The emergence of fintech—i.e., innovative financial technology products—has created both benefits and risks for consumers. Federal regulators face a number of challenges in overseeing these products.
Financial technology (i.e., fintech) refers to the use of technology and innovation to provide financial products and services. Advances in technology and the widespread use of the internet and mobile devices have helped fuel the growth in fintech products and services. However, fintech offers both benefits and challenges to consumers. Federal regulators also face challenges in overseeing fintech and protecting consumers.
- Fintech lenders are online, nonbank lenders that leverage financial technology to provide consumers and small businesses with loans. This type of lending has evolved from the peer-to-peer and marketplace lending business models to include partnerships with depository institutions and direct lending platforms. Fintech lenders may use less traditional data and credit algorithms to underwrite loans. This presents potential benefits (such as the expansion of credit) and risks (such as the potential for disparate impact and other fair lending issues).
- Virtual currencies use a distributed ledger technology (known as blockchain) to securely and anonymously conduct real-time transfers of digital assets (such as bitcoins) without the need for an intermediary. But financial regulators and law enforcement agencies may find it difficult to detect money laundering and other crimes involving virtual currencies. Additionally, the lack of an intermediary makes it difficult to protect consumers from the loss or theft of virtual currencies. There are also a number of issues with ensuring tax compliance with virtual currencies.
How blockchain, a form of distributed ledger technology, acts as a means of payment for cryptocurrencies.
Examples of Virtual Currency Transactions that Can Produce Taxable Capital Gains
- Insurtech—i.e., the innovative use of technology by insurance companies—offers the potential to improve customer experiences and lower insurer costs. Some insurers have begun to use artificial intelligence to explore ways to reduce costs by automating information gathering and risk assessment. However, this could make it more challenging to ensure that factors like race are not being used in the models that determine premiums. Additionally, how insurers collect and use consumer data raises questions about data accuracy, privacy, and ownership. Further, some insurtech firms sell coverage in nontraditional insurance markets that receive less regulatory oversight of their policies and rates.
- Digital wealth management platforms use algorithms based on consumers' data and risk preferences to provide digital services, including investment and financial advice, directly to consumers. These platforms may offer consumers greater access to such services and at a lower cost, but they may not capture a customer’s full finances and goals. They also may not be able to answer clarifying questions like a traditional wealth manager.
- Account aggregators offer products that allow individuals to consolidate all their accounts from multiple financial institutions. These products offer convenience and other benefits but may increase the risk of cyber attacks that can lead to fraud or a data breach.
Varied U.S. Regulatory Structure
The extent to which fintech firms are subject to federal oversight varies. For example, federal regulators may review some activities of fintech lenders or payment firms as part of overseeing risks arising from these firms' partnerships with banks. In other cases, state regulators primarily oversee fintech firms, such as insurtech firms, but federal regulators could take enforcement actions.
This varied U.S. regulatory structure poses challenges to fintech firms—for instance, these firms have noted difficulties with identifying the applicable laws and how their activities will be regulated—and consumer protection. To help, regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services. Some leading practices for interagency collaboration include defining agency roles and responsibilities and defining outcomes.
Artificial Intelligence: An Accountability Framework for Federal Agencies and Other Entities
Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance
Science & Tech Spotlight: Blockchain & Distributed Ledger Technologies
Financial Technology: Agencies Should Provide Clarification on Lenders' Use of Alternative Data
Insurance Markets: Benefits and Challenges Presented by Innovative Uses of Technology
Financial Technology: Agencies Should Provide Clarification on Lenders' Use of Alternative Data [Reissued with revisions on Mar. 12, 2019.]
Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight