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.
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.
- 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.
GAO-20-188: Published: Feb 12, 2020. Publicly Released: Feb 12, 2020.
As virtual currencies like bitcoin grow in popularity, how can IRS be sure that people are paying relevant taxes? IRS addressed some taxpayer questions in its 2014 and 2019 virtual currency guidance. For example, the guidance says that using virtual currency can produce taxable capital gains. But IRS could do more to help taxpayers comply. Financial institutions already report information about...
GAO-19-704SP: Published: Sep 16, 2019. Publicly Released: Sep 16, 2019.
The technology that allows Bitcoin and other cryptocurrencies to function could profoundly change the way government and industry do business. Distributed ledger technology allows the secure transfer of digital assets without management by a central authority. Instead, participants share synchronized copies of a ledger that records assets and transactions. Changes are visible to all participants. ...
GAO-19-423: Published: Jun 7, 2019. Publicly Released: Jun 7, 2019.
The innovative use of technology by insurance companies has the potential to improve customer experiences and lower costs. But it could also create risks for consumers and challenges for regulators. For example, we found that 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...
GAO-19-111: Published: Dec 19, 2018. Publicly Released: Dec 19, 2018.
Financial technology—or "fintech"—can help connect lenders and borrowers online. Some fintech lenders told us that they use alternative data to help determine borrowers' creditworthiness. For example, lenders may supplement traditional data (such as credit scores) with information about a borrower's college degree. Using alternative data could make loans available to more people, but could al...
GAO-18-254: Published: Mar 22, 2018. Publicly Released: Mar 22, 2018.
Fintech products—including payments, lending, wealth management, and others—generally provide benefits to consumers, such as convenience and lower costs. For example, fintech robo-advisers offer low cost investment advice provided solely by algorithms instead of humans. Fintech products pose similar risks as traditional products, but their risks may not always be sufficiently addressed by exis...
GAO-17-361: Published: Apr 19, 2017. Publicly Released: Apr 19, 2017.
The financial technology (fintech) industry is generally described in terms of subsectors that have or are likely to have the greatest impact on financial services, such as credit and payments. Commonly referenced subsectors associated with fintech include marketplace lending, mobile payments, digital wealth management, and distributed ledger technology.Marketplace lenders connect consumers and s...
GAO-14-496: Published: May 29, 2014. Publicly Released: Jun 26, 2014.
Virtual currencies are financial innovations that pose emerging challenges to federal financial regulatory and law enforcement agencies in carrying out their responsibilities, as the following examples illustrate:Virtual currency systems may provide greater anonymity than traditional payment systems and sometimes lack a central intermediary to maintain transaction information. As a result, financi...