Ex-CFPB Bigwig Talks Regulating Fintech Innovators
Raj Date, former deputy director of the Consumer Financial Protection Bureau, has some advice for regulators in dealing with innovative financial technology startups: engage in dialogues, be assertive early, and be flexible.
Date, speaking Thursday at American Banker's Marketplace Lending + Investing conference, discussed the proliferation of financial technology startups and touched on how regulators should approach them.
Regulators are in somewhat of a feeling-it-out phase when it comes to financial technology startups. They are aiming to balance prudent oversight without limiting innovation. Banks have been pressuring policymakers to step up their oversight. Meanwhile, a group of tech giants recently formed a financial innovation lobbying group.
Given its reach, and the proliferation of startups in this space, marketplace lending has become top of mind for regulators and banks.
Marketplace lending companies in particular have the capacity to serve segments traditionally underserved by lenders – such as small businesses – and have filled the credit void left by banks since the financial crisis, which regulators would want to encourage, Date said. But that must be balanced with measures to ensure consumers are not left vulnerable.
First, he said, regulatory agencies need to engage with the people at these tech companies to learn more about what they do. While regulators who oversee large banks with thousands of employees may not see the value in meeting with small-scale operations, it is imperative, Date said.
"After all, it's hard to effectively regulate on ideas you've never heard of," he added.
He also said regulators should not be afraid to "put a stake in the ground early," when it comes to issuing guidance and rules around emerging financial technologies and how they may impact the financial system. Doing this also requires agencies to be flexible and mature enough to "know when they are wrong" and revisit and change statutes later on.
Finally, Date advised regulatory agencies to take advantage of the discretion allowed them in what they choose to enforce and how to enforce.
"Use that flexibility you have to enable good ideas to happen faster, in a way that reduces the risk of people getting burned down the line," he said.
Date, who is currently managing partner of Fenway Summer LLC, a venture firm that focuses on financial services, argued that we are currently in a "very unique and special time in the industry" that has enabled the rise of fintech startups in great numbers.
"There's a real advantage in building process and technologies from scratch now, than trying to adapt patchwork existing technologies built in a different era," he said. Financial technology startups also benefit from low barriers of entry, and don't have the large fixed costs startups from 20 years ago might have had.
"Back then, if you wanted to start a consumer-facing company, you had to own a server, which would shortly have to be replaced anyway," he said.
Date said marketplace lending startups specifically have thrived in this environment, enabled by technology innovation and breakthroughs, shifting consumer behavior and capital markets dislocation.
"Marketplace lending takes advantage of each of these trends," he said.