Regulating Fintech in Canada and the United States: Comparison, Challenges and Opportunities (2020)

Abstract

The rise of fintech has attracted increased attention from investors, entrepreneurs, existing financial-sector participants and regulators. Fintech has many potential benefits and it could transform banking, lending, payments, investing and other financial services through the internet, smartphones, artificial intelligence, blockchain and cryptocurrencies, and many other current and future digital technologies. Such benefits include lower costs, an enhanced scope of products and services, and the possibility of reaching and offering previously underserved customers greater credit and financial services. Policy makers in Canada and the U.S. should encourage these positive developments, foster innovation and competition, and reduce barriers to entry, while ensuring adequate safeguards are established for the stability of the financial system and necessary consumer protections are in place.The market environment and regulatory approaches in Canada and the U.S. are similar but not uniform. Each jurisdiction faces different challenges and opportunities. The speed and complexity that this new wave of fintech has expanded throughout North America and the world, in just a few years, has created regulatory challenges for authorities in the U.S. and Canada. Fintech has many potential risks. If this revolution is not managed well, the results could be serious, including the risk of destabilizing the financial system.In the U.S., fintech has the potential for displacing banks and established financial institutions. There is also significant regulatory fragmentation and a growing desire for "principles-based" regulation -away from the "rules" based frameworks which generally characterize U.S. financial oversight. Several federal 1 and state regulators have instituted "regulatory sandboxes," which are an innovation that allows fintech firms to experiment with financial products and services in a limited and supervised way with potential relief from otherwise strict rules.Canada's financial regulatory structure is principles-based, and there is a healthy regulatory sandbox in securities jurisdiction. In Canada, due to high barriers to entry, and regulatory fragmentation for some fintech market segments not under federal oversight, fintech has been heavily driven by existing big banks. These incumbents often partner with upstart fintech firms to develop products and services inside the bank's existing infrastructure to enhance customer service and operations. As a result, new consumer-facing fintech firms in Canada are less prominent than in the U.S., which enjoys far greater levels of funding for fintech start-ups.Fintech creates new types of risks. When banks internally adopt fintech innovations into their existing processes and services there is cyber-risk and customer data vulnerability through new interface technologies, and risk to the stability of the financial system if more riskier borrowers are quickly approved for credit using algorithmic processes. Banks partnering with technology companies must also monitor and mana...

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