The U.S. Government Accountability Office (GAO) issued a report last month detailing the regulatory challenges currently facing the fintech sector. The agency found that existing laws and regulations may not be adequate to mitigate the risks posed by the increasingly widespread usage of fintech products and services. The report, which was prepared in response to a request from Congress, covers four major fintech product and service areas—payments, lending, wealth management and distributed ledger technology.
 
GAO last conducted a study of the fintech marketplace in 2011, in a report that focused exclusively on peer-to-peer lending sites. In the five years since, the fintech marketplace has grown significantly and branched out into new areas, including small business lending.

The new report was requested by Sens. Jeff Merkley, D-Ore.; Sherrod Brown, D-Ohio; and Jeanne Shaheen, D-N.H.

“Observers have questioned what the appropriate role of federal regulators should be in supervising fintech companies that provide small business capital and consumer lending,” the Senators wrote. “[I]t is possible that the current online marketplace for small business loans falls between the cracks for federal regulators. As we saw during the crisis, gaps in understanding and regulation of emerging financial products may result in predatory lending, consumer abuse or systemic issues.”

 “We are very interested in ensuring that fintech provides credit to small businesses and consumers in a way that prevents abusive practices while expanding economic opportunity. To that end, we are requesting that the GAO provide information,” the Merkley and Shaheen added.

In its report, GAO made numerous recommendations to regulators with the hope of “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 [abroad].”

According to GAO: "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."

The report also found that the complexity of U.S. financial law may be hindering fintech innovation in the U.S.

Because fintech companies have to comply with different states’ laws and regulations, development of new products and services can be prohibitively expensive.  To help resolve this problem, seven states have agreed to simplify the way financial technology companies can apply for licenses.  The states of Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington, recently will recognize each other’s findings when assessing the suitability of companies applying for money service business licenses. While the goal is to have all 50 states participate in this process by 2020, at the moment it is limited to fintech entities engaged in money services businesses.