Part of the beauty of fintech is its ability to meet consumers where they are and bridge the divide sometimes created by accessibility issues and inequality.

There must be regulations and pragmatic considerations when aiming to provide that bridge. Without the proper support, it could crumble instead of being a long-lasting solution.

There’s no one-size-fits-all approach to regulation in the world of financial services. Sometimes it’s a matter of encouraging fintech companies to engage in responsible behaviors—and other times, it looks like allowing responsible fintech companies to continue operating responsibly without regulatory burdens.

That’s where Phil Goldfelder, CEO of American Fintech Council, and former New York State Assemblymember, steps in as a guide with his wealth of experience and knowledge in the realm of regulatory policy. 

He holds a passion for practical and realistic progress that doesn’t get in the way of responsible financial service providers doing their work or hinder people from receiving the financial services they need and deserve.

The unintended consequences of “reactionary regulation” and how it weakens the bridge

Although regulations are generally enacted to solve specific problems, there can be a disconnect between the regulation and how companies will have to operate within that regulatory structure.

In other words, the ripple effect of a new rule can get lost in the chatter of ensuring everything is proper and on time.

Consider a company that is nationally based and serving consumers from California to Maine — the idea that they have to look at a patchwork of state regulatory structures, systems, interest rates, how they monitor and judge banks, fintech partnerships, and how they think about the many aspect innovative fintech companies have to deal with, it becomes dizzying. 

“Now, all of a sudden, while laws were passed with the best intentions, you're doing the opposite of what you're intended to do,” Goldfeder said. “Every state steps in and says, ‘It's our responsibility to serve and protect our consumers,’ but when you're doing that, you're inherently making it more difficult for innovative, responsible companies to operate.”

In such a circumstance, it’s common for fintech companies to pull out of complicated states and stop offering services there, decreasing the potential positive impact and lessening the reach of the bridge.

“Last April, in Colorado, they made a pretty significant change to state banking regulations. Ultimately, that law is to take effect this coming July of 2024. Most responsible, innovative, online lenders will exit the state of Colorado,” Goldfeder said. “In the interest of consumer protection, the legislature passed this law, but it will ultimately significantly decrease access to credit and responsible options for Colorado families.”

This type of reactionary regulation is all too common; if fintech is to truly thrive and provide the level of accessibility and relief it's capable of delivering, there must be adjustments to how these laws pass. 

Key efforts in establishing industry standards without regulatory mandates 

It's just as important for regulators to commit to working with fintech companies as it is for fintech companies to commit to working with regulators. It must go both ways for there to be a sustainable solution, compromise, or agreement.

“All AFC members are standards-based and are fully committed to regulatory best practice,” Goldfeder said. “But that only works when you're getting clear guidance from the regulators.”

One attempt at a more cohesive strategy comes in the form of the Novel Activity Supervisory Program from the Federal Reserve.

“The concept is we're going to steep ourselves in some of the banks offering fast programs and fast work innovative programs who are doing innovative partnerships, so we can learn the systems, understand what they're doing, and understand the way they're engaging with the financial services ecosystem, so we can best regulate them,” Goldfeder said.

That type of collaboration is a great start, with much more adaptation needed to serve consumers to the fullest benefit.

The value of working groups and listening sessions involving various players in FinTech (aka why it’s important to listen to the little guy)

The American FinTech Council is one of the only trade associations that counts innovative fintech companies as members, ensuring they have a seat at the table.

“The beauty of that is it creates a wide shared ecosystem of information about best practice, about the best ways to think about third party risk management, and hopefully create — in the absence of federal rules or regulatory rules from regulators — rules of the road for industry participants,” Goldfeder said. “It's that diverse membership that enables us to create the standards that, we think, ultimately, will best serve consumers.”

That said, there must be an understanding that — no matter how responsible a fintech company is — no one is perfect, and there will be mistakes.

But just like how we don’t forbid a child who accidentally spilled some milk from ever having milk again, we don’t banish a company from one misstep. As long as it was not an intentional action, there must be grace.

Alongside that understanding comes an appreciation for a younger company's perspective. While mature organizations may overlook certain aspects, a newer company can help bring the focus back to where it should be — consumers.

All it takes is an open ear and mind to ask the right questions and set change in motion.

Stay tuned for new episodes every other week on the Leaders in Lending Podcast.