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How Do Overburdensome Regulations Impact Fintech?

Fintech regulations are becoming the norm now that fintech is gaining more ground everywhere you turn. Legacy financial institutions can’t help but take notice as fintech continues to take a bigger slice of the pie, but they aren’t the only ones. Regulators are watching, too, as they recognize the disruption that game-changing mobile apps and other digital offerings have caused in financial services. With offerings such as banking as a service (BaaS), just about any tech or cryptocurrency company could resemble a bank despite not having a charter limiting the jurisdictions in which they can operate. And regulators are hovering, waiting for an opportunity to pounce with fintech regulations.

Consumers are no longer limited to banks as their only financial services provider and no longer have to rely on ATMs as their only means of access to funds. Now that the genie is out of the bottle, so to speak, there’s no going back. However, regulators’ threat of any knee-jerk response stands to do more harm than good to the burgeoning fintech space and the progress it has seen.


Table of Contents

How Do Overburdensome Regulations Impact Fintech?

Fintech Regulations Background

Fintech Regulation Adoption

Fintech Regulations: Overregulation Fallout



Fintech Regulations Background

It’s no secret that regulators are grappling with how to oversee this nimble, fast-moving industry that is growing hand over fist. Fintech, on the other hand, has been left to proceed in the gray areas of the law where there is no clear-cut precedent by which they can operate. This is where fintech regulations come into play.

Meanwhile, while fintech has matured since it started to catch on like wildfire after the 2008 financial crisis, it still has plenty more growth to achieve. For example, fintech startups looking to capture more consumer financial data are still left to build in the dark due to a need for more clarity on existing legislation, mainly Dodd-Frank. Regulators looking to swoop in for the next chapter of the fintech evolution could make or break this journey.

Meanwhile, bank CEOs like JPMorgan’s Jamie Dimon have repeatedly identified the rising competitive threat that fintech poses to the traditional finance industry.

“Mr. Dimon has bemoaned the fintech advantage and has called on regulators to create a ‘level playing field’ on which all financial services providers can exist.”

On the other hand, consumers have come to demand the same features that fintech innovation has introduced, such as zero overdraft fees and early direct deposit. They are increasingly leaving their banks for fintech apps that can do this easily. Banks are struggling to keep up and have been forced to redraw the lines in the sand they have created to compete.

For example, JPMorgan recently introduced early direct deposit for some of its checking account customers, a feature that has long been embedded in fintech apps. Banks have also changed the fine print on overdraft fees though most of them have yet to do away with the costs altogether.

Fintech Regulation Adoption

According to a report by Plaid dubbed “The Fintech Effect,” 88% of Americans turned to fintech providers in 2021, up from 58% in the prior year, outpacing the integration of things like the refrigerator, computers, and even smartphones in society. Fintech adoption is moving in one direction, and that is higher.

More people are managing their money on fintech platforms for saving, investing, and payments. While Gen Zers and Millennials are driving this trend, they are not alone.

“Even Baby Boomers have caught the fintech wave and have made mobile banking a way of life, especially in the wake of the pandemic. Americans largely credit fintech for giving them more control over their finances and greater transparency, resulting in a more inclusive and social financial experience.” 

Consumers turn to fintech apps for one of many reasons, but more often than not, it is for convenience and to save money, according to the Plaid report. In addition to saving money, consumers are also interested in saving time. Approximately 25% of those surveyed by Plaid reveal they save up to an hour every month by managing their money digitally. Americans also find fintech apps empowering, allowing them greater transparency into their financial picture and more control over their money, all of which have resulted in better financial habits and greater security.

As fintech adoption swells, regulators are increasingly chiming in. Michael Hsu, Acting Comptroller of the Currency, is worried that as more banks and fintech increasingly team up, it poses a potential systemic risk that, in a worst-case scenario, will lead to another financial crisis in the economy. He believes that business models for online lending, mobile payments, and innovative deposit technology could be more straightforward.

Fintech Regulations: Overregulation Fallout

While a reasonable regulatory framework might be welcome to ensure consumer protection, the fear is that regulators will fail to strike a balance and go too far. Overburdensome fintech regulations threaten to weaken U.S. fintech’s competitive position and create a one-step forward, two-step back scenario for the industry. There are many potential repercussions to overregulation, chief among which is the possibility of stifling innovation among fintech developers, which would have a ripple effect.

New entrepreneurs could be deterred from entering the space amid unreasonable barriers to entry. Overregulation would translate to higher compliance costs for fintech companies, many of which are small startups that could not afford these additional staff layers and would be forced to shut their doors. That fintech that can survive would have to offset higher compliance costs somehow and might pass those expenses onto consumers, who, in turn, would be left to pay the price for overregulation.

This would be especially burdensome for the unbanked and underbanked, who cannot access traditional financial services and rely on fintech products for things like credit.

“According to the Federal Reserve, 13% of American consumers remain underbanked and depend on alternative financial solutions such as those fintech provides. Some of those consumers have no access at all to a bank account.”

On the flip side, most of these individuals own a smartphone and, therefore, can access the financial services they need through the plethora of fintech apps. Fintech companies serve as a lifesaver to this segment of the U.S. population. Not only do they provide financial services that would otherwise be out of reach, but they do so at more affordable rates than banks.

Fintech does this thanks to its high-tech platforms that rely on algorithms, big data, and machine learning. These tools make better credit decisions and achieve cost savings they can then pass along to consumers in the form of lower interest rates, for example.

As a result, users can borrow money more cheaply, which is especially helpful in an economy with high inflation and rising interest rates at a time when banks are charging over 9% for a personal loan; as per Fed estimates, a fintech lender can afford to charge a rate as low as 4%.


While regulators maintain they are looking out for consumers, they also walk a fine line between that and compromising the financial benefits that fintech provides. Without fintech innovation, banks would have no incentive to improve their offerings or create more customer-friendly features. Overregulation affects nearly all Americans but none more than those who rely on fintech as their primary financial service providers.

Implementing a regulatory framework to address the unique role that fintech plays is a tricky puzzle that will take time to solve. In the meantime, overburdensome fintech regulations threaten to throw a wrench into the progress made in financial services, making it more difficult, if not impossible, for consumers to maintain the same level of control over their finances that they’ve had for the past decade-plus.

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