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Regulating Fintech for Financial Inclusion

Globally, 1.7 billion people, or roughly 21% of the world population, are unbanked, meaning they lack access to basic financial services such as a simple checking or savings account or a comparable mobile version. ((World Bank, Global Findex Database 2017 35, )) Nearly all unbanked individuals live in the developing world, with the largest portion living in China (225 million, 13%), India (190 million, 11%), Pakistan (100 million, 6%), and Indonesia (95 million, 6%). ((Id.))

Financial technology, or “fintech,” is a growing sector of the world economy and is changing the way we do business around the world. ((Alex Lazarow, How Fintech is eating the world, Forbes, (July 31, 2019 at 9:24 PM), CBC Insights identifies 48 fintech startup companies with valuation greater than $1 billion – so called unicorns – with an aggregate value of $187 billion USD. ((A unicorn is a startup company valued at more than $1 billion USD. CBInsights, Global Fintech Report Q2 2019 16 (2019) Fintech, a common but inexact shorthand for any technology in finance, refers to a “wide spectrum of technological innovations which impact a broad range of financial activities, including payments, investment management, capital raising, deposits and lending, insurance, regulatory compliance, and other activities in the financial services space.” ((William Magnuson, Regulating Fintech, Vanderbilt Law Review, 1167, 1174 n.16 (quoting Nat’l Econ. Council, A Framework for Fintech, WHITE HOUSE 2 (Jan. 2017), Familiar U.S. payment processing services such as Square, Venmo, and Stripe, crowdfunding platforms like Kickstarter, robo-advisors and retail investor tools such as Robinhood and Acorns, and Bitcoin and other cryptocurrencies are all part of the fintech ecosystem. ((Alyssa Schroer, 38 Fintech Companies and Startups to Keep in Your Back Pocket, Built In, (Updated August 22, 2019),

Fintech is rapidly changing the way we engage with our money by “increasingly providing services directly to consumers. . . . [F]intech innovation has lowered the barriers to entry, expanded access to financial services, and challenged traditional understandings about how finance works.” ((Magnuson, supra note 5at 1174.))

With access to financial institutions and markets comes access to credit, risk management, financial planning services, and improved standards of living through wealth creation, economic growth, and greater financial freedom. ((Rong Chen & Raian Divanbeigi, Can Regulation Promote Financial Inclusion?, World Bank Group 2 (2019).)) Efforts to remove barriers and make services more accessible and affordable to individuals and businesses regardless of income levels, are generally referred to as financial inclusion. ((See World Bank, Financial Inclusion Overview, (Defining financial inclusion as “individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.).)) For example, in many parts of the world the traditional brick and mortar bank is insufficient to provide services; self-reported barriers to account ownership include not enough money, no perceived need for an account, high expense of an account, a family member already has an account, distance or transportation barriers, lack of necessary documentation, and/or lack of trust. ((World Bank, supra note 1 at 39-41.)) Technology offers a new opportunity to move toward to full financial inclusion by dramatically restructuring how people manage and transact with their money. ((McKinsey Global Institute, Digital Finance for All: Powering Inclusive Growth in Emerging Economies, (2016),

Digital currency and e-payments are one of the most notable changes in the developed and developing world. In Kenya, the payment system M-Pesa which provides mobile banking access through standard text message interface (no smart phone required), is now accessed by 96% of Kenyan households and replicate models are appearing worldwide. ((Stella Dawson, Why does M-Pesa Lift Kenyans Out of Poverty?, CGAP Blog (Jan 18, 2017), One study estimated access to M-Pesa moved an estimated 194,000 or nearly 2% of the Kenyan households out of poverty with an even more pronounced impact on female-headed households. ((Tavneet Suri and William Jack, The long-run poverty and gender impacts of mobile money, 354 Science 1288 (2016)).) This is a powerful example of the transformation wrought by access to more freely move money.

Barriers can take many forms and are often concurrent. India tackled lack of identification with a unique biometric system called Aadhaar coupled with a “payment banks” that may only engage in low risk investing with deposits and are prohibited from lending. ((Center for Global Development, Financial Regulations for Improving Financial Inclusion, 19 (2016)

Some countries with less developed financial systems may not have an established credit rating agency, meaning lenders do not have an efficient, uniform way to access risk and credit-worthiness. ((Numbers Game: A Brief History and Future of Credit Scores, The Economist, July 6, 2019, Efforts to create alternative credit models to assess risk by using regular bank deposit history or utility payments are gaining traction and advocates believe this will be a significant step to increasing financial inclusion. ((Rodrigo Santabria, To Bank the Unbanked, Start Using Alternative Data, Center for Financial Inclusion(Aug. 14, 2018) )) Startup companies are beginning to enter this space by assessing credit worthiness using digital footprints and activity. ((Numbers Game: A Brief History and Future of Credit Scores, supra note 13 at 55-56.)) For instance, US-based Tala offer loans ranging from $10-$500 directly to their customers in India, Mexico, the Philippines, and Kenya based on an analysis of the user’s smart phone data. ((Id. at 56; Tala, (last accessed Nov. 4, 2019 at 1:00 PM). ))

Fintech is reshaping how people worldwide access and manage their money and presents a clear opportunity to increase access to the wider financial system. While the opportunity is immense, rapidly evolving technologies also create new unanticipated risks.

Regulatory Challenge

Despite the promising prospects fintech presents to increased financial inclusion, it is not a given that the financial services offered through fintech are in fact trustworthy, safe, stable, and efficient. There are a number of new complications regulators face as the fintech landscape evolves, namely: i) current regulation that is ill-suited to fintech products or business model, ii) balancing innovation with adequate protections for consumers, especially those with low financial literacy, iii) decentralized and rapidly evolving technologies that could pose new forms of systemic risk to local and global financial systems.

Existing regulatory structures may be ill-suited to new technologies and innovations. In the U.S., some regulatory adjustments have been made to adapt to the changing landscape such as exemptions from securities registration requirements for crowdfunding and emerging growth companies. ((Press Release, Securities and Exchange Commission, SEC Adopts JOBS Act Amendments to Help Entrepreneurs and Investors, April 5, 2017, As technologies rapidly develop, new regulatory questions continue to arise. In the case of so-called initial coin offerings (ICOs) ((Jake Frankenfield, Initial Coin Offering (ICO), Investopedia (last updated Dec. 20, 2018). ))— the sale of a future cryptocurrency to raise the funds needed to develop the cryptocurrency platform the U.S. Securities and Exchange Commission (SEC) recently filed suit to block the issuance of cryptocurrency “tokens” in an ICO arguing the tokens are securities and subject to disclosure and filing requirements. ((Press Release, Securities and Exchange Commission, SEC Halts Alleged $1.7B Unregistered Digital Token Offering, Oct. 11, 2019, See Matt Levine, The SEC Really Doesn’t Like ICOs, Bloomberg, (October 14, 2019, 12:04 PM), for discussion on ICOs and criticism of the move.)) There is significant jurisdictional variance in how fintech is policed as evidenced in worldwide cryptocurrency regulations: some nations like China and Colombia prohibit ICOs, some like Japan and the U.S. oversee through already existing frameworks, still others, like Spain and Luxemburg, have enacted or are contemplating distinct regulations tailored to fintech. ((The Law Library of Congress, Regulation of Cryptocurrency Around the World (2018),

Innovative business models and new technology can increase financial inclusion by changing the way consumers interact with the financial system, but they also present new concerns about consumer and investor protection. Financial literacy remains low worldwide; only 33% of adults worldwide are deemed financially literate with results varying greatly by income level. ((Leora Klapper, Annamaria Lusardi & Peter van Oudheusden, Financial Literacy Around the World: Insights from the Standard & Poor’s Ratings Services Global Financial Literacy Survey (2015)

Virtual currency transactions, for example, are irreversible and do not come with traditional protections because there is no physical exchange. New access to lending and credit can raise concerns about privacy and the way data is employed or possibly exploited; where do Tala and other companies draw the line for what data is fair game (and where should they?) in assessing credit worthiness? ((Numbers Game: A Brief History and Future of Credit Scores, supra note 13 at 56.)) Fintech may also create openings for fraud, as in the case of the Chinese peer-to-peer lender uncovered as a Ponzi scheme that had collected over 60 billion yuan ($9 billion dollars) from 900,000 investors. ((Reuters, Leader of China’s $9 billion Ezubao online scam gets life; 26 jailed, (Sept. 12, 2017 at 2:26 AM),

Finally, one of the great powers of technology is its global accessibility, but when viewed through the lens of systemic risk, the decentralized nature of technology may also pose a significant threat. ((Magnuson, supra note5 at 1199-1204.)) Systemic risk is the major justification for regulating the financial system and generally refers to the probability that economic shocks in one part of the financial system can lead to shocks in other parts of that system. ((Magnuson, supra note5 at 1189. Systemic risk can manifest in several ways: i) when institutions’ risk exposure is too similar to that of others institutions (referred to as correlation), ii) when assets or institutions are so interconnected that ones failure can create a chain reaction of failures, and iii) when faith in the system is compromised triggering panic and often runs on banks or other financial institutions (referred to as contagion). Hal S. Scott & Anna Gelpern, International Finance: Transactions, Policy, and Regulation, 26-27 (22nd ed. 2018).))

Although economies are increasingly interconnected, financial systems remain primarily administered on a country-by-country basis. ((Financial regulation does not follow a uniform model: Germany and Sweden empower a unified financial regulator, the U.K. employs a “twin peaks” approach with one regulator responsible for prudential regulations for banks and one regulator overseeing financial services firms, while the U.S. splits regulation among multiple federal agencies including the Federal Reserve, Commodities Futures Trading Commission, and the Securities and Exchange Commission. Scott and Gelpern, supra note 25 at 347.)) Changes implemented in response to the financial crisis of 2007-2009 (for example the wide-reaching Dodd-Frank Act) were driven by the desire to eliminate “too big to fail” institutions and the associated taxpayer-funded bailouts and were not necessarily focused on smaller or more dispersed fintech companies. ((Scott and Gelpern, supra note 25 at 84-86.)) With fintech, it may be more difficult for regulators to identify and monitor the relevant actors. “…[B]y contributing to the fragmentation of finance, fintech may be obscuring risk. Its model bears many of the features of systemic risk, and the level of such risk is likely to increase as the industry grows.” ((Magnuson, supra note 5 at 1207.)) Regulators should be thoughtful about the impact fintech can have on systemic risk as it becomes increasingly intertwined with varied industries and the world economy.

Looking Forward

Fintech blurs the traditional demarcation lines between industries and institutions. This rapidly evolving landscape presents the incredible opportunity for inclusive growth with the promise of helping to lift many people out of poverty.

The success stories from Kenya, India, Peru, and Nigeria show a world of possibility where economic growth can also be inclusive growth, but progress remains unsatisfactory and nearly two billion people still lack access to basic financial services. ((World Bank, supra note 1.))

Recent studies confirm that regulation can be a powerful tool to promote inclusive growth while also maintaining economic stability. ((See, e.g., Chen & Divanbeigi, supra note 8; Olu Ajakaiye & Sheriffdeen Tella, Financial Regulation in Low-Income Countries: Balancing Inclusive Growth with Financial Stability. The Nigeria Case (Overseas Development Institute, Working Paper No. 409, 2014), This doesn’t mean a uniform regulatory regime for all countries or for all fintech. Innovations like regulatory sandboxes, such as those currently in use in Australia, Hong Kong, and the United Kingdom, are one promising tool for testing new models in a supervised arena. ((Inter-American Development Bank, Fintech Latin America 2018: Growth and Consolidation 124, Meeting this opportunity it will require creative, thoughtful, and sustained cooperation across borders and a unified agreement to work toward inclusion. ((See, e.g.,Center for Global Development, supra note 13 (offering a comprehensive set of recommendations for to craft regulations that will increase financial inclusion.))) This is a tall order.

Financial inclusion is widely recognized as an enabler to meet mutually agreed development goals and an opportunity for global economic growth. ((See, e.g.,Leora Klapper, Financial Inclusion Has a Big Role to Play in Reaching the SDGs, Aug. 11, 2016, As fintech grows, regulators and lawmakers must consider whether current regulations are adequate, how to best protect and educate new entrants in the financial system, and how the dispersed fintech landscape may have new implications for creating systemic risk. Regulations can help shape the future we want, but only if the right balance is struck will the results be truly transformative.