If 2015 was the year where financial technology startup funding hit its peak, 2016 might be the year that regulators scared investors away.
Regulatory oversight of fintech startups is tightening, according to a report from PwC, and it's a growing concern for industry CEOs. PwC noted that 86 percent of financial services CEOs are worried about the impact of being too heavily regulated, and notes that the chorus of voices in Washington talking about fintech concerns is growing.
"The twin pillars of financial services regulation in the U.S. are safety and soundness and consumer protection," said Haskell Garfinkel, fintech co-lead with PwC. "Regulators are trying to balance these mandates with the flood of innovation occurring on the periphery of the regulated industry."
Indeed, the rapidly evolving sector has drawn the attention of numerous regulators.
Next week, the Treasury Department will publish research and recommendations regarding marketplace lending. The Consumer Financial Protection Bureau has inquired with fintech companies about business practices including companies' origination fees, and the Federal Trade Commission next month will host a forum with consumer advocates and law enforcement to weigh fintech's implications for consumers.
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It comes as investor interest in fintech companies looks to have stagnated.
After hitting an all-time high last year, the first quarter of investing in the space shows a 41 percent decline compared to the first quarter of 2015, the PwC report noted. Further, sector stocks including On Deck and Square saw shares decline this week amid disappointing earnings.
As more fintech companies mature, some have taken to adding ex-regulators in senior roles. In April, former FDIC chair Sheila Bair joined lender Avant's board of directors. Last year, lender SoFi brought former Securities and Exchange Commission chairman Arthur Levitt on as an advisor. Other companies, including payments startup Circle, have made similar hires.
Startups are looking to bolster credibility with Beltway veterans, at a time when regulators are seeking to address a gap in regulation between large, traditional financial institutions and startups.
"Regulatory agencies want to ensure that consumers receive all required disclosures and that the product will not harm consumers," said SoFi general counsel Rob Lavet.