The rise of digital commerce has led to bold proclamations
that the future of technology and the future of finance are increasingly
intertwined: Forbes has described “How Fintech Is Eating The World”, while
leading venture firm Andreessen Horowitz has predicted “Every Company Will Be a
Fintech Company.”
Although advances in technology have created novel
possibilities in finance and banking, progress has been slower than many
experts have predicted for one fundamental reason: regulatory overhead.
How can startups—given the complexity of post-crisis financial
regulation—compete and innovate in finance and banking?
That was the biggest question I faced when I founded CardX
in 2013, and my founding thesis was that the most innovative fintech companies
of the next decade would be those startups that tackle regulatory challenges
head-on.
Fintech is regtech
In contrast to many technology companies that think about
regulatory risk, fintechs have to think about regulatory opportunity.
From the outset, we believed that CardX’s primary value to
our clients was cutting through the regulatory complexity to deliver an
easy-to-use solution.
Visa and Mastercard had introduced new rules for credit card
surcharging that represented a huge economic opportunity, since they allowed
businesses to pass on the cost of credit card acceptance, but even large
businesses would have a hard time meeting all the requirements for full
compliance with these rules. Our regtech value proposition allowed businesses
to choose an option that they otherwise would have found inaccessible due to
the compliance barrier to entry.
Delivering the best experience for our clients meant not
merely delivering better payment pages, better terminals, and better reporting
than other providers on the market, but building compliance into the product so
they could comply with the rules—without any additional technology, process, or
legal overhead.
How to win on compliance
When fintechs recognize compliance as one of the most
fundamental challenges facing their clients and prospects, they are able to
offer a much more robust value proposition by addressing regulatory overhead as
ambitiously as possible.
Our conviction that fintechs need to have a presence
wherever their prospects have a problem took us all the way to the Supreme
Court in 2017, where we acted as amicus in the Expressions Hair Design v.
Schneiderman case that challenged a law that continued to restrict credit card
surcharging in New York state despite the change to the card brand rules.
Although there were numerous merchants and think tanks
joining the plaintiffs in supporting surcharging, CardX was the only payments
company to join the case, which—thanks to an 8-0 victory—opened new states to
surcharging.
Not only did Expressions give us an opportunity to
contribute our real-world expertise on how surcharging compliance can be
automated, it allowed us to carry the movement forward in states like Oklahoma
and most recently Kansas, where we were the plaintiff and changed the state law
to allow businesses there to use CardX. We were able to reshape the map because
our product proactively solved for the most common regulatory concerns: in the
statement of facts, we showed how a compliant surcharging solution guarantees
consumer protection standards will be met by always showing the surcharge amount
prior to the transaction and never charging excessive fees.
Our regulatory advocacy was key not only to introducing the
surcharging option to businesses located in states where it was previously
restricted, but it was just as important for our largest customers who wanted a
uniform experience for their payers nationwide: the Fortune 500 companies we
serve have consistently identified compliance expertise as the single most
salient factor in choosing CardX as their payments solution provider.
The next generation of fintech
Many of the biggest challenges in delivering a great product
experience in finance today are not the limitations of web technologies, but
rather the complexity of innovating within the nexus of laws, regulations, and
contracts governing the banking industry.
Rather than being daunted by this compliance barrier to
entry, the most successful fintechs recognize it as an opportunity to
outcompete.
As more and more companies start thinking about themselves
as fintechs, and fintech continues to eat away at traditional commerce, their
leaders must recognize that financial innovation can only move at the speed of
regulation. Many of the hardest problems in fintech are in finding ways to make
compliance seamless—which is why the biggest winners will be the companies that
understand that regtech is an inherent part of the fintech value proposition.
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