Bank-fintech partnerships do not need more regulation
In the wake of the global financial crisis, fintech companies burst onto the scene with a dizzying array of exciting new products and services. While fintechs may be best known for designing web and mobile applications that make it easy for consumers and small businesses to make payments and apply for financing, they have also introduced underwriting tools that help banks expand credit availability.
Instead of seeing banks as competition, many fintechs have chosen to work closely with banks on new product offerings. In these partnerships, the fintechs have the technological expertise and creativity, while their banking partners bring expertise in lending, payments and compliance with the array of laws and regulations that govern their business. The combination has proven to be very effective, with studies confirming positive effects on credit availability, financial inclusion and user experience.
Despite the proven benefits of bank-fintech partnerships, consumer advocates and some regulators have criticized them for making many state licensing and usury laws unenforceable. Using the pejorative and inaccurate term “rent-a-bank”, these critics argue that we need more regulation of bank-fintech partnerships, often proposing measures that would destroy the benefits they offer to the economy and the public. However, these feelings are misplaced.
First, the claim that bank-fintech partnerships are not regulated is simply untrue. In a typical bank partnership program, fintech markets and services loans. But the loans are actually given by the bank, not fintech.
In many programs, the bank keeps the loan on the books and only sells a share to the fintech. As a highly regulated entity, the bank is subject to robust oversight by state and federal regulators, including with respect to well-established guidelines on subprime and predatory lending.
The bank is required to conduct strict due diligence on the fintech at the beginning of the relationship, and to monitor and oversee the fintech’s marketing and servicing of the loan throughout its lifetime (even if the bank sells entire loans to the fintech after origination). Existing law also subjects fintechs to scrutiny as service providers to banks.
Bank-fintech partnerships are governed by program agreements that require the fintech to comply with the strict regulatory requirements applicable to the bank, and are subject to heavy bank oversight, including frequent compliance audits. Fintechs that partner with banks often must maintain state licenses for brokerage, servicing, fundraising and other activities, subjecting them to direct oversight by state licensing authorities.
Second, the suggestion that banking partnerships exist solely to “avoid” state usury limits and licensing laws is false. It is of course true that banks that partner with fintechs can lend nationally at the rates allowed by their home states. They can do so whether they partner with a fintech or not.
Additionally, in many bank-fintech partnerships, the bank offers loans at rates that are otherwise allowed under state law, so targeting these partnerships for this reason alone would throw the proverbial baby out with the bathwater.
As regards the question of whether there should be a national usury limit or restrictions on rate-export authority, the Supreme Court recently made it clear that this is a matter for Congress. To date, Congress has steered clear of lending rate controls because passing such a law would reduce credit availability and push consumers toward even more expensive options.
The proposed regulation of bank-fintech partnerships will significantly weaken innovation, harming consumers, small businesses and banks. If fintechs can’t work with banks, they have to lend directly.
Direct lending requires huge upfront investment in acquiring lending licenses, as well as greater ongoing license administration and multi-jurisdictional compliance programs.
We know firsthand that these costs can deter some fintechs from offering new products. Furthermore, the creativity and technical skills of fintechs have helped smaller banks, allowing them to leverage the internet and mobile applications to offer a better user experience, create opportunities to serve customers outside their traditional footprints, and improve efficiency while reducing credit risk. Limiting bank partnerships can only hurt these banks, which often lack the resources to develop their own technology improvements. The unintended damage for these banks is that their customers will be deprived of a better user experience and have less access to innovative credit products.
By continuing to allow these partnerships to combine the trust, reliability and stability of a bank with the innovative offerings of a technology company, we can ensure continued competition and deliver real benefits to consumers and small businesses.
