(Interview taken at LEND360 conference on October 6th 2016.)
Illinois has been in the forefront of financial services industry and it has now emerged as a leader in the fintech industry as well. Illinois Companies in financial services space managed to attract over $1.1 billion Venture Capital funding in 2015. According to World Business Chicago, Illinois fintech industry generates $25.9 billion in gross regional product and 8,412 companies employ an estimated 123,156 people. All these stats point out to the growing clout of Illinois in the fintech industry. In particular, Chicago-headquartered Avant with its $325 million raise in 2015 is the prime example of fintech success.
Fintech companies need a stable and progressive regulatory regime if they are to disrupt the status quo. In an exclusive interview; Bryan Schneider, Secretary at Illinois Department of Financial and Professional Regulation explains how Illinois is the natural home for fintech companies due to a collaborative regulatory ecosystem. He plans to bring in further reforms that will encourage more fintech companies to establish themselves in Illinois. The state already has one of the highest number of state-regulated fintechs, banks and credit unions and same goes for non-depository institutions like mortgage banking, origination, servicing etc. Because of its flexible, reasonable, and balanced regulatory framework, Illinois has the most depository institutions of any state and the state plans to help emerging start-ups to encourage economic activity in Illinois. The regulator is insistent on an insured depository model so as to ensure that all players are participating via a safe setup. The state and the regulator are able to take a case-by-case view on the basis of a business plan as mandated by the FDIC.
The secretary also appreciates the time taken for approvals and passing relevant regulation can be sometimes death knell for a young startup. Bryan not only understands regulatory technology and its ability to unshackle growth at young fintech start-ups but was previously on the board of entity administering NMLS. The system is one of the major reasons for growth in securitization in the mortgage industry. He lets on that NMLS is also contemplating to expand the platform to include license and regulation for other types of financial service providers. The ultimate aim is to create a one-stop shop for all regulatory requirements. What is required is an ongoing continuous process, where innovators need to pitch in and help regulators all across the nation in bringing uniformity throughout the system.
He feels states should use UK’s Financial Conduct Authority (FCA) as a working model; FCA is able to bring government and the industry on the same page, whereas in the US every state has a different answer for the same question. He feels better coordination and uniformity is required among the states.
It is the worst kept secret, but everyone knows federal and state agencies just don’t get along at all and its repercussion is endured by the stakeholders. The ideal scenario would be federal and state agencies joining hands to work together to bring uniformity and harmonization among all the regulators. In the long run, state regulators should listen to the needs and wants of the innovators and try to inculcate that in the system.
Another option that can be considered is a “Regulatory Sandbox”, it is a universal truth that there cannot be a perfect solution for everything every time. So by creating a pilot program (i.e. sandbox) it will allow innovators and regulators from the different states to pitch in at one common platform. The secretary affirms that many of the state regulators share the same view.
Fintech advisory counsel
To promote diversity of opinions, Illinois state regulators are considering building a fintech advisory counsel, such kind of counsels are generally present on banking side and are run by both state and federal agencies. As IT is always evolving, it is need of the hour in the fintech space. But the real challenge is how to develop the advisory mechanism for it to be responsive; once a year meeting would not serve the purpose of the industry. Again the Secretary believes that technology holds the key. By conducting sessions through a dedicated webinar and online chat platform, people will be able to identify the problems and can work together to find the solutions.
Another technology gaining popularity is blockchain. It is a distributed database that maintains the continuously growing list of records which are secured from tampering and revision. Till now it is mostly used in virtual currency but it can be utilized in other financial areas like mortgage lending. It would help to create a complete mortgage file in the blockchain. Regulators and private players can then rely on that data and not worry about leaving out any details. Payment tech has also grown to the extent that the ubiquitous financial instrument the “cheque” is in danger of going extinct in the new digital first millennial world. Bryan believes that payment tech regulations are balanced but he is still in favor of helping resolve any systematic issue for the growth of payment tech start-ups.
The secretary believes that communication is the key to creating a common and a balanced framework for the entire industry. Online forums have the power to ensure that every entrepreneur and business owner- big or small is heard. Illinois has always been the hotbed of financial technology with world leading futures and commodity exchanges. The Illinois regulators acknowledge fintech is the future and are rolling out their red carpet to make it the cradle of fintech innovation.
Author: Heena Dhir and George Popescu