The Federal Reserve of Atlanta notes three broad historical regulatory categories, including fintech regulations, in the United States since the American Revolution. If these trends did not exist, it would be unlikely that our financial institutions would have the safe and sound footing they have today.
Three Regulatory Periods and the Next Horizon
Fintechs might enjoy reading the Fed’s detailed report on regulatory nuances, but in short, there are three large blocks, plus an eye on the next era.
- The Crisis Era (1782-1930)
- The Regulatory Era (1913-1980)
- The Bank Data Era (1980 to Present)
- The Next Phase: Data Drive Era
Regulators have not entirely neglected fintechs. There are facets of the Gramm-Leach-Bliley Act (GLB) which directly affect fintechs. Even the Bank for International Settlements (BIS) has a position in regulating the lowly regulated fintech.
Fintech Regulations: Expect to Meet Your Friendly Regulators
Fintechs pay special note, as the CFPB is now adding you to the regulatory watchlist. Fintechs operate with much lower regulatory barriers than banks, but this is likely to change. Bloomberg Law covers the trend in an article titled CFPB Adds Friction to Fintech Inclusion Efforts.
- As fintech firms increase their reach into underserved communities considering ESG strategies, the Consumer Financial Protection Bureau is also tightening enforcement around discriminatory practices and non-banks.
- Despite their laudable goals, these fintech companies may be subject to even more significant regulatory risks, particularly from the Consumer Financial Protection Bureau. Recent announcements from this consumer protection watchdog highlight the need to develop appropriate policies and procedures to avoid regulatory action.
- In March 2022, the CFPB announced that it had updated its exam manual to address discriminatory practices by expanding the definition of unfair, deceptive, or abusive acts and practices, or UDAAP, under the Dodd-Frank Act. Under this new definition, discriminatory practices may meet the criteria for “unfairness” even if they do not involve “credit” as required by the ECOA.
This is a start. It is timely as the economy starts moving towards a recession.
- In March 2022, the CFPB announced that it had updated its exam manual to address discriminatory practices by expanding the definition of unfair, deceptive, or abusive acts and practices, or UDAAP, under the Dodd-Frank Act. Under this new definition, discriminatory practices may meet the criteria for “unfairness” even if they do not involve “credit” as required by the ECOA.
Another Area Where Regulators Should Go
Banks are different from fintechs. Their assets and liabilities are sacred to consumers and require protection from high-risk investments. To protect people’s lifesavings, the Federal Reserve oversees “safety and soundness.” Those words are not to be taken lightly.
Fintech Regulations: High Risk/High Reward Can Be Disruptive
When you consider the volatility of fintechs as the economy begins to toil, it is essential to consider the untested nature of these companies during an economic downturn. BNPL lending is undoubtedly an example, but even more so is consumer lending, where Oportun stock fell from a $25.20 high in November 2021 to the current level of $4.42. And Oportun is undoubtedly not alone.
Regulations—they are not so bad. They provide operational boundaries and consumer protections. Sure, sometimes it might feel like a root canal at your dentist, but when you conform to requirements, the playing field is level, assets are protected, and customers receive fair treatment.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
