The Biden administration enters the banks v. fintech war

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MM started the week with an overview of why financial technology start-ups face a tough 2023 in Washington. Let’s dig into an under-the-radar battle where the Biden administration is trying to give fintechs a boost and finds itself at odds with bankers and a bipartisan group of lawmakers.

The fight centers on a 2022 proposal from the Small Business Administration to allow fintech startups, which tout algorithms and digital-native operations as boons for borrowers, to begin offering government-backed loans under the department’s flagship “7(a)” program — long the domain of traditional lenders.

SBA rolled out the plan with an assist from Vice President Kamala Harris. She included it in a list of actions announced in October to help entrepreneurs — especially people of color — who are not served by banks.

The proposal appears as a major new front in a banking-versus-fintech lobbying war that is playing out across financial policy. Here’s why.

— Trade groups including the American Bankers Association and the National Association of Government Guaranteed Lenders warns that the SBA is ill-equipped to regulate the fintech companies that want to participate. Bank lobbyists argue that combined with loan guarantee changes the department is also proposing, the new participants could end up being a financial burden on the program and its borrowers.

“Congress will have to take action to slow this down,” said Tony Wilkinson, president and CEO of the trade group representing government-backed lenders. “We are staring at a potential problem. Congress and the SBA can stop it, or they have to clean it up.”

— Fintechs counter that banks are just trying to protect their turf and has done a poor job of serving the smallest businesses.

“What they have developed is a 7(a) oligopoly very similar to the taxi medallion scheme,” said Scott Stewartwho heads the Innovative Lending Platform Association.

— But as with almost all fintech in 2023, there is political baggage. Fintech lenders played a major role in providing emergency loans to the smallest businesses at the start of Covid-19, while traditional banks faced complaints that they were catering for their existing customers. But the startups have been dogged by accusations that they exposed the SBA to scammers. The leading House subcommittee on the coronavirus crisis said in a December report that fintechs failed to stop “obvious and preventable fraud,” leading to the unnecessary loss of taxpayer dollars.

Why you should care: The Biden administration’s implementation of the proposal will be a key indicator of the fintech world’s political capital in Washington. The House Small Business Committee’s top Democrat, Nydia Velazquez, and outgoing top Republican, Blaine Luetkemeyer, have warned the SBA about the plan.

Velazquez told MM in a statement: “SBA must take time to address the issues identified by Congress and exercise extreme caution before making changes to the flagship 7(a) program.”

The view from the SBA is that the fintech fraud problem was isolated to a couple of firms that have since been sanctioned. The agency argues that opening the program to more firms will increase competition among lenders and lower borrowing costs. “We must recognize that small business lending in 2023 is very different than it was in 1982,” an SBA spokesperson said in a statement.

And that was your brief reprieve from Kevin McCarthy — Thank you for sticking with MM during this historic week. Please send tips to [email protected] and [email protected].

House Republicans are the main event after adjourning Wednesday without a speaker … Japan’s Minister of Economy, Trade and Industry, Yasutoshi Nishimura, will speak at CSIS at noon.

Reality check: House drama shrinks congressional agenda — POLITICO’s Burgess Everett: “With only 50 Senate seats and a slim majority in the House of Representatives during Biden’s first two years in office, Democrats pushed through two sweeping party bills on Covid relief, as well as taxes, health care and energy. … An agenda even approaching that size appears out of reach in the coming months as House Republicans wrestle through a deadlocked speaker.”

Crypto is now a political weapon and can be bad for your brand. Just check these headlines.

— POLITICS: Lightfoot’s New Ad Attacks Garcia on ‘Crypto Villain’ — “The Chicago mayor’s race heats up on the airwaves this week with Mayor Lori Lightfoot out with campaign’s first negative TV ad, casting Congressman Jesus ‘Chuy’ Garcia as a pal around with “crypto-villains” and “accused polishers.”

— FT: FTX failure forces rethink on global sports sponsorship: “The FTX collapse is reverberating beyond the crypto and financial worlds, as the global sports industry considers the future of lucrative sponsorship deals with digital asset companies.”

— Bloomberg: Bitcoin miner Riot drops ‘blockchain’ from name after rough year — “Riot Blockchain Inc. has changed its name to Riot Platforms as the Bitcoin miner seeks to navigate the battered crypto landscape by diversifying operations.”

The government’s crypto crackdown continues. Here is the latest news.

— Coinbase pays $50 million in money laundering lawsuit — Sam reports that the US-based digital currency exchange agreed to pay a $50 million fine after the New York Department of Financial Services found it lacked safeguards to prevent users from laundering money and engaging in other illegal activity.

— US pulls FTX-linked holdings in Robinhood – Bloomberg: “The US government has seized – or is in the process of seizing – shares in Robinhood Markets Inc. worth hundreds of millions of dollars as part of the fraud case against Sam Bankman-Fried, founder of the failed crypto firm FTX, lawyers said in court Wednesday.”

— SEC raises red flag in Binance.US deal – Bloomberg: “The US Securities and Exchange Commission is pushing back on Binance.US’ plan to buy bankrupt crypto lender Voyager Digital in a deal valued at about $1 billion, according to a bankruptcy filing.”

— SEC Targets Alleged Crypto Scheme — The agency announced charges Wednesday against the masterminds of what it said was a fraudulent investment scheme that made false claims about blockchain technology.

Sen. John Kennedy bows out of Louisiana’s gubernatorial race – The member of the Senate Banking Committee, a key voice on issues such as China policy and flood insurance, said: “I just think I can help my state and my country more in the Senate.”

Fed versus markets — The WSJ’s Nick Timiraos reports that Federal Reserve officials at their meeting last month were concerned that investor optimism about an end to rate hikes could make it harder to fight inflation.

The Biden admin’s regulatory agenda is here — OMB has updated its so-called unified agenda for upcoming regulatory actions across departments and independent agencies. The list is not binding, but can be a useful tool for mapping the landscape of what is being worked on.

Among the gold nuggets in the searchable database are a potential CFTC regulation this year on arrangement contracts and possible CFPB rules on overdrafts.

On the agenda, the SEC expects to finalize its corporate climate disclosure rule in April, according to POLITICO’s energy team. The regulation is an overarching oversight goal for House Republicans. Opponents argue that the SEC is exceeding its authority.

Amazon plans major cuts —WSJ: “Amazon.com Inc.’s layoffs will affect more than 18,000 employees, the largest reduction disclosed in the past year at a major technology company, as the industry retreats amid economic uncertainty.”

US economic officials to visit Taiwan — FT: “The US is sending a delegation of trade and economic officials to Taiwan next week, as President Joe Biden’s administration seeks to strengthen commercial ties with the country.”

Former Representative Ed Perlmuttera Colorado Democrat who was a senior member of the Financial Services Committee is joining Holland & Knight as a partner in the firm’s Washington and Denver offices, POLITICO Influence reports.

Robert Robilliardwho most recently served as a top aide to crypto critic Rep. Brad Sherman, has joined the Crypto Council on Innovation as Director of Government Affairs.

John Rizzo has been appointed SVP of public affairs at comms and public affairs firm Clyde Group and will focus on its financial services clients. Rizzo was most recently a senior spokesperson at the Ministry of Finance. – Daniel Lippman

Peterson Foundation is out with a new poll that found 90 percent of voters want Congress to find a bipartisan way to reduce the national debt.

Correction — Yesterday’s MM misattributed a quote about the speaker’s race to Rep. Bill Huizenga.