Financial Innovation: “Fintech”
link to page 1 
Updated November 23, 2016
Financial Innovation: “Fintech”
Recent advances in the capability and use of digital
financial technology is whether the existing legal and
technology are affecting the way many financial services
regulatory framework appropriately facilitates the
are delivered by companies and used by consumers.
realization of potential benefits while adequately protecting
Innovations in financial technology—or fintech—
society from the risks. While the technologies in question
potentially could increase the efficiency and availability of
may be numerous and varied, there are common areas of
financial services, but may involve potential risks. Congress
analysis that can help address relevant policy concerns.
and regulators may face questions about how the benefits
Potential Opportunities
should be balanced against the risks. This In Focus gives a
broad overview of the issues commonly involved with
Technology has improved the production of goods and
innovative financial technology. It does not cover specific
services in virtually every industry, including finance.
innovations in detail, but instead provides a framework for
Fintech may be able to improve or replace the way certain
evaluating any innovation.
financial services are provided, potentially resulting in more
efficiency and increased customer and small business
Background
access.
Overview. “Fintech” usually refers to technologies with the
potential to alter the way certain financial services are
Efficiency. Fintech supporters assert that the traditional
performed. Table 1 provides a few examples. Some
processes used to provide certain financial services are
encumbered by legacy systems and have become outdated.
sources indicate that more than 4,000 fintech companies
Automation can replace employees, and digital, wireless
operated in the U.S. and the UK in 2015, and more than $24
technology can replace physical systems and infrastructure.
billion had been invested in fintech companies since 2010.
Algorithmic analysis of big data may be better able to
These numbers do not include internal investments made by
allocate capital across the financial system than traditional
incumbent financial institutions.
human assessments. Eliminating inefficiencies can reduce
Table 1. Examples of “Fintech”
the prices and increase the availability of financial services.
Financial Product or
Access. Fintech’s potential ability to increase efficiency
Innovation
Service Affected
may also increase consumer and small business access to
financial products and services. Reduced costs are likely to
Marketplace Lending
Commercial lending
reduce prices, and some customers that previously found
services too expensive could enter the market. Some that
Crowdfunding
Equity issuance
previously did not have access to funding—due to
Blockchain Ledgers
Payment and settlement
misinformation or lack of information about the risk of
losses—could potentially secure funding.
Robo-Advising
Wealth management
Also, as financial services are increasingly delivered online
Algorithmic High-Speed
Securities trading
and wirelessly, fintech may allow businesses to reach new
Trading
customers that were previously restricted by geographic
“RegTech”
Regulatory compliance
remoteness or unfamiliarity with products and services.
Increased accessibility may be especially beneficial to
“Big Data”
Many services; cross-
traditionally underserved groups, such as low-income,
cutting
minority, and rural populations.
Source: CRS.
Potential Risks
Notes: This is a non-exhaustive, illustrative list.
Risk taking is inherent in finance, and not a problem per se.
Technology has continuously changed finance throughout
However, losses can be problematic when parties do not
history—from using cuneiform writing to record debts on
understand the nature and magnitude of risks they assumed,
clay tablets to using mobile phones to deposit checks. Some
as unexpected losses can inflict undue harm on individuals,
innovations create opportunity to improve social and
companies, and the financial system. Innovation, by
economic outcomes; some create risks of undue or
definition, is relatively new and untested, and so certain
observers are concerned that it increases the risk of these
unexpected financial loss and instability; and many do both.
negative outcomes.
Policy issues. Fintech generally does not offer wholly new
products or services, but rather it changes the way
Unexpected losses. When an innovation has only a brief
traditional products and services are delivered. These
history of significant involvement in the financial system, it
existing products and services are subject to a variety of
can be hard to predict outcomes. Certain technologies may
federal and state laws and regulations. A possible issue for
not in the end allocate funds, assess risks, or otherwise
policymakers when evaluating a particular emerging
https://crsreports.congress.gov
Financial Innovation: “Fintech”
function as efficiently and accurately as intended, and so
regulations—may be a concern in this area. Fintech
generate unexpected losses.
potentially could provide an opportunity for companies to
claim they are not subject to certain regulations because of
Consumer harm. Proponents of certain innovations will
a superficial difference between how they operate
sometimes expressly state that the aim is to bring a service
compared to traditional companies.
or product directly to consumers and eliminate an
inefficient “middle-man.” However, this middle-man may
Are appropriate cybersecurity practices implemented?
be an experienced financial institution or professional that
As activity increasingly utilizes digital technology,
is able to explain and advise consumers on financial
sensitive data are generated. On one hand, data can be used
products and their risks. Also, new fintech startups may be
to accurately assess risks and ensure customers receive the
inexperienced in complying with consumer protection laws.
best products and services. However, data can be stolen and
These characteristics may increase the likelihood that
used inappropriately, and there are concerns over privacy
consumers engage in a financial activity and take on risks
issues. This raises questions over ownership and control of
that they do not fully understand.
the data—including to the rights of consumers and the
Policy and Regulation Questions
responsibilities of companies in accessing and using data—
and whether companies that use and collect data face
Certain policy considerations—such as the merits of tax
appropriate cybersecurity requirements.
incentives, government investment, and decreasing barriers
to capital raising—are related to technology and tech
Startups and Incumbents
companies generally. However, this In Focus examines
Either tech-focused start-ups or established financial
financial regulation issues, which are specific to financial
institutions could be the main purveyors of a new
technology.
technology. Each has different advantages and regulatory
considerations.
Are current regulations appropriate? Technology in
finance largely involves reducing the cost of producing
New tech-focused companies may be more adaptable and
existing products and services. The existing regulatory
responsive to technological and market changes relative to
structure was developed to address risks from these
incumbent institutions. These new companies typically
financial activities. It is possible that a new innovation can
focus on a relatively narrow set of services in which they
be integrated into the regulatory system with little
have identified inefficiency. Also, small, nonbank firms
disruption or policy action. For more information on
may not be subject to as much existing regulation and
financial regulation see CRS Report R44918, Who
oversight facing large traditional institutions. On the other
Regulates Whom? An Overview of the U.S. Financial
hand, start-ups may have difficulty gaining customers and
Regulatory Framework, by Marc Labonte.
securing funding. In terms of regulation, start-ups may lack
experience adhering to financial regulations, and the
Do regulations need to be altered? Some regulations may
compliance costs for smaller companies may be an
be stifling innovation and might be relaxed. On the other
imposing barrier to market entry and continued operation.
hand, there may be regulatory gaps that warrant stronger
regulation.
In contrast, existing financial institutions generally have
access to large numbers of customers relative to startups.
Introducing new technology requires innovators to face
Large firms may also be able to invest large amounts of
much uncertainty over success or failure, potentially
internal resources in new technologies or to acquire smaller
impeding the development and introduction of beneficial
fintech companies. Large, existing firms may face the
innovation. Regulation plays a part in this dynamic in two
opposite regulatory tradeoff that startups do; they could
ways. One, companies incur costs to comply with
have the expertise and resources to dedicate to compliance,
regulations. Two, it is sometimes unclear how regulators
but may face a greater existing regulatory burden.
will treat the innovation once it is brought to market.
CRS Resources
A potential solution being used in other countries, including
CRS Report R44614, Marketplace Lending: Fintech in
the UK, is to provide the option for companies to introduce
Consumer and Small-Business Lending, by David W.
a technology in a “regulatory sandbox” wherein companies
Perkins
that meet certain requirements can work with regulators and
not have to immediately be in total compliance with the full
CRS Report R43339, Bitcoin: Questions, Answers, and
range of applicable regulations. However, whether this
Analysis of Legal Issues, by Edward V. Murphy, M.
approach is appropriate for the U.S. and what form it should
Maureen Murphy, and Michael V. Seitzinger
take is debatable. Skeptics express concerns that such a
program could weaken consumer protections and reduce the
CRS Report R43608, High-Frequency Trading:
incentive for institutions to develop well-designed pilot
Background, Concerns, and Regulatory Developments, by
programs for new services.
Gary Shorter and Rena S. Miller
Some observers are concerned that existing regulations may
David W. Perkins, Analyst in Macroeconomic Policy
not adequately address risks posed by new companies,
IF10513
systems, and methods. Regulatory arbitrage—conducting
business in a way that circumvents unfavorable
https://crsreports.congress.gov
Financial Innovation: “Fintech”
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10513 · VERSION 3 · NEW
Updated November 23, 2016
Financial Innovation: “Fintech”
Recent advances in the capability and use of digital
financial technology is whether the existing legal and
technology are affecting the way many financial services
regulatory framework appropriately facilitates the
are delivered by companies and used by consumers.
realization of potential benefits while adequately protecting
Innovations in financial technology—or fintech—
society from the risks. While the technologies in question
potentially could increase the efficiency and availability of
may be numerous and varied, there are common areas of
financial services, but may involve potential risks. Congress
analysis that can help address relevant policy concerns.
and regulators may face questions about how the benefits
Potential Opportunities
should be balanced against the risks. This In Focus gives a
broad overview of the issues commonly involved with
Technology has improved the production of goods and
innovative financial technology. It does not cover specific
services in virtually every industry, including finance.
innovations in detail, but instead provides a framework for
Fintech may be able to improve or replace the way certain
evaluating any innovation.
financial services are provided, potentially resulting in more
efficiency and increased customer and small business
Background
access.
Overview. “Fintech” usually refers to technologies with the
potential to alter the way certain financial services are
Efficiency. Fintech supporters assert that the traditional
performed. Table 1 provides a few examples. Some
processes used to provide certain financial services are
encumbered by legacy systems and have become outdated.
sources indicate that more than 4,000 fintech companies
Automation can replace employees, and digital, wireless
operated in the U.S. and the UK in 2015, and more than $24
technology can replace physical systems and infrastructure.
billion had been invested in fintech companies since 2010.
Algorithmic analysis of big data may be better able to
These numbers do not include internal investments made by
allocate capital across the financial system than traditional
incumbent financial institutions.
human assessments. Eliminating inefficiencies can reduce
Table 1. Examples of “Fintech”
the prices and increase the availability of financial services.
Financial Product or
Access. Fintech’s potential ability to increase efficiency
Innovation
Service Affected
may also increase consumer and small business access to
financial products and services. Reduced costs are likely to
Marketplace Lending
Commercial lending
reduce prices, and some customers that previously found
services too expensive could enter the market. Some that
Crowdfunding
Equity issuance
previously did not have access to funding—due to
Blockchain Ledgers
Payment and settlement
misinformation or lack of information about the risk of
losses—could potentially secure funding.
Robo-Advising
Wealth management
Also, as financial services are increasingly delivered online
Algorithmic High-Speed
Securities trading
and wirelessly, fintech may allow businesses to reach new
Trading
customers that were previously restricted by geographic
“RegTech”
Regulatory compliance
remoteness or unfamiliarity with products and services.
Increased accessibility may be especially beneficial to
“Big Data”
Many services; cross-
traditionally underserved groups, such as low-income,
cutting
minority, and rural populations.
Source: CRS.
Potential Risks
Notes: This is a non-exhaustive, illustrative list.
Risk taking is inherent in finance, and not a problem per se.
Technology has continuously changed finance throughout
However, losses can be problematic when parties do not
history—from using cuneiform writing to record debts on
understand the nature and magnitude of risks they assumed,
clay tablets to using mobile phones to deposit checks. Some
as unexpected losses can inflict undue harm on individuals,
innovations create opportunity to improve social and
companies, and the financial system. Innovation, by
economic outcomes; some create risks of undue or
definition, is relatively new and untested, and so certain
observers are concerned that it increases the risk of these
unexpected financial loss and instability; and many do both.
negative outcomes.
Policy issues. Fintech generally does not offer wholly new
products or services, but rather it changes the way
Unexpected losses. When an innovation has only a brief
traditional products and services are delivered. These
history of significant involvement in the financial system, it
existing products and services are subject to a variety of
can be hard to predict outcomes. Certain technologies may
federal and state laws and regulations. A possible issue for
not in the end allocate funds, assess risks, or otherwise
policymakers when evaluating a particular emerging
https://crsreports.congress.gov
Financial Innovation: “Fintech”
function as efficiently and accurately as intended, and so
regulations—may be a concern in this area. Fintech
generate unexpected losses.
potentially could provide an opportunity for companies to
claim they are not subject to certain regulations because of
Consumer harm. Proponents of certain innovations will
a superficial difference between how they operate
sometimes expressly state that the aim is to bring a service
compared to traditional companies.
or product directly to consumers and eliminate an
inefficient “middle-man.” However, this middle-man may
Are appropriate cybersecurity practices implemented?
be an experienced financial institution or professional that
As activity increasingly utilizes digital technology,
is able to explain and advise consumers on financial
sensitive data are generated. On one hand, data can be used
products and their risks. Also, new fintech startups may be
to accurately assess risks and ensure customers receive the
inexperienced in complying with consumer protection laws.
best products and services. However, data can be stolen and
These characteristics may increase the likelihood that
used inappropriately, and there are concerns over privacy
consumers engage in a financial activity and take on risks
issues. This raises questions over ownership and control of
that they do not fully understand.
the data—including to the rights of consumers and the
Policy and Regulation Questions
responsibilities of companies in accessing and using data—
and whether companies that use and collect data face
Certain policy considerations—such as the merits of tax
appropriate cybersecurity requirements.
incentives, government investment, and decreasing barriers
to capital raising—are related to technology and tech
Startups and Incumbents
companies generally. However, this In Focus examines
Either tech-focused start-ups or established financial
financial regulation issues, which are specific to financial
institutions could be the main purveyors of a new
technology.
technology. Each has different advantages and regulatory
considerations.
Are current regulations appropriate? Technology in
finance largely involves reducing the cost of producing
New tech-focused companies may be more adaptable and
existing products and services. The existing regulatory
responsive to technological and market changes relative to
structure was developed to address risks from these
incumbent institutions. These new companies typically
financial activities. It is possible that a new innovation can
focus on a relatively narrow set of services in which they
be integrated into the regulatory system with little
have identified inefficiency. Also, small, nonbank firms
disruption or policy action. For more information on
may not be subject to as much existing regulation and
financial regulation see CRS Report R44918, Who
oversight facing large traditional institutions. On the other
Regulates Whom? An Overview of the U.S. Financial
hand, start-ups may have difficulty gaining customers and
Regulatory Framework, by Marc Labonte.
securing funding. In terms of regulation, start-ups may lack
experience adhering to financial regulations, and the
Do regulations need to be altered? Some regulations may
compliance costs for smaller companies may be an
be stifling innovation and might be relaxed. On the other
imposing barrier to market entry and continued operation.
hand, there may be regulatory gaps that warrant stronger
regulation.
In contrast, existing financial institutions generally have
access to large numbers of customers relative to startups.
Introducing new technology requires innovators to face
Large firms may also be able to invest large amounts of
much uncertainty over success or failure, potentially
internal resources in new technologies or to acquire smaller
impeding the development and introduction of beneficial
fintech companies. Large, existing firms may face the
innovation. Regulation plays a part in this dynamic in two
opposite regulatory tradeoff that startups do; they could
ways. One, companies incur costs to comply with
have the expertise and resources to dedicate to compliance,
regulations. Two, it is sometimes unclear how regulators
but may face a greater existing regulatory burden.
will treat the innovation once it is brought to market.
CRS Resources
A potential solution being used in other countries, including
CRS Report R44614, Marketplace Lending: Fintech in
the UK, is to provide the option for companies to introduce
Consumer and Small-Business Lending, by David W.
a technology in a “regulatory sandbox” wherein companies
Perkins
that meet certain requirements can work with regulators and
not have to immediately be in total compliance with the full
CRS Report R43339, Bitcoin: Questions, Answers, and
range of applicable regulations. However, whether this
Analysis of Legal Issues, by Edward V. Murphy, M.
approach is appropriate for the U.S. and what form it should
Maureen Murphy, and Michael V. Seitzinger
take is debatable. Skeptics express concerns that such a
program could weaken consumer protections and reduce the
CRS Report R43608, High-Frequency Trading:
incentive for institutions to develop well-designed pilot
Background, Concerns, and Regulatory Developments, by
programs for new services.
Gary Shorter and Rena S. Miller
Some observers are concerned that existing regulations may
David W. Perkins, Analyst in Macroeconomic Policy
not adequately address risks posed by new companies,
IF10513
systems, and methods. Regulatory arbitrage—conducting
business in a way that circumvents unfavorable
https://crsreports.congress.gov
Financial Innovation: “Fintech”
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10513 · VERSION 3 · NEW