Banking Exchange Magazine Logo

Innovation Avenue’s a one-way street

But it shouldn’t be. Fintech players discuss regulation. Compliance people should talk about innovation

UNconventional Wisdom is a periodic guest blog where the conventional wisdom is held up for fresh inspection. If you have some "UNconventional Wisdom" to share, email UNconventional Wisdom is a periodic guest blog where the conventional wisdom is held up for fresh inspection. If you have some "UNconventional Wisdom" to share, email [email protected]

I spoke this fall at Money 20/20, the largest financial conference in the U.S. and maybe globally. Over 10,000 gathered in Las Vegas to explore the frontiers of fintech.

Nearly every session I saw mentioned regulatory challenges. The same was true at the Milken Institute London Summit a few weeks earlier, which tackled technology issues ranging from finance to health.

The two meetings got me thinking: Why do innovation conferences talk constantly about regulation, while regulatory conferences barely mention innovation?

Financial innovation central … and regulatory discussion

There are exceptions, of course, but the contrast remains striking.

Money 20/20—which has a full regulatory track—drew a record audience. Topics included payments, mobile, digital currency, and block chain; online lending; mortgage lending models; savings and investment tools; alternative data; cyber security; privacy; financial inclusion and access; global consumer empowerment, the millennial market; and on and on.

 Startups pitched ideas. Huge companies unveiled initiatives. The exhibit hall’s glitz rivaled the Vegas strip. Three thousand people saw a show. Hallways were jammed. Parties were everywhere. The energy was palpable.

What about the other side, the compliance fraternity?

Missing ingredient at regulatory functions

Regulatory conferences have been setting records too— thousands are attending them. Appropriately, they talk about regulations. Compliance officers, lawyers, regulators, and consultants explain what’s changing, how to comply, what’s ahead.

They all offer valuable insight, but they rarely address fintech, much less hail from that world.

Most have not yet plugged into the innovation energy surge. They need to, because innovation is changing financial services generally, and compliance specifically.

Why Compliance can’t ignore innovation

Here’s why an interest in innovation is a prerequisite to doing the compliance job today.

• Disruption: Financial services is the first industry to face technology-driven disruption while also being pervasively regulated.

This means that the disruption of the industry will disrupt the regulatory system too.

• Speed: Financial people underestimate the speed and size of the coming transformation because the critical changes are happening outside their field of vision—in technology, not finance.

For instance, people in finance think of “mobile” as being about mobile payments. But payments are actually just a tiny sliver of how mobile technology is remaking our lives, including our money lives.

Financial people view Bitcoin and the block chain as a payment issue too, while this technology will actually restructure huge swaths of the economy, business models, and even internal operations.

• Nature of “compliance”: Financial people address privacy by complying with Regulation P’s requirements for handling their customers’ information. Outside of banking’s ken, privacy is meanwhile being deeply rethought as big data and artificial intelligence revolutionize finance and everything else.

Financial people think of consumer credit regulatory issues in terms of rules like the Equal Credit Opportunity, Fair Housing Act, or Fair Credit Reporting Act, while innovators are using alternative data and new data analytics to invent whole new models for underwriting and pricing, opening huge frontiers of both business and regulatory change.

Finance people see “robo-investing” as an exotic new issue, missing how “machine learning” and artificial intelligence will revolutionize every aspect of how people invest, save, spend, borrow, and manage their money.

• New pathways: I haven’t even touched on those innovations that have barely reached the financial industry’s radar at all.

Example 1: Breakthroughs in natural voice technology that, combined with big data and machine learning, will completely change financial “education” and how consumers are coached to make money choices.

Example 2: Another is the emergence of Yelp-style ratings in which people will choose financial providers and products by just pulling out their phones.

• New competition: Google, Facebook, Apple, Amazon, Square, PayPal, and others already offer consumer financial services and are already expanding from these bases. These—especially those with customer relationships much broader than financial services—are deeply embedded in the daily lives of hundreds of millions of people. They could provide more financial products and/or become an intermediating layer—a filter or advisor—standing between customers and traditional providers, changing the very structure of the market.

Surprise on top of surprise: Another reason the financial industry underestimates these changes is that the huge tech trends driving it—big data, artificial intelligence, mobile, the block chain and voice technology—are converging. As they merge, everything will escalate and accelerate.

• Lagging regulatory guidance: In the face of all this, innovation wins the race over regulation hands down. Innovation-related issues will bring high spikes in regulatory risk because their novelty and rapid evolution will outpace policy-making.

This will force the industry into a regulatory wilderness with few guideposts and unfamiliar dangers lurking everywhere, as regulators decide after the fact that new activities are causing consumer harm.

• Aging regulatory tools: One more blind spot is that, despite conventional wisdom, some innovators actually have compliance advantages. This is partly because their products tend to be simple and transparent, and partly because some startups use clean, new high-tech compliance tools that are both effective and efficient.

The widespread assumption that startups will be hobbled by regulatory barriers is partly true but flawed. They may even raise the bar for everyone.

In reality, banks must navigate two-way street

I began this guest blog pointing to the one-way street of discussion at conferences. But lack of discussion doesn’t mean things aren’t already on the move. The traditional industry faces dilemmas sparked by these shifts—traffic’s flowing both ways, whether you are prepared or not.

Compliance and risk staffs find themselves trying to protect their companies from regulatory risks that cannot be clearly assessed—amidst pressure from business units pursuing innovation and competing with others’ innovation. The compliance profession has evolved around expertise in implementing detailed technical rules, not navigating regulatory ambiguity, especially on the unfamiliar terrain of high-tech new products, channels, and partnerships.

I will address more specifics in a subsequent blog, but it is important for all companies to appreciate that change is already upon them.

Don’t fight it—work with it

Regulation and technology are the top challenges facing traditional financial companies. The two seem different, even unmixable. In reality, they increasingly are two sides of the same coin.

Partnering is especially crucial. One Money 20/20 speaker said startups used to believe they would overthrow the banks, but now are eager to partner with them. One person said to me, “Everyone has to pair off—choose a partner and go to the dance.”

What does it take to do that well, for the traditional company and the innovator? That seems like great topic for regulatory conferences in 2016.

Or, how about inviting tech innovators to talk about the big changes coming and what they will mean for finance?

And what if both groups—innovators and regulatory experts— started attending each other’s conferences, and built a wide, bustling two-way street?

Jo Ann Barefoot presents the second part of this blog, "14 fintech questions Compliance should ask"

Jo Ann Barefoot

Jo Ann Barefoot, a frequent contributor to, for many years was an ABA Banking Journal contributing editor and is now a member of the Banking Exchange Editorial Advisory Board. She is CEO of Barefoot Innovation Group, Cofounder of Hummingbird Regtech, and Senior Fellow Emerita of the Harvard Kennedy School Center for Business and Government. Barefoot has served on the Consumer Advisory Board of the Consumer Financial Protection Bureau. She has over 35 years of management, strategy, regulatory, and consulting experience focused on consumer financial protection. A former Deputy Comptroller of the Currency—the first woman to serve in that post—and partner at KPMG, she has advised most of America’s largest financial institutions, scores of community banks, and numerous non-profits and government agencies. She is a frequent speaker and media source on financial issues, has authored several books and over 150 articles, and has testified before Congress and other federal bodies. You can see Barefoot's periodic blog here, and follow her on Twitter on @JoAnnBarefoot

back to top


About Us

Connect With Us


Adaptive Authentication:

Superior User Experience and Growth through Intelligent Security

Banks and financial institutions find themselves trying to satisfy competing priorities. Fraud continues to grow at an alarming pace and in sophistication year-over-year.

Intelligent adaptive authentication is a new approach to combating fraud that solves this problem and achieves the twin goals of reducing fraud and delighting the customer.


OneSpan logo