How Many Lawyers Does It Take to Save a FinTech?

We probably won't have a Uber today had its founders bothered to find out the complete legal standing of their proposed car ride service amidst the regulated taxi industry. Ditto for AirBnB vis-a-vis hotel regulation. I tend to believe that whatever few fintechs will emerge from the hype successfully will be ones that ignore legislation, gather enough traction and use that to shape legislation ex post facto to their own advantage.

Ketharaman, I respectifully disagree with your position. The most successful FinTechs in the long term will be those who understand and appropriately manage their regulatory risk, rather than hiding their heads in the sand. Managing risk may include accepting risk, as well as remediating, mitigating or transferring it. But risk acceptance (i.e. not doing anything about it) should be with full understanding of what the risk is, and determination that the company can handle future occurrence of the risked event. I think this is more like what Uber did, although perhaps not with analytic rigor. The lack of rigor in certain countries has been very painful for them (e.g. their need to retreat in Germany earlier this year).

@GrahamSeel: Then we must agree to disagree. This whole concept of sensing risk, mitigating risk, etc., is enterprise world luxury. Even there, it mostly results in the enterprise doing nothing. So much so progressive enterprises are empowering their incubation units within their organizations to think out of the box and telling them "we'll think about regulation later". This whole legal awareness and risk sensitive approach is absolutely repugnant to the concept and style of startups. If Uber had followed this approach, it wouldn't be around in 459 cities today. AFAIK, Uber has retreated only one or two product categories in Germany - which is not a bad tradeoff for spreading to 75 countries. 

I'm not the only one saying this. According to Fast Company article titled "The Food-Sharing Economy Is Delicious And Illegal—Will It Survive?"

"As startups launch in heavily regulated industries such as food, health, transportation, and housing, clashes with the law have become as common in Silicon Valley as office ping-pong tables. The MOST COMMON APPROACH to these regulatory battles—successfully embraced by lodging site Airbnb, ride-hailing app Uber, fantasy football site FanDuel, and DNA testing and analysis company23andMe— is to IGNORE THE TROUBLESOME LAW as long as possible. "For a long time, the advice was, just keep your head down, build the kind of network you need to be viable, and then once you have viability, NOBODY IS GOING TO BE ABLE TO SHUT YOU DOWN," ... "If Uber had gone to the regulators first, the entrenched interests would have crushed them in seconds. What might have been easy for regulators to squash in a startup is another matter after the offending business becomes one of the most valuable private companies in the world. When New York City Mayor Bill de Blasio threatened to limit Uber’s expansion last summer, the former startup, now months away from being declared a $62.5 billion company, orchestrated a campaign, complete with television ads, lobbyists, and even a "De Blasio’s Uber" feature in its app that showed users a dystopian world in which they must wait 25 minutes for a ride. The mayor backed down." (capitalization mine for emphasis).

@Ketha ..while you have made a valid observations and points about the start up DNA, don't you think these differ from industry to industry.  Banking and financial services is highly regulated and unlike other industries it has got a direct bearing on the performance of economy and governments. Add to that the reputation that bankers have earned post the 2008 financial crisis everyone in this industry is under scrutiny.

Having said that I am hoping that regulations don't kill innovation. However it just takes one shock for the whole system to come down. I am anxiously watching the fate of alternative lenders as I believe they are operating on the edge without much regulation and they might just trigger events like the sub prime crisis . 

@ChetanGhadge:

TY for your comment and nice to hear from you!

Well, my examples of the approach used by startups to get ahead of the law are all from other highly regulated industries viz. food, health, transportation, and housing.

The purpose of regulation is to protect consumer's interest. In theory, it can coexist with innovation. But, regulation happens via regulators. In actual practice, I've rarely seen a regulator who asks the consumer how they wish their interest to be protected. Instead, most regulators assume they know best how to protect the consumer's interest and regulate away in a manner that puts a brake on doing things differently from status quo aka innovation. So regulation does kill innovation far more often than it facilitates innovation in the real world.

2FA regulation for online payments in India created an entire industry of prepaid mobile wallets that succeeded by finding a way to circumvent 2FA. Not sure whether you'd call that an example of regulation facilitating innovation!

IMO, while some law breaking startups will be forced to shut down, I doubt if many startups that go out of the way to find out the legal position of their offering will ever take off.  

As for subprime crisis, TBH I haven't seen any regulation from any regulator that would guaranteee a non-recurrence of the crisis - even by traditional banks, let alone online lending marketplaces!

Absolutely agree, Ketha!

TY for your kind words @AlexanderdeLange!

This Economic Times article profiles many alt-lending fintech startups. Not surprisingly, the only fintech that tries to assess its legal standing - altflo - gets confused by the ambiguity and shuts down! 

Sorry the correct link to the ET article is http://economictimes.indiatimes.com/small-biz/money/meet-the-alternative-lending-startups/articleshow/53244587.cms

According to American Banker, it's not clear how many of 50+ regulators have jurisdiction over US fintechs! Amidst this confusion, fintechs can't be blamed for staying away from lawyers!!