CFPB puts Fintech in its regulatory crosshairs – InsideSources

Starting in April, the Consumer Financial Protection Bureau (CFPB) announced that it would step up regulation of fintech companies. This proposed rule would govern when and how the CFPB would make results of supervisory actions available to the public and expand the agency’s regulatory reach.

While transparency in itself is a noble goal, this rule is a step forward in creating an environment of burdensome regulation for fintech companies, as it further cements the CFPB’s authority over non-bank entities and continues to increase regulation in an industry that is beginning and promises. to generate significant consumer welfare.

Assume that fintech regulation continues to intensify and burden new technologies. If so, it will be more difficult for them to provide consumers with affordable financing options, disproportionately harming low-income Americans and those outside the conventional banking system.

The agency’s interest in further regulation of fintech companies comes at a critical time as the US Chamber of Commerce has already warned that director Rohit Chopra could “radically change the nature of the US financial services industry” and “harm consumer choice and innovation.”

Over-regulation of fintech companies poses a real danger to consumer welfare as it will deny Americans access to a form of financing that they overwhelmingly benefit from. In 2021, Plaid commissioned a report titled The Fintech Effect which found that more than 88 percent of Americans regularly use fintech products, up 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 the center.”

While consumers routinely cite convenience (93 percent) and savings (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 their finances, gave them more control and enabled them to develop better habits so that they can achieve financial security and safety.

Over-regulating fintech companies risk not being able to provide such a valuable service to consumers.

Some fintech companies also provide vital access to credit for unbanked and unbanked Americans that will inevitably be lost through further CFPB regulation. The Federal Reserve has estimated that while 81 percent of Americans are fully banked, “meaning 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 “used alternative financial services.” The final 6 percent did not have access to a bank account, meaning they were unbanked and existed completely outside the modern banking ecosystem.

While unbanked and underbanked Americans may not have access to a traditional bank account, nearly three-quarters own a smartphone and can therefore access credit from fintech companies. As the Federal Deposit Insurance Corp. noted, such high adoption of mobile phones among the underbanked and unbanked means that fintech companies can particularly benefit underserved consumers.

Overregulation that could push fintech companies out of the market will predictably mean that American consumers who rely most on this service will 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 repayment and how much consumers can afford to borrow. On the other hand, traditional banks still use credit scores to determine the likelihood of repayment and how much consumers can afford to borrow.

The Federal Reserve estimated that the average interest rate on 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 able to achieve financial and economic security.

As noted by the Federal Reserve, fintech companies can provide “credit access to consumers at a lower cost” due to their increased use of “alternative data sources, big data and machine learning technologies and other new artificial intelligence models.” The Congressional Research Service has confirmed these findings, arguing that the heavy use of technology allows fintech companies to offer lower rates for borrowers. Unnecessary and burdensome regulation by the CFPB could ultimately lead to consumers losing 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 overreach and create a regulatory environment that detracts from the significant consumer welfare that fintech companies provide. While it would cause significant and unnecessary harm to consumers, low incomes and those outside of conventional banking would be hardest hit, leaving them without access to finance and credit.

Unfortunately, the increasing attention the agency is giving fintech companies suggests it is not considering these consumers.