On October 26, 2016, the Financial Trade Commission hosted a forum on Crowdfunding and Peer-to-Peer Payments, in Washington, D.C., the latest in the Commission’s FinTech Forums Series. The forum included two panels: (1) Peer-to-Peer Payments – Their Emergence and Path Ahead and (2) Crowdfunding – Benefits and Risks for Consumers. The panels featured state and federal regulators, representatives from FinTech companies, a consumer advocate, and an academic.
Two themes emerged from both the Peer-to-Peer Payments and Crowdfunding panels:
- Consumer education is vital to achieving benefits of the FinTech industry. Speakers on both panels agreed that FinTech companies should educate consumers about how new FinTech products and services operate and the potential risks associated with those offerings. According to Ira Rheingold, Executive Director of the National Association of Consumer Advocates, FinTech companies have an obligation to do so. Some panelists noted that a consumer may understand how to use a technology, but may not understand the implications of the technology. For example, a consumer may understand how to contribute money on a crowdfunding website, but may not understand that contributing to a project does not necessarily mean the consumer will receive a good or service. As FinTech offerings continue to become more complex and ubiquitous, consumers may struggle to understand new technologies. FinTech companies can help fill this gap.
Evan Zullow, a member of the FTC’s Division of Financial Practices, commented that the FTC considers whether an entity has provided “reasonable” consumer education when evaluating potential consumer harm and a simple consumer disclosure may not suffice.
- New technologies still present fraud risks. While new technologies offer new methods for bad actors to commit fraud, the fraud schemes remain the same. For example, advance fee fraud may now involve a request for a peer-to-peer payment instead of a paper check. Additionally, FinTech companies, like many other technology providers, face “crime-as-a-service” threats, in which a bad actor develops a product, such as ransomware, and sells the product to another bad actor to deploy against a technology provider. At least one panelist advised that every FinTech company should expect to be the target of fraud at some point and that those attacks will likely not be in a form that that the company has contemplated. Although a FinTech company can develop antifraud technology and implement antifraud policies and procedures, consumer education regarding fraud and data security can also prevent or reduce fraud.
Additional themes emerged in each panel. The Peer-to-Peer Payments Panel themes included:
- Consumer disclosures remain important, but the format and the method of delivering a disclosure should align with the relevant technology. Beth Chun, Assistant Attorney General in the Texas Office of the Attorney General, emphasized the importance of consumer disclosures in the FinTech industry. Some panelists argued that state-mandated disclosures to consumers do not necessarily correspond to the evolution of the FinTech industry. Brian Peters, Executive Director of Financial Innovation Now, argued that FinTech companies may be able to provide more modern disclosures that educate consumers better than those prescribed under state laws but, because state law has not kept pace with technological advances, a FinTech company may not be able to do so and still comply with state laws.
- Disparate state and federal regulatory regimes can hinder innovation. According to at least one panelist, FinTech startups struggle to comply with the disparate state financial services regulatory regimes, particularly when pursuing licensure in multiple states. Additionally, FinTech companies can be subject to a state’s laws governing unfair and deceptive acts and practices, data security, and consumer privacy. Panelists argued that a national FinTech regulatory scheme could help ease compliance burdens and free up time and capital to develop new FinTech products and services.
Other panelists argued that a regulatory “sandbox,” such as the one established by the UK’s Financial Conduct Authority, could allow FinTech companies the space to develop new products and enhance consumer protections through those developments.
At least one panelist recommended incorporating a compliance position on the startup’s team early in the company’s lifecycle to help manage compliance burdens throughout the product development process.
- State and federal regulators can help startups during the development stage. Representatives from both state and federal regulatory agencies encouraged startups to approach their agencies with questions about a new product or service prior to a public launch. According to Ms. Chun, regulators can help startups identify and evaluate potential regulatory pitfalls that may be associated with the new offering. Such consultations can also help educate regulators about FinTech developments and industry best practices.
The Crowdfunding Panel themes included:
- Crowdfunding offers unique benefits to companies and consumers. Those benefits include:
- Enabling quick success, and fast failure. Crowdfunding platforms allow viable companies to quickly obtain funding for a project that traditional financial backers may be unwilling to support. Many of these companies continue to operate long after their initial round of crowdfunding. Conversely, companies that may not yet be ready for market can quickly learn this if and when they fail to raise sufficient funds.
- Promoting diversity. Traditional financial backers may be drawn toward projects similar to other successful projects and reject nontraditional projects. Crowdfunding allows creators of those diverse projects to raise funds.
- Creating community. Andrew Dix, Founder & CEO of Crowded Media Group, explained that crowdfunding creates a virtual community for backers. People from varying backgrounds and geographies can come together to help launch something new, fostering a feeling of community and engagement.
- The growth of the crowdfunding market poses important compliance considerations. According to panelists, crowdfunding’s small footprint in the FinTech industry has allowed crowdfunding platforms to self-police and maintain industry standards that help prevent consumer harm. As the market grows, however, consumer education and disclosure requirements will become increasingly important to the extent that less reputable crowdfunding platforms enter the market. Michal Rosenn, General Counsel of Kickstarter, noted that many crowdfunding platforms currently deny applications from developers that do not pass the platforms’ vetting processes. As the market grows, those developers will be able to take their projects to other platforms that may not impose strict vetting processes. Panelists also noted that increased crowdfunding platform functionality may create data security and consumer privacy risks. According to Mr. Rheingold, establishing industry best practices now could help reduce consumer harm and the need for regulatory intervention later.