Five legal threats for fintech’s hottest start-ups

Five legal threats for fintech’s hottest start-ups

Nearly 20 years ago, the launch of online payments giant PayPal shook the financial services industry.  Now, a new generation of financial technology or “fintech” companies is once again breaking down the oversized doors of the conservative banking business. From facilitating loans to wealth management to mobile payments to tax preparation, fintech companies are attacking traditional — and often inefficient — practices that shut out as many as two billion consumers (most outside the United States) from the most basic financial services.

The recent growth of fintech start-ups is impressive.  Four of the top 20 companies in Inc. magazine’s latest list of the 500 fastest-growing private companies are financial services start-ups, who hold 27 slots on the list overall. In data collected by KPMG, thirteen fintech startups are valued at over $1 billion, achieving the status Silicon Valley investors refer to as a “unicorn” because of their rarity. These include Square (mobile payments), Prosper (peer-to-peer lending), Shopify (retail sales management) and Credit Karma (financial management).

Incumbent bankers are worried, and rightly so. In a recent letter to shareholders of JP Morgan Chase, America’s largest bank, chief executive Jamie Dimon warned investors that “Silicon Valley is coming.” Goldman Sachs, according to Inc., “estimates that upstarts could steal up to $4.7 trillion in annual revenue” from incumbent banks, a potential payday that is driving venture investors to pour nearly $25 billion annually into the sector.

In addition to the potential disruption of Bitcoin and other payment innovations, Dimon acknowledged the speed and flexibility of “hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking,” particularly those that use big data to make loans more efficiently than traditional banks. For his part, Dimon believes his company can make its own investments, or, where necessary, partner with the disruptors.

This is a story being played out in many industries. But more than any other, the winners and losers in the “big bang” disruption of financial services will be determined by how government regulators apply laws that may go back a hundred years or more. From commercial banking to insurance to payment processing to investment management, traditional financial services are subject to intensive regulation from a wide variety of global, federal, and state overseers.

On the one hand, that regulation imposes considerable costs and innovation delays from which the start-ups are largely immune.  But those same rules can also provide potent protections for incumbents, keeping the start-ups out of markets that require licensing and other government approvals before serving customers.

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