Beginning in April, the Consumer Financial Protection Bureau (CFPB) announced it would step up its regulation of fintech companies. This proposed rule would govern when and how the CFPB will make results from supervisory action available to the public and expand the bureau’s regulatory reach.
While transparency in and of itself is a noble goal, this rule is a step forward toward creating an environment of burdensome regulation for fintech companies as it further cements the CFPB’s authority over nonbank entities and continues to augment regulation on an industry that is nascent and promises to generate significant consumer welfare.
Suppose fintech regulation continues to intensify and burden new technologies. In that case, it will be harder for them to provide consumers with low-cost financing options, disproportionately harming lower-income Americans and those who are outside the conventional banking system.
The bureau’s interest in further regulating fintech companies comes at a critical time when the U.S. Chamber of Commercehas already warned that Director Rohit Chopra could “radically change the nature of America’s financial services industry” and “harm consumer choice and innovation.”
Over-regulation of fintech companies presents a real danger to consumer welfare as it will deny Americans access to a form of financing from which they overwhelmingly benefit. In 2021, Plaid commissioned a report titled The Fintech Effect that found more than 88 percent of Americans regularly use fintech products, an increase from 58 percent in 2020. As Plaid noted, such high adoption rates mean that fintech “is no longer a corner of the financial system, but approaching its center.”
While consumers routinely cite convenience (93 percent) and saving money (78 percent) as the top reasons for using fintech products and services, they also cited the fact that such services allowed them to keep track of finances, gave them more control, and enabled them to develop better habits, allowing them to achieve economic security and certainty.
Over-regulating fintech companies risk being unable to provide such a valuable service to consumers.
Some fintech companies also provide essential access to credit for underbanked and unbanked Americans, which would inevitably be lost through further CFPB regulation. The Federal Reserve has estimated that while 81 percent of Americans are fully banked, “meaning that they had a bank account and, in the past 12 months, did not use any of the alternative financial services,” 13 percent were underbanked and “made use of alternative financial services.” The final 6 percent did not have access to a bank account, meaning they were unbanked and existed entirely outside the modern banking ecosystem.
While unbanked and underbanked Americans may not have access to a traditional bank account, almost three-quarters own a smartphone and therefore can access credit from fintech companies. As the Federal Deposit Insurance Corp. noted, such high adaptation of cell phones among the underbanked and unbanked means fintech companies can especially benefit underserved consumers.
Over-regulation that could push fintech companies out of the market would predictably mean American consumers who most depend on this service would lose access to it.
Unlike traditional lenders, fintech companies offer consumers access to lower interest rates due to their technology and algorithms, allowing consumers to borrow money at a lower cost. For example, algorithms enable them to more accurately determine the likelihood of repayments and how much consumers can afford to borrow. On the other hand, traditional banks still use credit scores to determine the likelihood of repaying and how much consumers can afford to borrow.
The Federal Reserve estimated that the average interest rate of a personal loan was 9.41 percent. Fintech companies can offer interest rates as low as 4 percent, meaning consumers have lower monthly repayments and are better placed to achieve financial and economic security.
As noted by the Federal Reserve, fintech companies can provide “credit access to consumers at a lower cost” because of their increased use of “alternative data sources, big data and machine learning technology, and other new artificial intelligence models.” The Congressional Research Service has reaffirmed these findings, contending that the heavy use of technology allows fintech companies to offer lower rates for borrowers. Unnecessary and burdensome regulation from the CFPB could ultimately see consumers lose access to this cheaper form of lending.
While the CFPB intends to use its regulatory authority to protect consumers, it must be careful not to overstep and create a regulatory environment that degrades the significant consumer welfare fintech companies provide. While doing so would inflict considerable and unnecessary harm on consumers at large, low-income and those outside of conventional banking would be hardest hit, leaving them without access to finance and credit.
Unfortunately, the growing attention the bureau is paying to fintech companies suggests they are not considering these consumers.