Federal Government Provides Faster Approvals and Tax Credits for Consumer FinTech Products


        "FinTech" is a freshly coined term in financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in payment technology , trading platforms, retail banking , investment , financial planning and even crypto-currencies like bitcoin and blockchain.  More specifically, FinTech refers to new solutions which demonstrate an incremental or radical, disruptive innovation development of applications, processes, products or business models in the financial services industry.

        Improved data analytics will help institutional clients further refine their investment decisions and open new opportunities for financial innovation. Trends toward mobile banking, increased information, data and more accurate analytics and decentralization of access will create opportunities for institutions and individuals to interact in heretofore unprecedented ways. As FinTech and the associated developments are an entirely new frontier of research and development, the FinTech industry, and the start-ups that comprise its majority, are ideal candidates for the now permanent R&D Tax Credit.

The R&D Tax Credit

        Originally enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes (PATH) Act making the R&D Tax Credit permanent.  Furthermore, in this latest iteration of the R&D Tax Credit, Congress continued the legislative trend to incentivize American businesses, particularly tech oriented start-ups.  Specifically, the new provisions of the PATH Act provide start-up companies with the ability to take a payroll tax credit, even without incurring actual tax liability.  
        Beginning in 2016, the R&D credit can be used to offset Alternative Minimum Tax and start-up businesses can utilize the credit against payroll taxes. FinTech companies incur significant amounts of R&D costs, which can, and should, be recovered through the R&D credit.  Some examples of the per-capita R&D costs incurred by leading FinTech companies are shown below in Figure 1:


Figure 1. FinTech R&D Per Capita Expenses

CFPB's New "Fast-Track" for FinTech Approvals

        The Consumer Financial Protection Bureau (CFPB) finalized a new policy on February 16, 2016 which focused on reducing vague regulatory restrictions for companies that  develop untested financial products and services.  The agency has been weighing the new policy for over a year since first proposing it in October 2014. Some companies have criticized the current state of consumer regulations as stifling potential improvements in areas of banking such as lending, payments and deposit-taking.

The Benefits of the "No-Action" Letter

        With the new policy, the CFPB is encouraging both FinTech startups and more established banks to apply for the "no-action" letter. Specifically, companies may request “no-action” letters indicating that bureau staff have “no present intention” to initiate enforcement or supervisory actions based on a particular product or aspect of a product.  

        The policy is ostensibly aimed at facilitating innovation by providing companies a method for vetting new products for regulatory compliance concerns before launching them.   Companies that are granted these letters get assurances from a regulator that it has no intention of taking enforcement action against the company for introducing a new financial service, though such letters could be revoked at any time if the CFPB changes its mind.  According to CFPB Director Richard Cordray, the CFPB is seeking to "foster a consumer financial marketplace where companies develop safe, innovative products and approaches that can help make people's lives better."   Factors for consideration will be relevant supervision mechanisms and enforcement history, as well as the actual workings of the product itself.

        In recent years, some FinTech companies have held off on launching new ideas because there was no formal process in place to find out whether regulators would view a new product as raising consumer-protection or antidiscrimination concerns. The move could have implications for a wide range of financial companies that specialize in lending and payments. Many of the regulations governing terms and conditions, disclosures and other aspects of financial products were implemented before the advent of the Internet and the proliferation of smart-phones. "No-action" letters could be appropriate for companies that use technologies or data that did not exist at the time that the current rules were made, for example.

        For example, Vouch Financial Inc., a startup lender that gives borrowers discounted rates on loans if their friends or family members agree to help cover a potential default, would likely apply for a no-action letter for new products that it plans to roll out, according to CEO Yee Lee.   This decision would result from venture capitalists and the investors that buy loans from upstarts having a preference for lenders that had been vetted by the CFPB’s new process.  Also, a formal response from a governing regulatory body that governs an area will provide clarity as to the applicable regulations, and the enforcement of same.

Advantages of the R&D Credit for FinTech Start-Ups

        The FinTech industry is largely populated by start-up companies.  As such, the initial revenue streams of these companies often do not result in taxable income.  Previously, these companies, comprising the majority of the FinTech industry, would not have been able to utilize the R&D Tax Credit.  However, that limitation has been lifted as of December 18, 2015.

        Specifically, the R&D Credit has now been expanded to apply credits in excess of income taxes to FICA payroll tax liability.  Notably, even if a company was unprofitable and had no tax liability, the credit can be taken against payroll taxes for start-up businesses with less than $5,000,000 in gross receipts.  This offset is capped at $250,000 per year, over a five year period.

        As such, the R&D Tax Credit now allows this payroll tax to be taken directly against FICA taxes, and does not require general income tax liability for the company to utilize the credit amounts.  Most importantly, this credit directly affects the payroll amounts incurred by the start-up.  Typically, the largest cost for a start-up is payroll; the people with the best ideas will look for the best compensation.  As such, the key personnel, and the dollars necessary to keep them around, are usually the most expensive line item in a start-up's P&L accounting balances.  Now, fledging FinTech start-up companies will realize significant tax benefits regardless of not generating a profit.


Utilization of the R&D Credit for Mobile FinTech Applications and Payments

        Mobile banking is broadly defined as the use of mobile devices, such as smart phones and tablets, to perform banking tasks, such as monitoring account balances, transferring funds, paying bills, contacting management for issues, among many others.  The combination of electronics and mobility has driven major changes in consumer behavior. The handling of finances is not an exception. The growing penetration of smart devices is pushing banks and financial services companies towards mobile solutions that fit the demands of modern consumers. Innovation has become the watchword as customers increasingly condition their banking choices on convenience and ease of use.  

        As such, mobile banking solutions have become key to both customers and banks that are looking for convenient, time saving, and efficient applications, customers increasingly factor mobile banking capabilities into their choice of financial institution. According to New York-based consulting firm AlixPartners, 60% of smartphone or tablet users who switched banks in the fourth quarter of 2013 said mobile banking was an important factor in the decision.

        Despite the challenge of meeting rising expectations from users, mobile banking applications bring major opportunities for financial institutions, particularly when it comes to reducing expenses. The average cost of a mobile transaction is only ten (10) cents, which is half that of desktop-computer transactions. More strikingly, an ATM transaction costs on average $1.25,  which is over twelve (12) times the mobile transaction cost.  Mobile banking applications also emerge as an important weapon in the battle to retain customers. Not only do they provide numerous gateways to promote customer loyalty but they also serve as data gathering platforms, generating unprecedented information on users’ behaviors and preferences. The possibility of rating and reviewing applications in forums like the Apple App Store and Google Play Store has exposed mobile banking providers to the rigorous scrutiny of public opinion. Recurrent criticisms include bugs, no deposit function or low deposit limit, and poor design.


        The new CFPB position opens the regulatory gate for FinTech startups with a mobile payment function.  The "no-action" letter will allow development, testing, and initial implementation of FinTech companies and mobile applications without the ethereal threat of regulation enforcement constantly in the background.  Even so, it is in any FinTech startup's best interest to adhere to the regulatory restrictions as best as possible. When combined with the "no-action" letter policy, the R&D Credit becomes an even more ideal opportunity for FinTech startups to recoup payroll taxes.

Article Citation List



Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

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