Document Type

Article

Publication Date

2018

Abstract

Fintech is a reality of our modern society, and will likely become even more so in the future. Peer-to-peer lending, cybercurrencies, smart contracts, algorithmic lending, and more, have required adaptation by consumers and producers of financial services. Our modes of doing business will continue to be challenged and changed by these and other Fintech innovations, almost certainly expanding beyond merely “promot[ing] financial inclusion, expand[ing] access to capital for individuals and small businesses, and more broadly reshap[ing] how society interacts with financial services.” By reducing transaction costs, advancing technology opens the doors to innovations the likes of which we might not even be able to comprehend. The natural opacity of the future precludes precise predictions, but not general forecasts regarding likely trends.

This essay proposes one such forecast—the rise and expansion of Fintech is going to make life difficult for two groups: (1) financial regulators; and (2) incumbents within the regulated industries. Regulators are likely to see their workload increase because the rate of innovation is speeding up, requiring them to do their job more rapidly but, ideally, without any loss of accuracy and efficacy. Many Fintech observers have argued that technological innovation is likely to increase beyond the capacity of regulation to keep pace. If true, the task of regulation becomes even harder, perhaps impossible. Correspondingly, regulated incumbents will find their business model disrupted to the extent that it involves their using regulation as a way of crowding out competition in order to protect profit margins and market share. ...

Section II will offer a basic primer on rent-seeking, a concept from public choice economics that describes how the well-connected and/or well-funded seek special favors from government. Rent seeking is always harmful to consumers and, as a result, it is usually hidden or, worse, covered with grand pronouncements about how the political favors are actually necessary to promote some public good, such as safety, stability, avoidance of systemic risk, and so on. Section II will also provide recent examples contained in the largest financial “reform” in our history, the Dodd–Frank Wall Street Reform and Consumer Protection Act.

Section III will explain how Fintech has the potential to curb or even eliminate rent-seeking in the financial industry. If regulators cannot keep up with innovation, the alphabet-soup of regulatory agencies that are tasked with the financial sector will be unable to interfere in markets to protect incumbents. With no one able to bestow rents, the rent seeking will disappear, greatly benefitting consumers.

Section IV addresses the inevitable and, in many ways, understandable, concerns about unregulated markets. Beyond the concerns of financial regulators, many in society will be concerned that regulation is needed to keep unprincipled swindlers from taking advantage of consumer ignorance and effectively ruining investor confidence in our financial markets.18 Section IV will offer a brief defense of unregulated markets but will also argue that the same harms are inflicted on consumers by regulated—and protected— incumbents who need not fear competition. In many ways, Fintech reduces the need for financial intermediaries, empowering consumers to take control of their own financial health and forcing financial companies to compete for their money. Section IV will, therefore, argue that regardless of where the “optimal” level of regulation used to be, the rise of Fintech has shifted the ideal state in the direction of deregulation.

Section V will then offer some conclusions.

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