For Fintech, a Window of Opportunity

Regulatory arbitrage may provide some of the heat behind fintech’s fire.

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Fintech, the common name for a wave of startups bringing new technology to traditional financial services, is unquestionably having a moment.

Total annual investment in fintech startups hit $19 billion in 2015, according to a report from BI Intelligence, a figure which, if the trend persists, 2016 will beat out. Startups in the sector run the gamut of financial services, from online-only banks, to payments, lending, insurance products, and investment advising. According to Ed Heffernan ’86, the excitement over the sector isn’t just due to the productivity gains of new technology.

The financial crisis that brought on the Great Recession also led to a wave of new regulations for financial institutions, in particular 2010’s Dodd–Frank Wall Street Reform and Consumer Protection Act. The most significant overhaul of US financial regulation since the Great Depression, the act was meant to bring greater stability to the US financial system and to better protect consumers who may have difficulty assessing the risk of complex financial products.

The regulation also created an opportunity for these new companies. By carefully tailoring their business models, many fintech startups are able to avoid the more onerous requirements of the post-crisis regulation. While that’s good news for these fledgling companies — it may not be forever. Trends suggest that incumbents are waking up to the threat posed by fintech and, of course, it’s only a matter of time before regulators catch up to shifting business models.

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