Fintech is new from regulatory standpoint and likely heading into uncharted territory: Philadelphia Fed President

Financial Technology or “FinTech” is the latest iteration of changes in the financial system, going on for a few decades now, said Patrick T. Harker, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia.

Speaking at “The Global Interdependence Center’s Payment Systems in the Internet Age Conference”, Harker focused on the evolution of fintech and the role it plays in the overall financial system. He particularly discussed the regulatory landscape in this emerging sector.

“It [fintech] is still new from a regulatory standpoint, and it’s likely heading into uncharted territory. It’s unlikely that increased oversight will be welcomed with open arms, but I should say now that it’s actually in the interest of fintech firms”, Harker said.

Underscoring the importance of trust in a financial system, Harker said that regulation is necessary for a functioning system. He emphasized that fintech firms need the same trust as any other bank or financial institution.

“This underlying expectation is why it’s best to get in early on regulation. It’s in these firms’ self-interest to provide a layer of trust-building that regulation can offer, particularly those that are getting to a scale where negative events could have major consequences”, Harker said.

“What fintech outfits don’t want is regulation that comes in after a crisis. That type of regulation almost always fights the last war, and that could mean tighter strictures and less room for innovation after the crash at the end of a credit cycle. Policymakers have too much experience with the old adage that history may not always repeat itself, but it often rhymes.”

To that end, he listed two things to focus on when talking about regulation:

• First, that it’s structured to protect both institutions and the public.
   
• Second, considering what regulation already looks like and where it’s headed.

Further, elaborating on the existing regulations in the U.S., he said:

“There is an open question about whether or who should supervise fintech lenders in the United States, made all the more complicated by the interplay between our state and federal regulatory frameworks”.

“It continues to be, in my opinion, in the interest of fintech companies to be regulated.”

Harker said that while regulation can’t solve everything and can’t anticipate or guard against every problem, it can try to achieve this.

“For me, regulation is not just a question of protecting consumers; it’s a question of protecting the innovators as well. It’s in their best interest to have an established framework in which to operate. In part because the trust it engenders will underpin their essential role in the financial system”, he added.