Fintech License Choices Face Scrutiny Over Regulatory Arbitrage

Fintechs’ choices of banking, payments and electronic-money licenses are facing closer scrutiny from regulators and other authorities. The focus is on whether companies seek lighter oversight or choose a regulatory framework that fits their business plans.

A license can determine which services a company may offer, where it can operate, how much capital it must hold and which regulator supervises it. Firms may choose a jurisdiction based on its rules, application process, operating costs, customer access or relationships with banking partners.

Regulatory arbitrage occurs when a company structures its activities to benefit from differences between legal systems and reduce the oversight applied to services similar to those offered by other firms. A licensing choice can also reflect a company’s business model, target markets, funding structure and need to offer specific payment or lending products.

Regulators are examining how fintechs describe their services and divide responsibilities among licensed entities, technology providers and business partners. They may compare a company’s actual activities with the permissions granted under its license and assess whether customers receive the protections required by law.

The issue has become more prominent as fintechs expand across borders and offer products that resemble banking, payments, lending or investment services. A company’s license can affect which consumer-protection, anti-money-laundering and reporting requirements apply.

Regulatory authorities can assess a firm’s operations rather than rely only on the name of its license. Companies may face additional questions when customer-facing services are separated from the entity that holds the authorization.