The Dangers of Over-Regulating FinTech Software Companies

In a survey conducted on software providers for FinTech companies, 70% of the respondents stated they were keen on collaborating with FinTechs to work on data and AI, while 60% noted fraud as an area to partner with FinTechs. As the FinTech industry continues to redefine itself, experts note that understanding the difference between companies using financial technology for moving money and those providing services to FinTechs is imperative.

In April 2022, The Consumer Financial Protection Bureau (CFPB) announced that it will use a legal provision to investigate nonbank financial firms that present risks to customers. The CFPB believes that this action will aid in safeguarding consumers in leveling the playing field between banks and nonbanks.

While all FinTech financial institutions must adhere to FinTech laws and regulations to protect users and ensure the safety of payments, software companies serving FinTechs should not be subject to the same rules because they don’t have the same — or any — control over the money.

“The same set of regulations and constraints should not be universally applied to all software companies that serve FinTechs, as many do not move money and play no role in banking activities. Rather, they provide an interface to connect two endpoints or a data processing service,” says Monica Eaton, CEO of Chargebacks911, a company that enables businesses of all sizes to identify criminal fraud and track transactions from within a unified platform. “FinTechs have been able to develop new products and services quickly and efficiently precisely because they are not subject to the same regulatory burden as banks and other financial institutions. If these companies were suddenly subject to the same regulations, it could slow down innovation in the industry.

With the growth of eCommerce, there is growing demand for business solutions that streamline processes, unify datasets, and provide scalability — allowing businesses to advance from manual methods or reliance on mainframe environments that were not built to keep pace with today’s digital marketplace. Service providers that provide fraud scoring technology similarly assist financial institutions with scaling constraints — while other types of platforms provide turn-key solutions that allow banks to automate their customer handling processes. These service providers have an important role in the framework of commerce and FinTech.

“What is needed is a clearer understanding on the part of regulatory agencies as to which is which. Lumping all companies that sell solutions supporting a financial service or process or have clients that are FinTech into one group is ‘categorically’ wrong. It’s important to ensure that commerce and the mechanisms and policies that govern payments are not hampered by misaligned regulations that treat companies that serve a financial institution or retailer the same as a financial institution or retailer,” concludes Eaton.