Last week, the US Department of Treasury published a report entitled Assessing the Impact of New Entrant Non-bank Firms on Competition in Consumer Finance Markets. The report was delivered to the White House Competition Council.
The 128-page document informed the White House that Fintech firms are creating new risks to consumers and market integrity and thus in need of “enhanced oversight.”
In July of 2021, President Joe Biden told Treasury to review the impact of tech firms and non-bank companies and these firms’ impact on traditional financial services companies. While the report recognizes that additional competition is good for consumers, at the same time, the report claims they are not subject to the same degree of regulatory oversight of traditional financial services firms.
The report states:
“New entrant non-bank firms have a growing presence across core consumer finance markets and are increasingly managing the points through which consumers access financial products and services. This trend has been particularly acute in the markets for payments and consumer lending. The available data support the view that while entering core consumer finance markets via a bank charter remains limited, Fintech firms have been entering the market in increasing numbers. Over 1,200 Fintech firms, focused on consumer deposits, lending, and payments, formed in the decade following the 2007-08 global financial crisis. In the mortgage market, Fintech and other non-bank originations rose from approximately 30% of the market in 2007 to 50% by 2015. Additionally, Fintech funding has grown, with an average of 1,200 general Fintech funding deals completed each year between 2015 and 2021. Over this period, the annual total funding for the industry increased from $10.7 billion in 2015 to $62.9 billion in 2021. Fintech funding has faltered in 2022, largely in response to macroeconomic trends and conditions, though the investment capacity of US Fintech investors remains high. There have also been increasing investments in technology by IDIs. Collectively, the relatively high levels of new entry by non-bank firms, investment in such firms, and investment in technology by IDIs [insured depository institutions] suggest competitive pressure from new entrant non-bank firms.”
Secretary of the Treasury Janet Yellen commented on the report, stating that innovation and competition must work hand in hand with a healthy economy:
“While non-bank firms’ entrance into core consumer finance markets has increased competition and innovation, it has not come without additional risks to consumer protection and market integrity. This report lays out actions that would maintain fair, transparent, and competitive markets while encouraging responsible innovation that benefits consumers. With existing authorities, regulators can encourage competition and innovation while further safeguarding and protecting consumers.”
The report admits that Fintechs are improving the delivery of financial services but worries about “regulatory arbitrage” or perhaps “sidestepping safety” and consumer protection requirements.
New uses of AI [artificial intelligence] and ML [machine learning] could cause problems as well, according to the authors.
The report recommends the following changes to oversight:
- First, to enable competition in responsible consumer credit underwriting, Treasury recommends that regulators take various steps to ensure that credit underwriting practices of all lenders are designed to increase credit visibility, reduce bias, and prudently expand credit to consumers.
- Second, to enable effective oversight of bank-Fintech relationships, Treasury recommends that federal banking regulators implement a clear and consistently applied supervisory framework for an IDI’s role in bank-Fintech relationships to address competition, consumer protection, and safety and soundness concerns.
- Third, to encourage competition in responsible small-dollar lending, Treasury recommends that the agencies increase consistency in supervisory practices related to small-dollar lending programs.
- Fourth, to enable secure data sharing, Treasury recommends that federal banking regulators and CFPB take steps to help promote a more unified approach to oversight of consumer-authorized data sharing.
Treasury references ongoing activity within federal agencies like the Consumer Financial Protection Bureau’s review of BNPL providers.
The report also points to the fact that several large Fintech lenders have been acquired by, or have converted to operate as, an IDI, which is said to have further blurred the distinction between IDI and Fintech lending.
So where is the problem?
What the report does not discuss is the fact that Fintechs desire regulation and recognize the importance of compliance in delivering financial services that engenders trust. Regulators have been slow to chart a path for Fintechs – perhaps to the benefit of incumbent financial firms. Chronically, the maze of federal and state regulators has diminished the ability of firms to innovate, creating a hidden cost for consumers. A push for regulatory consolidation should be a part of the Treasury recommendations, but unfortunately, it is not.
The report is available here.