Industry / Trends

Regulators Walk Fine Line Between Protecting Consumers, Stifling FinTech Innovation

Dots Shape

i2c president, Jim McCarthy, recently joined PYMNTS CEO, Karen Webster, for a discussion to hear his take on how regulators and legislators are taking an extremely close look at how Big Tech, banks and fintechs are operating in the financial services industry. This blog post is republished from a PYMNTS.com/i2c Inc. interview originally published on PYMNTS.com


The regulators sharpen their gaze, the legislators sharpen their pencils and bang the gavels – and Big Tech, banks and fintechs are in the crosshairs, perhaps more so now than ever before.

As Jim McCarthy, president of i2c, told PYMNTS‘ Karen Webster, there’s a fine line between getting rules in place to promote healthy competition and unintentionally hampering innovation through regulatory myopia. Competition through policy is no easy task, especially when financial services are involved.

“Banks are an easy target,” McCarthy said. “They always have been and always will be.”

Right now, all manner of agencies are regulators are looking at card fees, on what the Consumer Financial Protection Bureau (CFPB) terms “junk fees” on late and all manner of business practices. But, he noted, there’s a real risk that the powers that be – on Capitol Hill and elsewhere – will go too far, crimping innovation and benefits that are funded by new revenue streams.

The sectors under the microscope, from payday lending to revolving cards and buy now, pay later (BNPL) offerings, he said, provide tremendous liquidity to consumers around the globe.

The Need to Price for Risk

At the end of the day, the lenders are pricing for risk, and fees and interest rates are the cost of doing business. If banks are not allowed to price risk with some degree of freedom, he predicted, they won‘t extend credit, and people will be pushed out of the mainstream markets toward much less attractive options.

And, he contended, the scrutiny might be aimed at the wrong firms, as some of the most egregious credit card interest rates are being levied by firms that issue private-label cards.

The recent race by big banks to cancel or modify overdraft fees stands as an example of how market forces can spur wholesale changes – FinTechs have been offering competitive checking and savings products with no fees – and by the specter of policymakers’ increased oversight.

But the loss of overdraft fees and perhaps legislation that caps on how the banks can do business may lead to lower authorization rates.

Competition and the ability to innovate have given rise to the Credit Karmas and Credit Sesames of the world, the firms that have helped individuals and families build credit and gain access to a range of financial services.

The saber-rattling on the Hill can “make for good political theater – but then again there can be unintended consequences, and credit is a wonderful instrument for most people,” said McCarthy, who added, “I don‘t know what legislation solves for without breaking other things.”

The Metaverse

Turning his attention to another sector that has been buffeted about by regulators the world over, it may seem that any merger of any consequence, at least when it comes to Big Tech, is poised to get shot down – or at least get weighed down.

Except one, by Microsoft – for Activision, of course.

The fact that the deal, at least thus far, is moving right along is a testament to Microsoft CEO Satya Nadella’s move to make the tech giant a “friendlier” company, McCarthy said, at least in terms of how the government perceives the firm. We‘re well past the days when (think back to the browser wars in the 1990s on this one) Microsoft was viewed as public enemy No. 1.

Fast forward to today, and Google, Apple and Facebook have supplanted Microsoft as the firms that are under scrutiny. As McCarthy quipped about Microsoft, “I don‘t know if they have better lobbyists, but somehow they have become the ‘friendly‘ tech company in all of this.”

As to the contention that the Microsoft-for-Activision deal is tied to the metaverse, McCarthy posited that the buyout is actually a deal that plays on strengths that Microsoft has steadily been cultivating over the years – namely, gaming.

Lagging Behind

Past is prologue as regulators were arguably late recognizing the impact of Facebook’s buyout of Instagram and Whatsapp. (“No one cared,” said McCarthy.)

But he said it’s clear that the government does not realize what happened with the pandemic – and the enormous growth of screen time, where we‘re all on our devices now. In fact, revenues from the online gaming vertical, and time spent on gaming, outstrips the movies.

And as the metaverse takes shape, he said, now the tech behemoth has a place at the table, largely on the strength of the Xbox, having viewed it as an investment for the future. Not to be counted out, YouTube has gaming channels, Amazon’s got Twitch, and Facebook’s buying up and constructing patent portfolios. We‘re in a world where most tech players mix hardware and software, where Microsoft is cementing a niche with infrastructure and Azure.

But the regulators, he said, are “just focused on what they‘ve missed in the past. They‘re prosecuting the Instagram acquisition as opposed to what’s right in front of them.”

Staying Ahead of the Curve

Asked by Webster about his wish list for where legislators and regulators should direct their attention, McCarthy said that the cryptocurrency space urgently needs guardrails.

Crypto regulation and frameworks would be useful. Meta’s reported winding down of its Diem project points out that as the metaverse takes shape, there will still be a need to purchase/monetize and pay over those networks.

As he said of Diem, “I thought the idea was a good one inside the closed loop, and the need doesn‘t go away.” A framework that is easily digestible and understood can help ensure that companies operate well within their jurisdictions and tackle anti-money laundering (AML) and know your customer (KYC) best practices.

Across all of these sectors, from Big Tech to banking, said McCarthy, “regulators are a day late and more than a few dollars short on where the world is headed.”

About Jim

As President of i2c, Jim McCarthy oversees teams working with clients, partners and prospects. An industry veteran, he brings over 20 years of experience and knowledge in financial services across all stakeholders in the industry. Most recently, Jim served as a strategic consultant and advisor to many Silicon Valley fintech startups. Prior to consulting, he worked at Visa for eighteen years. During his last position as Visa's EVP of Innovation and Strategic Partnerships, he was responsible for the development of their product and technology roadmap, innovation efforts, and led business development for strategic partnerships. He was also responsible for the introduction of both 3-D Secure and the Visa Token Service, which have become industry standards, as well as contributed to the launch of Apple Pay®