Fintech Activities Can Provide Benefits and Pose Risks to Consumers and the Broader Financial System

Fintech products in payments; lending; wealth management; and  distributed ledger technology can provide consumers and the broader  financial system with various benefits but may also pose risks similar to  those of traditional products. On the  other hand, providers could potentially also increase risks to financial  stability. Fintech Firms’ Compliance with Applicable Laws Is Subject to Varied Federal Oversight

The extent to which fintech firms are subject to federal oversight of their  compliance with applicable consumer or other laws varied. Fintech Firms Providing Investment Advice Are Subject to the Same Oversight as Traditional Financial Institutions

Fintech robo-advisers offering wealth management advice would  generally be subject to the same federal and state oversight as traditional  investment advisers. To review for compliance with this standard and other applicable  requirements, staff from SEC and state securities regulators conduct  examinations of registered investment advisers. However, NCUA’s staff noted some of their examiners had  accompanied state regulators in an examination that involved a credit  union’s partnership with a fintech payments firm. Finally, state regulators can also take enforcement action against  financial institutions and fintech firms that violate state data security or  consumer protection laws. Indications of Fintech Activities Creating Widespread Consumer Harm Appear Limited Compared to Traditional Providers

Available regulatory data show that the number of consumer complaints  against fintech activities appears modest compared to traditional  providers. The U.S. Regulatory Environment Poses Various Challenges to Fintech Firms

Fintech firms can find that the complexity of the U.S. financial regulatory  system creates challenges in identifying the laws and regulations that  apply to their activities, and that complying with state licensing and  reporting requirements can be expensive and time-consuming for mobile  payment providers and fintech lenders. Fintech payments and DLT firms and other market participants told us  that navigating this regulatory complexity can result in some firms  delaying the launch of innovative products and services—or not launching  them in the United States—because the fintech firms are worried about  regulatory interpretation. Although banking regulators and CFPB have discussed issues related to  account aggregation within FFIEC, these discussions have not yet  defined outcomes or produced any public outcomes to help guide fintech  firms and traditional financial institutions which could help lead to market- based solutions, or defined agency roles and responsibilities. Consideration of Regulatory Approaches Abroad Could Benefit Fintech Regulation and Innovation

Regulators abroad have addressed the emergence of financial innovation  through various means, including establishing innovation offices;  establishing mechanisms for allowing fintech firms to conduct trial  operations; holding innovation competitions; providing funding for firms  through business accelerators; and using various methods to coordinate  with other regulators domestically and internationally. While certain U.S.  regulators have adopted similar efforts, further adoption of these  approaches by U.S. regulators could facilitate interactions between  regulators and fintech firms and improve regulators’ knowledge of fintech  products. Regulators Abroad Use Various Approaches to Learn about and Enable Development of New Fintech Products, and U.S. Regulators Could Consider Taking Similar Steps

Internationally, some regulators have taken various approaches that help  educate their staff on emerging products and help innovators develop  products in limited-risk environments (see fig. (For additional  information on interagency collaborative efforts, see app. Although regulators have been reluctant to act too quickly in light of  related industry efforts, they could increase collaboration to address key  issues such as consumer reimbursement for unauthorized transactions. While constraints may limit the ability or willingness of  regulators to fully adopt these practices, additional consideration by these  regulators of some of the approaches taken by regulators abroad could  assist U.S. regulators in learning more about new financial technologies  that could provide useful knowledge for their own regulatory activities. Regarding our recommendation  that the Federal Reserve engage in collaborative discussions that  incorporate leading practices with other financial regulators regarding  financial account aggregation issues, the Federal Reserve acknowledged  the importance of working together to ensure that consumers were  protected, and noted a variety of ways it already coordinates on such  issues, and noted that it will continue to engage in such discussions to  address the important issues surrounding reimbursement for consumers  using these services. Appendix I: Objectives, Scope, and Methodology

This report examines (1) fintech benefits, risks, and extent of legal or  regulatory protections for users; (2) efforts by U.S. regulators to oversee  fintech activities; (3) challenges that the regulatory environment poses to  fintech firms; and (4) the steps taken by domestic and other countries’  regulators to encourage financial innovation within their countries. To assess the regulatory environment and various challenges faced by  fintech firms, we identified relevant laws and regulations pertaining to  fintech companies within our scope by reviewing prior GAO reports on  financial regulation and fintech, interviewed agency staff and industry  participants, and analyzed relevant agency documents, including relevant  laws and regulations.
Why GAO Did This Study

Advances in technology and the widespread use of the Internet and mobile communication devices have helped fuel the rise of traditional financial services provided by non-traditional technology-enabled providers, often referred to as fintech.
GAO was asked to provide information on various aspects of fintech activities. This report addresses fintech payment, lending, wealth management, and other products. GAO assesses 1) fintech benefits, risks, and protections for users; 2) regulatory oversight of fintech firms; 3) regulatory challenges for fintech firms; and 4) the steps taken by domestic and other countries' regulators to encourage financial innovation within their countries. GAO reviewed available data, literature, and agency documents; analyzed relevant laws and regulations; and conducted interviews with over 120 federal and state regulators, market participants, and observers, and regulators in 4 countries with active fintech sectors and varying regulatory approaches.

What GAO Found

Fintech products—including payments, lending, wealth management, and others—generally provide benefits to consumers, such as convenience and lower costs. For example, fintech robo-advisers offer low cost investment advice provided solely by algorithms instead of humans. Fintech products pose similar risks as traditional products, but their risks may not always be sufficiently addressed by existing laws and regulations. Also, regulators and others noted that fintech activities create data security and privacy concerns and could potentially impact overall financial stability as fintech grows. The extent to which fintech firms are subject to federal oversight of their compliance with applicable laws varies. Securities regulators can oversee fintech investment advisers in the same ways as traditional investment advisers. Federal regulators may review some activities of fintech lenders or payment firms as part of overseeing risks arising from these firms' partnerships with banks or credit unions. In other cases, state regulators primarily oversee fintech firms, but federal regulators could take enforcement actions. Regulators have published consumer complaints against fintech firms, but indications of widespread consumer harm appear limited. The U.S. regulatory structure poses challenges to fintech firms. With numerous regulators, fintech firms noted that identifying the applicable laws and how their activities will be regulated can be difficult. Although regulators have issued some guidance, fintech payment and lending firms say complying with fragmented state requirements is costly and time-consuming. Regulators are collaborating in various ways, including engaging in discussions on financial protections for customers that may experience harm when their accounts are aggregated by a fintech firm and unauthorized transactions occur. Market participants disagree over reimbursement for such consumers, and key regulators are reluctant to act prematurely. Given their mandated consumer protection missions, regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services. GAO has identified leading practices for interagency collaboration, including defining agency roles and responsibilities and defining outcomes. Implementing these practices could increase the effectiveness of regulators' efforts to help resolve this conflict.
Regulators abroad have taken various approaches to encourage fintech innovation. These include establishing innovation offices to help fintech firms understand applicable regulations and foster regulatory interactions. Some use “regulatory sandboxes” that allow fintech firms to offer products on a limited scale and provide valuable knowledge about products and risks to both firms and regulators. Regulators abroad also established various mechanisms to coordinate with other agencies on financial innovation. While some U.S. regulators have taken similar steps, others have not due to concerns of favoring certain competitors or perceived lack of authority. While these constraints may limit regulators' ability to take such steps, considering these approaches could result in better interactions between U.S. regulators and fintech firms and help regulators increase their understanding of fintech products. This would be consistent with GAO's framework calling for regulatory systems to be flexible and forward looking to help regulators adapt to market innovations.

What GAO Recommends

GAO is making numerous recommendations related to improving interagency coordination on fintech, addressing competing concerns on financial account aggregation, and evaluating whether it would be feasible and beneficial to adopt regulatory approaches similar to those undertaken by regulators in jurisdictions outside of the United States. In written comments on a draft of this report, the agencies stated that they concurred with GAO's recommendations and would take responsive steps.