FinTech: The Big Buzz in Law, Regulation, and Business

By: Doriyon Glass*| Staff Writer

https://www.sec.gov/spotlight/fintech

The FinTech panel from JBIPL’s 2017 Symposium consisted of four impressive panelists, two of which, the moderator noted, are national experts on the law relating to FinTech.  The discussion answered the question of what is FinTech and some of the controversies and concerns relating to FinTech. Put simply, FinTech is the automation of finance.  The panelists elaborated on this through three dimensions of FinTech: (1) The cognitive business, self-learning algorithms, (2) the Blockchain infrastructure, and (3)  how all of these different technology developments come together.

The panelists first discussed automation and the cognitive business.  To provide some background they mentioned JP Morgan hiring 5000 compliance employees and spending $4 billion a year on compliance.  The discussion then moved to IBM’s purchase of Promontory Financial, a premiere regulatory consulting firm that banks go to when they have compliance issues.  IBM made this purchase for Watson, a cognitive learning system. Watson is able to learn by being fed information and trained.  The plan is to feed into Watson all the compliance laws, regulations, announcements, and enforcement actions and have the experts from Promontory train Watson.  The hope is to make Watson a trusted entity that big banks, like JP Morgan, can license and displace some compliance employees and costs.

The discussion then moved to the Blockchain infrastructure.  Very simply put, Blockchain is the basic platform on which cryptocurrencies operate.  Currently, most financial services use a two-sided network that is run with a trusted third party intermediary, like Visa or MasterCard.  Credit card transactions are valid and the merchants accept this form because they know Visa will authenticate the payment.  Blockchain will fundamentally disrupt any industry run this way with authentication by consensus.  This is because if there is another way to authenticate a transaction the trusted third party’s role decreases.  Since a Blockchain transaction can only be authenticated through consensus it is inherently safe; whereas, a trusted third party intermediary can be compromised.

One of the panelist brought up the benefit of partnership.  Banks are excellent at quantifying and managing risk.  Tech companies are excellent at customer experience, but not so great at risk.  There needs to be a healthy appreciation for what each side brings to the table, but if either side, or regulators dig in their heels it leads to problems.  Banks have worries as well as needs for FinTech.  It has the potential to substantially eliminate costs, and to provide access to financial systems to the unbanked and underbanked.  But banks are also concerned with maintaining their primacy.  Another concern is the FinTech Charter.

If you want to do any type of financial services in this country you have to be licensed on a state by state basis, unless you are a nationally chartered bank.  The FinTech Charter is a special purpose charter that will allow FinTech companies to essentially become a national bank with all the relevant privileges.  This includes preemption of state licensing laws, allowing the company to operate on a nationwide basis.  The panelists explained these companies will also be subject to numerous state and federal laws (fair lending, access to credit, etc.) that come with being a bank.  The panel ended with a question for the audience: how far has the U.S. fallen behind the world in innovation in FinTech.  Companies are intentionally launching in other countries who are more friendly to FinTech.  This is due to our fragmented regulatory structure and the difficulty in getting the many regulatory authorities on the same page.  A panelist mentioned Congressman McHenry’s bill, which would essentially force regulators to work with FinTech companies.  A company could  apply for a waiver for a rule or regulation the regulator would have to prove why it should not be granted.

Doriyon Glass is a second year law student at Wake Forest University School of Law. She is interested in employment and higher education law. Before law school she studied Legal Studies and Criminal Justice at Gannon University in Erie, Pennsylvania., where she was a member of the women’s basketball team.