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November 15, 2022

Under the Hood: Fintech Culture and Failing Forward Fast, plus Regulatory Sandboxes

Carla McMorris

Click here to listen to the full podcast.

Under the Hood season 2 continues. In this series hosted by Synapse founder and CEO, Sankaet Pathak, Under the Hood takes a deep dive into various challenges and opportunities in  FinTech. Topics range from technical design and architecture to regulatory and policy challenges.

This episode takes a birds-eye view of the current culture of the Fintech industry. Sankaet is joined by Rodney Williams, the co-founder of SoLo Funds, and Adam Shapiro, a partner at Klaros Group and former regulator.

Sankaet began the discussion by asking what the guests thought the culture of the Fintech industry currently is. Then he shared that he thought we were moving in the right direction, but not everyone is incentivized for success and has the confidence to fail forward fast knowing that the banks, Fintechs, and the regulators are aligned. Everyone is trying to build something that has a positive impact for consumers and businesses, but how do we do it in the fastest and safest way possible?

Here are some highlights from the discussion:

The Importance of Understanding the Regulatory & Compliance Framework

Adam shared that there are real challenges in building safely in Fintech because the stakes are a lot higher than in some other products. There’s a real cost of getting this wrong. He highlighted that some Fintech innovators don’t really understand why we have the regulatory and compliance framework that we have. When they are innovating, knowing the rules, knowing why they are there, understanding the underlying public policy, then working out how to apply the rules to their products is essential. 

The Regulatory Perspectives of Informal versus Formal Lending Models

The group delved deep into SoLo Funds’ audiences, highlighting their cash flow challenges, their budgeting issues, and their surprising dynamics. They also highlighted SoLo’s solutions including not using credit reports and their lender model. They also talked about informal lending in underserved communities from churches and individuals because the traditional financial system isn’t designed to make it work for their culture. When asked if he thought regulations would have to change to support informal lending, Rodney said he thought they may have to change or regulations would have to change.

Fintechs Struggling in “The Missing Middle”

Adam shared that the US regulatory system is very fragmented, making it difficult for innovators with unique business models and unique underwriting models. He also talked about the fact that the lending regulatory system was built for a larger loans. It is hard to fit a smaller loan with a dollar fee into an existing loan. A loan with an APR of roughly 50% is actually illegal in many states. He pointed out that at the top there are the standard loans, then there are the payday loans at the bottom, and the Fintech models struggle in “the missing middle”. Partnering with a bank or a Banking-as-a-Service (BaaS) provider or others can be helpful here. Another way to approach it is to structure the business so that it’s not a regulated entity, but it can go off the rails if you don’t take on the regulated requirements.

The Variety of Regulatory Sandboxes

The discussion moved on to regulatory sandboxes and Adam defined the models as a variety, ranging from very simple to very formal. The simple model would encourage Fintechs to bounce ideas off of the regulators. The very formal model would give cover to the process of a product that would normally be against regulations. He thinks there are limits to what sandboxes can achieve for early-stage founders who can only spend so much time with regulators. Sandboxes aren’t likely to become the silver bullet given the regulatory structure we have.

To learn more, listen to episode 4 of the Under the Hood podcast.

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Under the Hood: Fintech Culture and Failing Forward Fast, plus Regulatory Sandboxes

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Carla McMorris
November 15, 2022

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