Federalism and federalization on the fintech frontier

Financial technology, or fintech, is the application of technology to the provision of financial services. Although fintech is not new, the ways in which people can transmit money, access credit, and invest have recently changed significantly. Industries that were relatively stable are now facing an influx of new competitors leveraging technology to provide more access, more efficiency, and better value than the status quo. Because these new methods and market participants often do not easily fit in the existing regulatory boxes, the changes are straining existing regulatory assumptions, including the issue of whether and how the states or federal government should regulate fintech firms.

Although these enhanced financial services have arisen to meet consumer need, their regulatory status threatens their progress. Many fintech firms are regulated on a state-by-state basis even though their transactions are interstate, and they compete with firms that enjoy more consistent rules through federal preemption. This dynamic can harm efficiency, competitive equity, and political equity. This paper looks at developments in marketplace lending, money transmission, and online sales of securities in an attempt to identify situations in which greater federalization of the rules may be justified. It also considers a situation in which the federal government should abstain from intervening, even if it has the right to do so. Whether the states or federal government should take the lead in regulating fintech is an emerging and important question whose answer will affect the financial lives of consumers and investors. This paper seeks to begin a conversation about how we determine whether federalism or federalization is appropriate.