Fintech is a rapidly growing and transforming industry, and the rise of crypto has supercharged everything. As you’d expect, regulators have been slowly but surely working to catch up with the changing face of finance. 

For innovative founders, navigating the space between the technology and the new regulatory framework is an ever-present challenge. John Beccia founded the strategic consulting firm FS Vector to help guide founders through the changing compliance and regulatory landscape.

We gave Beccia a call to better understand how regulation may change the crypto, how to best “move with less certainty” and what greenspace community banks have yet to explore when it comes to financial innovation.

Crypto is a fascinating space and one that is too new to be heavily regulated. What steps do you expect the government to take when it comes to compliance around crypto markets and banks? How will that change the crypto space?

Take traditional financial services regulation as a model. The first credit cards came out in the late 50s or early 60s, and we really didn't have consumer regulations around those types of products until the late 70s. These things have a long cycle, so one of the challenging things about crypto is the fast pace of the technology. We haven't even harnessed the use cases here. If you're a regulator, you're looking at: what are the activities happening? And what are the risks? There's a certain bucket of risks that we have that are pretty clear in terms of things like money laundering, or things related to security risks, privacy, and consumer investor protection. 

The other complicating factor is that we have so many regulators in the US, both at the federal and the state level. And you have so many different layers and so many different missions within these different agencies. There are a couple areas that are being emphasized right now — stable coins are one where we're seeing potential legislation and potential regulation around. Also, regulators are looking not only at the general compliance risk around things like money laundering but also at the more systemic risks and liquidity risks. This all ties into whether there is a need for a central bank digital currency. There are a lot of moving parts here.

When you’re working with fintechs, is there a compliance misunderstand you run into often? 

Well, at the very beginning, you have different attitudes towards compliance, right? To be fair to founders, a lot of the folks that are coming up with really cool ideas in this space have never had financial services regulatory backgrounds. They're more on the tech side, so they don't understand how regulation works. Some embrace it and others don't. So, there are two ends of the spectrum. The ones that commit to compliance early on tend to have a competitive advantage — they're able to get to market quickly, get licenses, get bank partnerships, and more. The other folks will tend to hit roadblocks along the way; they'll get a lot of traction on their product but that's when the regulators will come knocking. 

But there's another side of it, too — you don't want to over-engineer it. It's really a risk-based approach. Sometimes you have to move with less certainty. We obviously want to comply with the regulations, but we also try to build a business that does not provide friction to the end-user. So, you're always navigating the tightrope: how do we build this in a practical way where we're also complying? Often, it's about negotiating the space between the letter of the law and the spirit of the law. 

Obviously, the compliance arena around community banks and credit unions is very robust, but is there a green space for innovation that you see that those institutions may have been reticent to enter out of caution?

I think so. If you're too conservative, you're gonna move too slow and you're gonna miss out on opportunities. There is something to the first-mover advantage. So, like I said, there has to be some middle ground that you can take. 

We're seeing the whole face of financial services changing in terms of traditional financial institutions, too, and it's interesting to see some of these smaller banks reinventing themselves. Cross River Bank just did a huge Series D financing of $620 million — they were an early adopter in this space, providing the rails and connectivity for some of these businesses to build and scale. So, I think the whole idea of what a bank is will change dramatically in the next three-to-five years. That's why we spend a lot of time just educating all the different stakeholders here — the industry participants and the regulators — to get them comfortable. Yes, there are risks, but here's what we do to mitigate the risks. And then, to the industry participants, we say: Listen, these are the regulatory expectations. This is why you need to put these things in place to have a risk-based approach and have compliance programs to prevent against bad things happening.

How do you think community banks and credit unions can use partnerships with fintechs to compete with the bigger banks? Is there a world where their ability to move quickly is actually an advantage in the fast-moving personal finance space?

I think there's a lot of opportunity. It's still a small set of banks that are playing in this space because it does take some will, some commitment, some investments on the technical side, and the ability to think a little differently. My background is in the banking space and things don't move very quickly in banking. They're not really technologically advanced. Remote deposit capture was such a huge thing back in the day, and it took us over a year to just implement that technology. But for the banks that are going all in here, there is a huge opportunity. 

I think you're also going to see more fintechs acquire banks or merge with banks. There's this convergence here — not only at the partnership model — but with some more mature combinations of these types of entities to allow the facilitation of different products and services. So, there's plenty of greenspace. It's just a matter of making sure that the regulatory issues are being addressed and just staying on top of working with policymakers to make sure that innovation is not impeded along the way.