Competition among financial hubs around the world, aiming to attract FinTech firms is greater than ever. The US has traditionally been at the forefront of financial innovation, attracting the majority of investment flowing into the FinTech sector year after year. Today, two of the three largest FinTech centres are based in the US, with New York and California second to only London in terms of market size as well as investment. This year’s developments, however, have put the US’s leading status into doubt.
FinTech centres globally have been particularly busy this year. The UK’s post-Brexit status is increasingly challenged by other European hubs, as well as by centres from the Asia-Pacific region, with the UK itself among the most active countries. Efforts range from country-level initiatives, through bilateral agreements, to multilateral associations. While FinTech hubs from the UK, Germany, Hong Kong, Australia, Canada and Mexico have recently joined forces under the Global Fintech Hubs Federation (GFHF), European and Asian countries have been engaging in setting up mutual FinTech bridges. The UK and multiple countries from the Asia-Pacific region have also established FinTech sandboxes this year. With the US uninvolved in either of these initiatives, the tide has been turning. In light of these developments, the US regulatory environment has become outdated and globally non-competitive. Unsurprisingly, the US FinTech space has been growing increasingly concerned about the country’s inactivity, with firms considering relocating to countries that offer more support and a better infrastructure.
At long last, the US has decided to respond. Earlier this month, a bill aiming to set up a FinTech sandbox was introduced in the US Congress. Like most sandboxes, the US initiative is designed to encourage start-ups to innovate, enabling them to trial products and ideas through a limited launch, avoiding an otherwise lengthy regulatory procedure. Mirroring its UK equivalent, in order to qualify for a place in the sandbox, applicants’ products and services are required to serve a public interest and improve the financial services industry, without posing a risk to the financial system or consumers. Via setting up internal ‘financial services innovation offices’, federal agencies, including the Federal Reserve Board and the Treasury Department, would be responsible for facilitating the sandbox. US start-ups seem to appreciate the idea; the ability to experiment with their products in a sandbox, relatively free of regulatory scrutiny, enables them to focus their efforts on what they do best – developing innovative products and services, without potentially damaging consequences.
While setting up a FinTech sandbox in an attempt to stay competitive and keep innovation and start-ups in the country is a logical step from the US political scene, there is nothing ground-breaking about it – the initiative is a mere copy of what other countries have done before. Although introducing the idea in Congress is important in raising awareness to the issue, given the political uncertainty caused by the upcoming Presidential elections, the bill is not expected to pass any time soon. By the time it comes into effect, if at all, it might be too late for the US to turn FinTechs’ attention back to New York and California.