Federalism and FinTech

In “Federalism and FinTech,” a chapter in Prosperity Unleashed: Smarter Financial Regulation, published by the Heritage Foundation, Brian Knight provides an in-depth look at how financial technology or “FinTech” companies are beginning to utilize advances in communications, data processing, and cryptography to compete with traditional financial services providers. Some of the most powerful FinTech applications are removing geographic limitations on where companies can offer services and, in general, lowering barriers to entry for new firms. This newly competitive landscape is exposing weaknesses, inefficiency, and inequity in the U.S. financial regulatory structure.

  • Technology is enabling many market participants to provide services on a national basis, but because many of these providers are not banks, they are subject to state-by-state regulation.
  • This state-by-state regulation places non-bank providers at a disadvantage relative to their bank competitors because banks enjoy a much more consistent regulatory environment due to powers granted by federal law.
  • State-by-state regulation of many innovative financial services is also inefficient and gives large wealthy states an advantage over smaller states because the rich states can, de facto, regulate the national market.
  • In cases where state-by-state regulation creates significant inefficiency, harms competitive equity, or creates political inequality, Congress should consider creating a consistent national regulatory environment that displaces state-by-state regulation.
  • Conversely, in cases where state regulation does not create inefficiency, harm competitive equity, or create political inequality, such as Rule 147, Congress should refrain from imposing federal requirements.

Read the full chapter here.