Thought Leadership

Regulatory Catch-Up

2024 - 4th Quarter Update

As FinTech companies grow and play a larger role in core financial activities, U.S. regulators are working to close oversight gaps, addressing crucial risks related to data security, consumer protection, and financial stability. This has led to a wave of new regulatory proposals and guidance in 2024, with a focus on areas such as FinTech-bank partnerships, consumer data protection, and operational resilience. The overarching goal is to integrate FinTechs into a regulatory framework that can adapt to emerging risks while still encouraging innovation.

Data Security

As FinTech companies operate in a digital-first environment, they handle vast amounts of consumer data to provide personalized financial solutions. However, the reliance on consumer data makes them prime targets for cyber threats, posing risks to both individual consumers and the broader financial ecosystem. Recognizing this, regulators are emphasizing data security as a core area of FinTech oversight. The Consumer Financial Protection Bureau (CFPB), for instance, recently introduced open banking regulations that empower consumers to move their data easily between providers while enforcing strict data protection standards on FinTechs. By mandating secure data transfer protocols, these rules aim to protect consumers from data breaches and misuse, ensuring that as FinTechs innovate, they do so with robust data safeguards in place.

Consumer Protection

Building on data security, the issue of consumer protection has taken center stage as FinTechs increasingly handle financial services traditionally reserved for regulated banks. Many consumers trust FinTechs with essential functions like deposits, digital wallets, and lending—services where transparency and reliability are paramount. To protect consumers, the Federal Deposit Insurance Corporation (FDIC) has proposed new rules aimed at enhancing the accountability of banks in their partnerships with FinTechs. Announced in September 2024, these rules require banks to maintain accurate records of accounts managed by FinTechs, ensuring consumers can access their funds in case of a bank failure. Additionally, recent enforcement actions, such as the Federal Trade Commission's (FTC) lawsuit against a FinTech app accused of misleading users about cash advance options, underscore regulators' commitment to safeguarding consumers against deceptive practices. Through these measures, regulators are working to ensure that FinTech innovations benefit consumers without compromising their rights and financial well-being.

Financial Stability

The interconnection between FinTechs and traditional financial institutions has broader implications for the stability of the financial system as a whole. As FinTechs take on roles once exclusive to banks—such as lending and payments—there is an increased risk of systemic instability if these entities operate without sufficient regulatory oversight. To mitigate such risks, the FDIC’s proposed regulations for bank-FinTech partnerships focus on ensuring that banks maintain accountability for their FinTech partners’ operations. This is particularly important to prevent “shadow banking” risks, where FinTechs might inadvertently circumvent the safeguards established for traditional banks. By bringing FinTech activities under a regulatory umbrella, the FDIC and other agencies aim to prevent potential crises that could arise from unregulated FinTech practices, ultimately supporting a stable and resilient financial ecosystem.

In summary, data security, consumer protection, and financial stability are interdependent goals that regulators are addressing through a series of targeted rules and guidance in 2024. These regulatory changes are designed not only to close oversight gaps but also to create a balanced environment where FinTech innovation can continue responsibly. As FinTech companies and banks adapt to these evolving standards, the financial landscape is expected to become safer and more resilient. By advancing a framework that protects consumers and upholds financial stability, regulators are ensuring that FinTech’s promise of inclusivity and innovation is fulfilled without sacrificing security or trust in the financial system.