what businesses actually do. Separate licenses and standards govern lending to home buyers or small businesses. Processing payments between banks doesn’t pose the same risk as deposits, so risk-sensitive regulations in the U.K. are relaxed.
Giving up the one-size-fits-all model of financial relationships, such as the brick-and-mortar bank or middle-class mortgage, opens the door to customization, specialization, and reimagining customer-business relationships. Dated regulations treating Pandora and Spotify like 1970s record labels or radio stations led to a total copyright overhaul. Customers’ expectations have changed every bit as much for financial services as for the music industry. Change is overdue.
Tala, a California-based company offering microloans in developing countries, is using mobile phone habits to determine creditworthiness. If a potential borrower tops up his minutes at regular intervals, has a wide network of contacts who he’s known for years and stays in contact with, and pays his other bills regularly, he’s very likely to repay the loan of $50 to stock his fruit stand or $250 for a motorbike. Similarly, for any type or source of data fintech models find predictive, the would-be borrower may consent to share, or not.
Modern regulation should allow the customer to determine who has access to their data, choosing what to share or not to share for a certain service, including underwriting, investing, processing payments, and deposits. This is the path toward transparency and innovation.
Until recently, customers weren’t entitled to access their credit bureau data, which banks were using to make decisions about borrowers’ financial futures. Forward-thinking regulation gave customers the right to see these records and challenge their accuracy, despite resistance from the data holders. It’s certainly important that we develop regulations to give customers control of their financial data and banking services, instead of the banks.
But we can’t take this too far. Monolithic regulatory frameworks don’t allow for the dynamic, interwoven range of options and diversified offerings customers have come to expect, whether they’re rock songs or small business loans. Letting radio stations log what songs you listen to late at night might have seemed absurd back in the day, but now people love the custom experience and curated suggestions provided by companies collecting that data.
Banking is changing fast, whether banks and regulators are ready or not. Very few millennials value walking into a bank branch and speaking to a teller—that’s not what “banking” means to them. If you don’t intend to buy a home, have a child, go to college, or directly deposit a paycheck, PayPal’s the only bank you need.
If you want something else, there’s a company out there that can do it. Let people opt into the world they want, instead of forcing them into the one that was easier yesterday.
Kathryn Petralia is the co-founder and president of Kabbage.