Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight
Highlights
What GAO Found
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 existing laws and regulations. Also, regulators and others noted that fintech activities create data security and privacy concerns and could potentially impact overall financial stability as fintech grows. The extent to which fintech firms are subject to federal oversight of their compliance with applicable laws varies. Securities regulators can oversee fintech investment advisers in the same ways as traditional investment advisers. 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, but federal regulators could take enforcement actions. Regulators have published consumer complaints against fintech firms, but indications of widespread consumer harm appear limited. The U.S. regulatory structure poses challenges to fintech firms. With numerous regulators, fintech firms noted that identifying the applicable laws and how their activities will be regulated can be difficult. Although regulators have issued some guidance, fintech payment and lending firms say complying with fragmented state requirements is costly and time-consuming. Regulators are collaborating in various ways, including engaging in discussions on financial protections for customers that may experience harm when their accounts are aggregated by a fintech firm and unauthorized transactions occur. Market participants disagree over reimbursement for such consumers, and key regulators are reluctant to act prematurely. Given their mandated consumer protection missions, regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services. GAO has identified leading practices for interagency collaboration, including defining agency roles and responsibilities and defining outcomes. Implementing these practices could increase the effectiveness of regulators' efforts to help resolve this conflict.
Regulators abroad have taken various approaches to encourage fintech innovation. These include establishing innovation offices to help fintech firms understand applicable regulations and foster regulatory interactions. Some use “regulatory sandboxes” that allow fintech firms to offer products on a limited scale and provide valuable knowledge about products and risks to both firms and regulators. Regulators abroad also established various mechanisms to coordinate with other agencies on financial innovation. While some U.S. regulators have taken similar steps, others have not due to concerns of favoring certain competitors or perceived lack of authority. While these constraints may limit regulators' ability to take such steps, considering these approaches could result in better interactions between U.S. regulators and fintech firms and help regulators increase their understanding of fintech products. This would be consistent with GAO's framework calling for regulatory systems to be flexible and forward looking to help regulators adapt to market innovations.
Why GAO Did This Study
Advances in technology and the widespread use of the Internet and mobile communication devices have helped fuel the rise of traditional financial services provided by non-traditional technology-enabled providers, often referred to as fintech.
GAO was asked to provide information on various aspects of fintech activities. This report addresses fintech payment, lending, wealth management, and other products. GAO assesses 1) fintech benefits, risks, and protections for users; 2) regulatory oversight of fintech firms; 3) regulatory challenges for fintech firms; and 4) the steps taken by domestic and other countries' regulators to encourage financial innovation within their countries. GAO reviewed available data, literature, and agency documents; analyzed relevant laws and regulations; and conducted interviews with over 120 federal and state regulators, market participants, and observers, and regulators in 4 countries with active fintech sectors and varying regulatory approaches.
Recommendations
GAO is making numerous recommendations related to improving interagency coordination on fintech, addressing competing concerns on financial account aggregation, and evaluating whether it would be feasible and beneficial to adopt regulatory approaches similar to those undertaken by regulators in jurisdictions outside of the United States. In written comments on a draft of this report, the agencies stated that they concurred with GAO's recommendations and would take responsive steps.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
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| Board of Governors | The Chair of the Board of Governors of the Federal Reserve System should invite the National Credit Union Administration to participate in the Interagency Fintech Discussion Forum. (Recommendation 1) |
In a May 2018 letter, the Chair of the Federal Reserve Board noted that the Federal Reserve agreed that the National Credit Union Administration's (NCUA) oversight of credit unions provides it with experiences and perspectives that are relevant to the group's collaborative work on fintech consumer protection issues and accordingly, Board staff have invited relevant contacts at the NCUA to take part in future meetings of the Interagency Fintech Discussion Forum. In June 2018, Federal Reserve staff advised us that NCUA staff had been invited to participate in this forum and that some NCUA staff attended the forum's meeting held on June 28, 2018.
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| Federal Communications Commission | The Chairman of the Federal Communications Commission (FCC) should discuss with the Presidents of the Federal Reserve Banks of Atlanta and Boston whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 2) |
In June 2018, FCC staff told us they had consulted with Federal Reserve staff about participating in the Mobile Payments Industry Working Group. They noted that they have designated a staff member to serve as point of contact for matters regarding this working group. Regarding the working group's next likely meeting in 2019, the FCC staff indicated that they agreed to discuss this meeting's agenda with the Federal Reserve and determine at that time whether it would be beneficial for FCC to attend that meeting.
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| Federal Reserve Bank, Atlanta, GA | The President of the Federal Reserve Bank of Atlanta should discuss with the Chairman of the FCC and the President of the Federal Reserve Bank of Boston whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 3) |
In a May 2018 letter, the Chair of the Federal Reserve Board noted that staffs at the Federal Reserve Banks of Atlanta and Boston have been in contact with appropriate staff at the Federal Communications Commission (FCC) about the FCC's participation in the 2018-2019 Federal Reserve's Mobile Payments Industry Working Group (MPIW). The letter stated that Federal Reserve Bank staff were scheduling a call with FCC representatives to provide more details on the MPIW and discuss relevant topics and plans for the meeting. In June 2018, Federal Reserve staff provided documentation that Federal Reserve Bank staff had discussed the role of the working group with FCC staff and had agreed to talk again in advance of the next likely meeting in early 2019 about its agenda and possible topics in the mobile payments space that would be of interest to the FCC as well as other regulators.
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| Federal Reserve Bank, Boston, MA | The President of the Federal Reserve Bank of Boston should discuss with the Chairman of the FCC and the President of the Federal Reserve Bank of Atlanta whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 4) |
In a May 2018 letter, the Chair of the Federal Reserve Board noted that staffs at the Federal Reserve Banks of Atlanta and Boston have been in contact with appropriate staff at the Federal Communications Commission (FCC) about the FCC's participation in the 2018-2019 Federal Reserve's Mobile Payments Industry Working Group (MPIW). The letter stated that Federal Reserve Bank staff were scheduling a call with FCC representatives to provide more details on the MPIW and discuss relevant topics and plans for the meeting. In June 2018, Federal Reserve staff provided documentation that Federal Reserve Bank staff had discussed the role of the working group with FCC staff and had agreed to talk again in advance of the next likely meeting in early 2019 about its agenda and possible topics in the mobile payments space that would be of interest to the FCC as well as other regulators.
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| Consumer Financial Protection Bureau | The Director of the Consumer Financial Protection Bureau should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 5) |
In January 2020, GAO met with CFPB to discuss the recommendation and potential outcomes that could close the recommendation. CFPB officials stated that they will be hosting a public forum on data aggregation in February 2020. They noted that results from the public forum could include action related to the data aggregation recommendation. In October 2020, staff from CFPB and the other financial regulators provided documentation that they had collaborated in the development of a CFPB advance notice of proposed rulemaking (ANPR) on consumer access to financial records, which could result in a rulemaking that clarifies how consumer protection law applies to account aggregation services. CFPB staff said they will continue to consult with the other financial regulators during the formal comment period of the ANPR. Further, they stated that while the ANPR does not compel CFPB to proceed with a formal rulemaking, the agencies commit to continuing their collaborative work to help market participants address the important issues surrounding account aggregation services. On October 27, 2022, CFPB issued an outline of rulemaking proposals and alternatives under consideration as part of a requirement to gather input from small businesses that could be affected by such a rule. CFPB held a small business review panel to gather this input and issued the final report of the panel in March 2023, and plans to follow that with a notice of proposed rulemaking (NPRM). In October 2023, CFPB published the NPRM in which the agency makes clear that financial institutions covered by Regulation E are liable to reimburse consumers for unauthorized transactions related to account aggregation services, and that these institutions may be able to seek reimbursement from other parties through private network rules, contracts, and commercial law.
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| Board of Governors |
Priority Rec.
The Chair of the Board of Governors of the Federal Reserve System should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 6) |
Staff from the Federal Reserve and the other financial regulators provided documentation that they had collaborated with CFPB in the development of an advance notice of proposed rulemaking (ANPR) on consumer access to financial records, which could result in a rulemaking that clarifies how consumer protection law applies to account aggregation services. Federal Reserve staff said they will continue to consult with CFPB during the formal comment period of the ANPR. Further, they stated that while the ANPR does not compel CFPB to proceed with a formal rulemaking, the agencies commit to continuing their collaborative work with CFPB to help market participants address the important issues surrounding account aggregation services.
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| Federal Deposit Insurance Corporation |
Priority Rec.
The Chairman of the Federal Deposit Insurance Corporation should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 7) |
Staff from FDIC and the other financial regulators provided documentation that they had collaborated with CFPB in the development of an advance notice of proposed rulemaking (ANPR) on consumer access to financial records, which could result in a rulemaking that clarifies how consumer protection law applies to account aggregation services. FDIC staff said they will continue to consult with CFPB during the formal comment period of the ANPR. Further, they stated that while the ANPR does not compel CFPB to proceed with a formal rulemaking, the agencies commit to continuing their collaborative work with CFPB to help market participants address the important issues surrounding account aggregation services.
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| National Credit Union Administration | The Chairman of the National Credit Union Administration should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 8) |
Staff from NCUA and the other financial regulators provided documentation that they had collaborated with CFPB in the development of an advance notice of proposed rulemaking (ANPR) on consumer access to financial records, which could result in a rulemaking that clarifies how consumer protection law applies to account aggregation services. NCUA staff said they will continue to consult with CFPB during the formal comment period of the ANPR. Further, they stated that while the ANPR does not compel CFPB to proceed with a formal rulemaking, the agencies commit to continuing their collaborative work with CFPB to help market participants address the important issues surrounding account aggregation services.
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| Office of the Comptroller of the Currency | The Comptroller of the Currency should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 9) |
Staff from OCC and the other financial regulators provided documentation that they had collaborated with CFPB in the development of an advance notice of proposed rulemaking (ANPR) on consumer access to financial records, which could result in a rulemaking that clarifies how consumer protection law applies to account aggregation services. OCC staff said they will continue to consult with CFPB during the formal comment period of the ANPR. Further, they stated that while the ANPR does not compel CFPB to proceed with a formal rulemaking, the agencies commit to continuing their collaborative work with CFPB to help market participants address the important issues surrounding account aggregation services.
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| Federal Deposit Insurance Corporation | The Chairman of the Federal Deposit Insurance Corporation should formally evaluate the feasibility and benefit of establishing an office of innovation or clear contact point, including at least a website with a dedicated email address. (Recommendation 10) |
In November 2018, Chairman McWilliams announced that FDIC will create an Office of Innovation. In April 2019, FDIC officials told us that the agency is in the process of establishing the new office. Officials noted that the agency is still considering a number of key questions that will shape the office, and has not yet hired the necessary staff to answer those questions. We are closing this recommendation because FDIC has formally evaluated the feasibility and benefit of establishing an Office of Innovation.
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| National Credit Union Administration | The Chairman of the National Credit Union Administration should formally evaluate the feasibility and benefit of establishing an office of innovation or clear contact point, including at least a website with a dedicated email address. (Recommendation 11) |
NCUA officials told us that in August 2018 the agency established a working group to formally evaluate the feasibility of establishing a dedicated work unit to oversee and lead fintech and innovation efforts, including creating a website and monitoring a dedicated e-mail account. NCUA officials indicated that as of November 2019 the working group was deliberating key considerations related to establishing a dedicated work unit. In December 2020, NCUA established a Director of Financial Technology and Access and created a new work unit to serve as a dedicated point of contact to focus on fintech practices and needs in the credit union system and to work with credit unions and fintech companies to harness the opportunities that innovation provides.
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| Board of Governors | The Chair of the Board of Governors of the Federal Reserve System should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 12) |
The Federal Reserve has undertaken several actions to address this recommendation. The Federal Reserve has engaged with foreign and domestic regulatory counterparts and technology companies to study and develop its innovation technology supervision capabilities. Through office hours, Federal Reserve staff have also engaged with industry to stay updated on development in financial innovation. In 2021 and 2022, the Federal Reserve held two symposia, bringing together academics, industry experts and regulators to discuss various financial innovation topics. Additionally, through its TechLab, created in 2020, the Federal Reserve has studied the opportunities and risks associated with payment technologies, including central bank digital currencies, distributed ledger technologies, crypto assets, and technical standards. In December 2021, the Federal Reserve established the System Fintech Supervisory Program to identify, monitor, and assess the range of risks arising from supervised firms' fintech activities. The Program is responsible for fostering collaboration and coordination across Reserve Banks, among other things.
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| Commodity Futures Trading Commission | The Chairman of the Commodity Futures Trading Commission should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 13) |
CFTC has taken several actions to develop its knowledge-building initiatives related to financial innovation to address this recommendation. In particular, in 2022, CFTC created the Office of Technology Innovation (OTI), which was designed to be a think tank to help develop more nuanced understanding of emerging technology. OTI has held internal training events, called Commission Learning Circles, through which the office trains CFTC staff on various technology innovation topics. Externally, CFTC has also pursued prize competitions in order to stimulate innovation that can advance the agency's goals. CFTC hosted its first prize competition in 2020, called Project Streetlamp, which challenged innovators to leverage technologies to identify unregistered foreign entities potentially engaging in illegal activity. Additionally, CFTC has met with 300-400 fintech firms to help gain a better understanding of financial innovations, among other things.
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| Federal Deposit Insurance Corporation | The Chairman of the Federal Deposit Insurance Corporation should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 14) |
FDIC has taken actions to address this recommendation. In April 2019, FDIC met with two regulators that have adopted knowledge-building initiatives. Such initiatives may include regulatory sandboxes, pilot programs, proofs of concept, innovation competitions, and accelerators that provide fintech firms the opportunity to operate and share information with appropriate regulators. After conducting an evaluation, in late 2019 and early 2020, FDIC formally sought OMB approval to adopt two knowledge-building initiatives: innovation competitions and a pilot program.
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| National Credit Union Administration | The Chairman of the National Credit Union Administration should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 15) |
NCUA has taken action to address this recommendation. In January 2023, NCUA established a Fintech and Access Program, which oversees efforts related to the use of financial technology and innovation. Through this program, NCUA has pursued two knowledge-building efforts. First, NCUA is developing plans to host a series of three financial technology sprints, starting in the fourth quarter of 2024. NCUA's purpose in hosting these sprints includes encouraging and promoting the use of technology in providing products and services to existing members. Additionally, NCUA is considering an initiative to establish a financial technology accelerator program.
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| United States Securities and Exchange Commission | The Chairman of the Securities and Exchange Commission should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 16) |
SEC concurred and has taken action to address this recommendation. In October 2018, SEC launched FinHub, which serves as a resource for public engagement on SEC's fintech-related issues and initiatives. Additionally, FinHub serves as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems. FinHub staff stated that they hold bilateral meetings with financial regulators in other countries roughly twice a month and, among other items, discuss knowledge-building initiatives, such as regulatory sandboxes. FinHub staff also participate in an International Organization of Securities Commissions (IOSCO) Fintech Working Group, which comprises regulators from various countries and meets monthly to discuss fintech-related initiatives of each regulator. As part of a report issued by the IOSCO Fintech Working Group in April 2019, SEC conducted a study of various knowledge-building initiatives used by other regulators and whether those initiatives would be appropriate for SEC to employ, including reviews of regulatory sandboxes, pilot programs, proofs of concept, innovation competitions, and agency-led accelerators. For this study, SEC staff leveraged insight gained through conversations with internal and external stakeholders to understand various types of initiatives whether they would be applicable and valuable to the SEC. According to staff, SEC has also participated in Tech Sprints, similar to the Hackcelerator described in GAO-18-254, at the Massachusetts Institute of Technology and in the United Kingdom.
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