Over the past decade, the way Americans accessed capital has changed dramatically. Whereas previous generations relied on financing from high-street banks, today’s young adults and unbanked consumers are more likely to use fintech companies, mostly accessible through their smartphones. Despite the significant change and democratization of consumer finance, the Consumer Finance Protection Bureau (CFPB) has become increasingly active in regulating these fintech organizations. While regulations are in their infancy, the CFPB and Biden Administration must be careful not to overregulate and choke the industry to the point it cannot meet consumer needs.
In April 2022, the CFPB – led by Rohit Chopra – announced they were planning on tapping into an unused “legal provision to examine nonbank financial companies that pose risks to consumers” and “level the playing field between banks and non-banks.” The increased scrutiny, the Bureau stated, would likely take the form of “supervisory examinations to review the books and records of regulated entities.”
However, the authority to investigate non-bank entities is based on overly broad and vague language. For instance, the CFPB invokes long “dormant authority” provisions from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which stipulates that the agency may use “reasonable cause” to investigate non-bank entities that it determines pose a risk to consumers. Likewise, the Bureau draws upon a 2013 procedural rule for its authority, which does not even define “risk to consumers.” It simply notes the potential for unfair and deceptive practices that potentially violate federal consumer protection laws by “non-bank covered persons.”
Following the announcement of increased scrutiny of fintech companies, CFPB announced an additional procedural rule that would see “the results of CFPB supervision of non-bank entities to public release.” While this proposal is relatively modest, it provides further evidence that fintech companies are squarely in the crosshairs of federal regulators.
Fintech is an abbreviation for financial technology and is a new method of banking that relies on “software and algorithms that are used on computers and, increasingly, smartphones” to deliver financial services to businesses and consumers. Unlike traditional banks, fintech companies do not operate as banks, and their use of advanced technology allows them to employ fewer people, enabling them to offer lower interest rates to consumers. Fintech companies are now worth an estimated $7.9 billion.
Since the emergence of fintech in 2008 as an alternative to traditional banking institutions, it has proved immensely popular with consumers. In their 2021 report, The Fintech Effect, Plaid reported that 88% of Americans now use fintech services, a number larger than those who use video streaming services or social media. While consumers routinely cite convenience (93%) and saving money (78%) as the top reasons for using fintech, they also reported that fintech allowed them to keep track of finances, gave them more control, and enabled them to develop better habits, as the main reason they used these services.
The considerable popularity of fintech services should clearly warn CFPB that overregulating these innovative technologies could ultimately deny consumers access to services they overwhelmingly want.
One of the main advantages of fintech companies is that they offer consumers access to lower interest rates than high-street banks. Unlike banks, fintech companies deploy advanced technology to automate much of the lending process, meaning they require fewer staff and fewer physical buildings. This business model allows them to offer consumers lower interest rates, saving them money in the long term.
Such trends were acknowledged by the Federal Reserve when in 2017 it noted “the use of alternative data sources, big data and machine learning technology, and other new artificial intelligence (AI) models” has allowed fintech companies to provide “credit access to consumers at a lower cost.”
Imposing overly burdensome regulations on fintech companies could ultimately diminish their ability to provide unbanked and underbanked Americans with lower-cost access to credit, forcing them to use more expensive mainstream lenders.
While the desire to protect Americans from risky financial companies is a noble goal, and reflects the task Congress has set before it, the Bureau must be careful not to overregulate fintech. Doing so not only risks destroying innovative financial services that are overwhelmingly popular with consumers, but it also risks denying them access to alternative financial options and reducing the availability of banking options for them.
Edward Longe and Nate Scherer are with the American Consumer Institute, a nonprofit educational and research organization. Published in The Economic Standard