Building standards that match fintech’s speed

Sima Gandhi is co-founder of the Coalition for Financial Ecosystem Standards (CFES) and a senior advisor at FS Vector, a Washington, D.C.–based advisory firm focused on fintech, financial services and regulatory strategy.

On Circle’s first day of trading, the stock closed at $240.38 per share, a 675% increase from its IPO price of $31 per share. Circle issues the USDC token, the second-largest U.S. dollar-pegged stablecoin, and the IPO's popularity demonstrates investor appetite for stablecoins. 

This demand is driven in part by the recently passed GENIUS Act that creates a clear regulatory framework for issuers. As a result, Amazon, Walmart, JPMorgan, and Visa have started to explore issuing their own stablecoins or incorporating stablecoin capabilities into their processes, likely by partnering with a fintech. Banks now have more incentives to partner with fintechs to offer yield-bearing and lending products. These digital assets are another example of fast-moving innovation in finance, and how regulations have helped boost their popularity.

Circle’s eye-catching IPO highlights the pace of change in financial services, where stablecoins and other digital products are gaining ground faster than regulations can adapt. Standards developed through public-private partnerships can step in where regulation lags, promoting safety without slowing innovation. 

Technology innovation in finance moves fast and delivers powerful products that improve customer experiences and drive financial inclusion. Yet, federal agencies do not have sufficient staffing to issue regulations at the same clip, and state regulations can create complexities and inconsistencies that make compliance a challenge. 

That’s where standards developed through public-private partnerships play a critical role.

By working together, industry groups that partner with the government can balance safety and innovation to develop standards that evolve at the same pace as innovation. For example, the Coalition for Financial Ecosystem Standards (CFES), part of the advisory firm FS Vector, works with industry leaders on how banks and fintechs can successfully collaborate.

Technology is becoming increasingly ingrained within financial products and processes, which makes partnerships between banks and non-bank fintechs more complex and important. Yet, key players may not know what best practices are. Standards can fill a void where regulation is lacking and provide education about the dynamic relationships between banks and fintechs. These partnerships have produced cutting-edge innovations, such as Circle and another recent IPO, Chime Financial, which offers mobile banking services through Stride Bank and The Bancorp Bank. These innovations were only possible through these partnerships.

Standards help partnerships succeed in a landscape where innovation changes quickly. Where the technology leapfrogs use cases envisioned by regulations, standards help innovators understand compliance and risk management expectations and hold them accountable to these expectations. They can also evolve more quickly than regulations, keeping pace with technological advances to serve as a blueprint for how to operate in a more compliant manner. Compliance should not be a barrier to entry or a competitive differentiator, but rather table stakes if we can take the guesswork out through clear standards.

Maintaining compliance is important for organizations. Regulators ensure this through the examination process, but exams can be burdensome to federal agencies that are increasingly understaffed. Third-party audits focusing on regulations and standards can serve as an important source of feedback with regard to compliance. They also serve as force multipliers for regulators in the powerful seat of overseeing reports and programs.

Risk management is also a priority for financial firms, and, like compliance requirements, understanding, assessing, and managing risk is complicated without clear regulation. Standards based on industry best practices help industry players manage risks more successfully. They can add clarity and evolve with technology to focus risk management on outcomes rather than processes. Industry players can obtain certifications that assess their program against certain levels so they’re more aligned with how their bank partner manages risk. Importantly, certifications also make it clear to regulators how risk is being managed in these bank–fintech partnerships.

In this way, standards and certifications create a forum for regulators and industry players to engage directly and constructively. As bank–fintech partnerships, technology, and stablecoins continue to evolve in financial services, collaboration between industry and regulators will be even more important. Industry-led standards are a commonsense solution to help guide innovation across the financial ecosystem.