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Financial Technology

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.

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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.

For instance:

  • Marketplace lenders are online, nonbank firms that use technology as a platform to match up borrowers with lenders. Marketplace 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.

  • 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 or credit unions. 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. 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.

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  • portrait of Michael E. Clements
    • Michael E. Clements
    • Director, Financial Markets and Community Investment
    • ClementsM@gao.gov
    • (202) 512-8678