How Federal Financial Regulatory Agencies can use Fintech to Improve Financial Transactions

Financial technology (“fintech”) has become one of the most important inventions in today’s world. However, technology’s overall impact on our financial institutions is still unclear. Fintech has become an essential tool in the financial world, but we need to (i) identify and (ii) improve the potential uses of fintech for the financial systems of the future. The role of the federal government in this context is especially important, but complicated.

As we know, technology has been integrated into financial applications, legal matters, and other areas, but one of the most impacted sectors is the finance industry as a means to improve their current processes. Financial institutions have leveraged financial technology to improve their banking processes and products to benefit consumers. In furtherance of this goal, the banking and securities industry spent over 7% of their annual revenue on IT, accounting for $9.5 billion in 2016 alone. Fintech should result in a benefit to the economy as a whole, but we do not have the data to capture the impact of the current financial system. Payment systems, consumer protection, issues like natural disasters, are all factors in evaluating the dynamics of the fintech process.

Currently, Federal Reserve Banks are working on a new payment service system known as FedNow, which might compete with some forms of fintech. FedNow offers a safe and efficient payment service available for financial institutions, which would allow payees to access their funds “within seconds”.[1] This service would provide payment to individuals and businesses by sending a “payment message” to their financial institutions in real time. The service is expected to be launched in 2023 or 2024. With FedNow, the Fed would continue its dual role as market regulator and market participant.

Notwithstanding FedNow, the Fed and the federal financial regulatory agencies must also get involved and promote the continued growth and regulation of fintech. Financial regulators, both at federal and state levels, have not addressed the situation by advancing new regulations, guidelines, and/or procedures aimed directly at fintech, but instead have focused on “rent-a-charter” (and similar) regulations that might give tech firms greater latitude in this context.

Federal financial regulatory agencies, specifically, the Consumer Financial Protection Bureau, must continue to guarantee that fintech processes comply with consumer protection law. Three regulations that must be strictly adhered to in lending activities utilizing fintech: (i) The Truth in Lending Act (TILA), (ii) the Equal Credit Opportunity Act (ECOA), and (iii) the Fair Credit Reporting Act (FCRA). These three regulations are imperative to the lending process and represent key safeguards for consumers. Financial regulators protect consumers from inappropriate activities of financial institutions and provide a legal framework of compliance.

Recent natural events—COVID and severe storms, among othershave created widespread economic hardship. These natural disasters are outside of human control, but the result of these events could nonetheless prove harmful in the long run to an increasingly global economy. The federal government needs to meet the oversight challenge posed by fintech for ordinary financial procedures or, at least, in the case of a natural disaster. The federal government could use agencies like FEMA and the Small Business Administration to support municipalities, towns, or financial institutions mitigate these disasters by supporting the development of information infrastructure, since without functioning channels of communication (internet, cellular are often out of service), transactions cannot happen.

In order to support fintech’s continued growth, our financial regulators need to fundamentally reevaluate their positions, and embrace fintech’s role in creating an increasingly disaster-resistant economy.

Mr. Cruz focused his practice in civil and commercial matters including banking, corporate law, debt collection, business law, compliance, notary and general civil law matters. He was In House Counsel at Westernbank Puerto Rico. As part of his private practice he represented financial institutions in Court and commercial and banking transactions. In addition, he was appointed Municipal Judge at Judicial Branch of Puerto Rico and frequently designated Superior Judge. He is currently Associate Professor at the University of Puerto Rico, Mayaguez Campus. Mr. Cruz has been Professor of the following courses: Financial Institutions Management, Introduction to law, Business Law, Credit and Collection Management, Corporate Finance, Public Finance, International Finance and Commercial Law.

[1] The Federal Reserve, (last visited Aug. 31, 2020).


Leave a Comment