(This article originally appeared as an op-ed in the Financial Times published Monday, April 15th).
The future of finance is digital. Entrepreneurs are building new online banks, lenders, and payments companies that seek to improve customer experience and compete directly with incumbent brands. In China, WeChat Pay and Alipay have shown how thoroughly tech companies can revolutionise consumer finance. Just this week, it emerged that Alipay’s parent, Ant Financial, is raising $9bn at a $150bn valuation that would make it the world’s most valuable private company.
Many regulators, from Hong Kong to London and Ottawa, are actively working to encourage the next generation of safe financial innovation through new rules and laws. The US is falling behind. Its paralysed regulatory system allows other governments to take the lead and overseas companies to out-innovate American entrepreneurs. While others move forward, Congress is focused on petty squabbles over rewriting the Dodd-Frank rules for traditional banks. They are missing the point.
The financial markets need competition — not just among existing banks, but between them and new challengers. Right now, US laws protect incumbents from innovation and disruption. We need legislation that helps smaller, innovative financial companies to start, grow and offer new choices to millions of Americans.
To accomplish this, Congress must take three specific steps that other places have already tried. Lawmakers should authorise the creation of a “fintech” charter allowing new entrants to do some things that only banks can do now. We need to break the banks’ monopoly. The Office of Comptroller of Currency has been considering such a charter, but its legal basis is shaky, and lobbying has stalled the effort. The EU has already created the e-money licence — a charter for financial technology companies — and forced banks to give access (with customer permission) to third-party companies. By allowing new entrants to build services on top of existing banks’ data and infrastructure, the EU is forcing the sector to fuel new competitors.
Second, Congress should make it possible for the Federal Deposit Insurance Corporation to insure deposits at technology-first or mobile-first banks. Some state banking regulators say they want to charter such new banks, but the FDIC has been closed for business. Increased competition would force incumbent lenders to improve. The UK has approved more technology-driven “challenger” banks since the financial crisis than the US has approved banks of any kind. Britain’s competition watchdog has mandated software standards and industry guidelines to help drive innovation in retail banking.
Third, Congress should create a “regulatory sandbox” that gives new fintech companies the chance to experiment without having to comply with the different rules promulgated by the many agencies that oversee parts of finance. Australia’s financial regulator created the first such regulatory carve out. It allows emerging companies to offer some financial services without a licence for up to a year to give them a chance to test the market and build their products. Singapore, Hong Kong and Canada have followed suit, while Abu Dhabi launched a tailored regulatory regime for new companies.
Hampered by old technology and cultural issues, banks of all sizes are excluding too many people — the FDIC estimates that 27 per cent of Americans do not have adequate banking services. US policymakers need to stop focusing on regulating — or deregulating — banking. Instead they should be finding ways to foster ingenuity and innovation in the broader sector. Failure to do so will allow other financial markets to leave all Americans behind.
The writer is a partner at Deciens Capital, a venture capital firm focused on early stage financial technology