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.
