As Even’s general counsel, part of my job is to help navigate the intersection of innovative financial products and the laws and regulations that weren’t necessarily written with the technology that has enabled innovation in mind. Innovating in consumer financial services — where guidance is limited, or ambiguous, or both — presents both opportunities and challenges. On the one hand, a lack of direct regulatory guidance can create opportunities because it leaves space for creativity. On the other hand, it can create challenges in navigating what guardrails apply to how products should be built. However complicated and nuanced it may be, it’s prudent to try and figure out what rules might reasonably apply to a nascent product. Here are four principles for how fintech companies can innovate for consumers while respecting the rules — even if it’s not always clear what those rules are.
Generally speaking, consumer financial services are highly regulated because they can be complex, and have the potential to harm consumers. Policymakers, regulators, and legislators want to protect consumers from predatory products, create a marketplace that builds confidence for all stakeholders, and enable consumers to access financial services that improve their lives. These are fundamental public policy principles, and all fintechs should be consistently aligned with them. To start, fintechs should identify any laws and regulations that are directly applicable to their products and services (including those adjacent to consumer financial services, like privacy regulation), and make sure to comply with them.
A fintech can look at the policy motivations behind the existing laws, and use that information to guide development of its product — even if those laws aren’t directly applicable.
However, there won’t always be directly applicable laws and regulations to comply with. This is where implementing north star public policy principles can guide how a fintech can safely innovate. Consider the fact that many consumer financial services provide value that’s linked to public policy goals; for example, tools that increase access to safe, low-cost financial products that improve financial stability.
While existing regulations might not be directly applicable to the area in which a fintech innovates, northstar public policy principles can point innovators in the direction of similar regulations from which they can take guidance. A fintech can look at the policy motivations behind the existing laws, and use that information to guide development of its product — even if those laws aren’t directly applicable.
For example, a fintech might be building a product for which there is no law mandating they make certain disclosures to users. But it can be reasonably analogized that clear and conspicuous disclosures, aimed at ensuring consumers fully understand the product they’re using, would be appropriate, due to similarities to an existing regulated product or service.
Many fintech companies are too small to hire all the legal and regulatory resources and expertise they need in-house, and fintech innovation is multi-faceted and complex. Therefore, fintechs should seek counsel from credible third parties who can provide deep expertise, as well as broad industry perspective. It’s important for fintechs to seek this outside counsel early in their product development process, and continue to consult with them regularly.
This is beneficial because great outside counsel aren’t just experts in financial services — they can also provide perspectives across the entire industry, because they’re likely to be working with multiple companies. By enlisting outside counsel, fintechs can access information about, and advice on, the evolving regulatory landscape and existing regulatory frameworks with which they might otherwise struggle to contend.
It’s also important for fintechs to engage with other stakeholders who may be thinking about developing policy and regulation. Understanding the approaches and concerns of consumer advocates, think tanks, and prospective regulatory bodies can provide invaluable information and perspectives — for example, identifying areas of potential consumer harm — which can help fintechs build a product that’s more likely to comply with any future regulatory framework.
Getting advice and guidance from outside counsel is only valuable if it’s then implemented correctly. Fintechs that invest early in internal resources to translate all that legal and regulatory guidance into practice are going to end up with better products. When a company sees compliance not as a burden, but as an integral part of what makes a product work, this is ultimately a competitive advantage. The resulting product is born from innovation that’s informed by an evolving regulatory landscape, meaning it’s consumer friendly, protects users’ interests, adds value to the market, and improves peoples’ lives.
When problems arise, fintechs with experts and thoughtful policies in place learn from what happened, and use that information to improve consumer products.
Beyond building with compliance in mind, it’s also important to maintain this approach, meaning long-term investments in legal and compliance are critical. Fintech products often involve sensitive information, meaning investments in information security are also imperative. For example, fintechs need to develop programmatic approaches to compliance and information security, and establish a strong culture of internal oversight. This will enable the company to quickly identify issues, mitigate consumer harm, and thoroughly remediate any problems.
As an added benefit, these kinds of investments and cultural guardrails lead to a virtuous feedback loop. When problems arise, fintechs with experts and thoughtful policies in place learn from what happened, and use that information to improve consumer products. The return on internal investment is perhaps most evident in complaint and issues management programs, often led by a compliance team in partnership with operations, product, and engineering teams. This kind of program facilitates a feedback loop by synthesizing consumer feedback identified by teams like customer support, and then providing that information to technical teams, enabling the fintech to continuously improve its products and services.
While regulation may be limited at the outset, as an industry develops and continues to innovate, regulatory interest is bound to increase— especially if a service is popular and widely used. Often, this can result in new regulatory frameworks for previously unregulated financial services and products. Fintechs should engage with the prospect of developing regulations by reaching out to stakeholders like policymakers, legislators, and prospective regulatory oversight entities. Doing so will help the fintech understand stakeholder concerns, and in turn, help those stakeholders properly understand the fintech’s product.
Fintechs should be thoughtfully proactive in their approach, and incorporate the spirit of regulation into their products and services.
This is especially crucial if it’s important for stakeholders to distinguish the fintech’s product from existing offerings in the marketplace. Innovators should frame their products within the broader context of financial services, and be able to explain the value their product brings to the table for consumers. Ideally, they should also use data to demonstrate positive consumer impact. By providing stakeholders with education about the product, as well as evidence of impact, fintechs may be able to influence new regulatory frameworks.
When it comes to innovation in financial services, while the absence of clear guidelines represents an opportunity, fintechs should be thoughtfully proactive in their approach, and incorporate the spirit of regulation into their products and services. To do so, companies should work hard to make sure that the development and offering of products are guided by public policy, informed by credible third parties, and implemented by experts. With the goal of demonstrating positive impact — and potentially influencing a new regulatory framework — consumers may be better served, and an emerging industry may thrive.
Priya Pai is the General Counsel at Even where she serves on the executive team and is responsible for the legal, compliance, and government relations functions of the business. Prior to joining Even, Priya was General Counsel of Earnest, a student loan refinancing fintech startup. Prior to Earnest, Priya was a partner at Kirkland & Ellis LLP. She holds a Juris Doctor from Stanford University and Bachelor of Science in Economics from the University of Michigan.
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