Fintech innovators duck government regulators

Unregulated unicorns — think Chime, worth $14.5 billion, or Plaid, worth $5.3 billion if its acquisition by Visa is allowed to go through — are transforming the world of financial services.

Why it matters: Fast-growing startups generally try very hard to avoid regulation. As they become increasingly important, they collectively represent a growing blind spot for regulators.

• Some startups, like the $10 billion Affirm, have been effectively unregulated ever since the Trump administration rendered the Consumer Financial Protection Bureau toothless.
• The largest private fintech is Stripe, worth $36 billion. While it does have many regulators touching parts of its business, it doesn't have a banking license, which is what brings the real scrutiny.

How it works: Chime used to be called Chime Bank. Its main product is mobile banking, and its features include overdraft protection, credit cards and the ability to send paper checks. But it is not a bank.

• In principle, regulators have visibility into Chime via its partner banks, who in turn become regulators-by-proxy. But at some point, Chime will be too big and too important to be regulated at one remove.

Be smart: U.S. fintechs tend to avoid blatantly antagonizing regulators in the way that Ant Group's billionaire controlling shareholder did recently.

• Jack Ma railed against financial regulators, said that financial regulation was outdated and claimed technology companies should not be subject to regulation.
• Between the lines: The IPO would probably have happened on time had it not been for Ma's speech.

Robinhood came close, however, when it tried to do an end-run around banking regulations by offering an uninsured checking account.

Between the lines: U.S. regulators would never simply announce a crackdown on a formerly-unregulated financial giant 36 hours before its IPO. But they all understand that heavily-regulated banks are operating at a competitive disadvantage to startups.

The bottom line: Regulators haven't been able to keep up with the pace of financial innovation in America; too many companies now find it too easy to slip between categories and evade effective regulation.

• In 2007, before he was distracted by the financial crisis, then-Fed chair Ben Bernanke proposed instead a risk-based system that would regulate financial companies not according to what they did but rather according to the risk they pose. It's probably time for that idea to be revisited.