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Fintech firms and other non-bank companies have “augmented
consumer finance markets” and “accelerat[ed] an evolution
in consumer financial products and services.” Evidence also
suggests that these firms have expanded consumer access to credit,
payment solutions, and low-cost bank and transaction accounts.
That’s the overall assessment of a recent report put out by the
US Department of the Treasury (“Treasury”) on the state
of competition in the fintech marketplace (“Treasury
Report”). While cautioning that it can be hard to get good
data on this fast-changing marketplace, and noting that some new
entrants might be “sidestepping” comprehensive regulatory
supervision, the Treasury Report concludes that these new entrants
could increase competition in consumer financial services and that
there is potential for this competition to benefit consumers by
lowering prices, improving convenience, and leveraging more
advanced technology. The Treasury Report also offers several
suggestions to enhance and streamline supervision of the fintech
sector.
The Treasury Department prepared the report in response to
President Biden’s Executive Order on promoting competition in
the US economy (“Competition EO”). Pursuant to the
Competition EO, the Treasury Report focuses on fintech and other
new entrant non-bank firms directly involved in the provision of
digital financial products and services in core consumer finance
markets—namely, deposits, payments, and credit.1
The Treasury Report is the final report in a series of reports
assessing competition in various sectors of the
economy.2
In this Legal Update, we summarize the key findings and
recommendations in the Treasury Report.
Key Benefits Identified in the Treasury Report
The Treasury Report highlights how non-bank firms’ entry
into and participation in consumer financial services markets
presents opportunities and benefits for consumers. The Treasury
Report notes that across market segments, fintech firms are
challenging market incumbents using new business models, new
technology, and newly available data. These innovations enable
non-banks to compete by offering differentiated products that are
often more personalized and accessible and, in doing so, change the
provision of financial services and how firms compete.3
The Treasury Report emphasizes how the entrance of non-bank firms
in consumer finance markets provides benefits such as increased
competition, improved products and services, consumer cost savings,
expanded financial infrastructure to increase reach to underserved
and unserved individuals, enhanced approaches to overcome
discrimination, and improved consumer financial
well-being.4
Key Concerns Identified in the Treasury Report
While the Treasury Report acknowledges a number of opportunities
and benefits associated with the entry of non-bank firms in the
consumer finance market, the Treasury Report also raises several
concerns:
- Regulatory Arbitrage. The Treasury Report draws attention to
how non-bank firms offering unbundled functions of traditional
banking, such as deposits, payments, and credit, have not been
subject to the same comprehensive supervision and regulation as
banks. The Treasury Report expresses a concern that some non-bank
firms may seek or create relationships with banks and small credit
card issuers primarily to avoid consumer protections and engage in
harmful lending practices. Alternatively, non-bank firms may obtain
certain exemptions or otherwise avoid application of certain
regulations through these partnerships. In either case, the
Treasury questions the level of oversight and supervision that
should be applied to these partnerships in order to support
application of, and compliance with, consumer
protections.5 - Prudential Concerns. The Treasury Report notes that as the
consumer finance and banking market has evolved and non-bank
entrants have matured, there has been some movement toward
re-bundling of services. The Treasury Report includes a concern
that the presence of non-bank firms outside the bank regulatory
perimeter—while offering a similar set of products and
services that pose similar prudential risks as banks, such as
deposit-taking and making loans and extensions of
credit—poses a risk.6 - Mix of Commerce and Banking. The Treasury Report is concerned
that depository institutions owned by non-bank firms would be
subject to the risks of their commercial affiliates, which could
cause complications for regulators, particularly given the lack of
consolidated supervision. The Treasury Report also highlights other
concerns about conflicts of interest and the concentration of
financial, economic, and political power more generally with the
mixing of commerce and banking.7 - Reliability and Fraud. The Treasury Report notes that new
entrant non-bank firms generally focus on digital channels for the
provision of financial services and may be particularly exposed to
issues with reliability and fraud.8 - Data Privacy and Security. The Treasury Report emphasizes how
non-bank firms generally access consumer financial account data
through data aggregators, which leads to concerns about the
aggregators’ on-going, unlimited access to consumer financial
information and the lack of supervision over them. The Treasury
Report also mentions general concerns about data privacy and
surveillance.9 - Bias and Discrimination. The Treasury Report discusses how
non-bank firms have leveraged advances in
technologies—including artificial intelligence/machine
learning (“AI/ML”)—to enable enhanced underwriting
and expanded access to credit to those with thin credit files or
who reside in underserved areas.10 At the same time, the
Treasury Report highlights how the use of AI/ML technologies by
non-bank firms presents new challenges to ensuring transparency and
fairness—particularly as it relates to credit
underwriting—and new forms of discrimination
risk.11 - Consumer Financial Well-being. The Treasury Report also
includes a concern that some non-bank firms may extend credit
without sufficiently considering a consumer’s financial
capabilities and ability to repay or may exploit information
asymmetries to market products that are unfair, deceptive, or
abusive.12
Key Recommendations
In light of the risks mentioned above, the Treasury Report
provides a list of recommendations for federal regulators to enable
competition in the delivery of consumer financial services and
promote regulatory oversight across financial institutions that is
commensurate to the activities and risks associated with non-bank
firms.13 The Treasury Report makes the following
recommendations:
1. Encouraging Enhanced Measures of Competition and Review of
Concentration in Banking.
The Treasury Report encourages the DOJ and federal banking
agencies to review bank merger oversight policies in light of
ongoing consolidation and the potential waning utility of certain
traditional measurements of competition due to the evolving
marketplace and limitations of official data
sources.14
2. Enabling Competition in Responsible Consumer Credit
Underwriting.
The Treasury Report recommends that federal banking regulators,
in consultation with the Consumer Financial Protection Bureau
(“CFPB”) and other federal agencies, support responsible
consumer credit underwriting approaches that are designed to
increase credit visibility, reduce bias, and prudently expand
access to credit to US consumers.15
3. Enabling Effective Oversight of Bank-Fintech
Relationships.
The Treasury Report recommends that federal banking regulators
implement a clear and consistently applied supervisory framework
for bank-fintech relationships. The Treasury Report notes that
federal banking regulators recently proposed interagency guidance
on managing risks presented by relationships between banks and
non-bank third parties (“TPRM Guidance”), which, if
finalized, would replace each agency’s current guidance, and
provide a uniform framework for banks to manage their third-party
relationships. The Treasury Report recommends that federal banking
regulators finalize the TRPM Guidance.16
The Treasury Report also states that contractual arrangements
underlying a bank-fintech relationship should support a robust,
risk-based approach to reviewing a bank’s activities. The
Treasury Report specifically recommends that as federal banking
regulators finalize the TPRM Guidance, they should include language
to help encourage banks to negotiate effective oversight provisions
in their contracts with fintech firms and other third-party service
providers that align with the bank’s internal oversight and
risk management of its consumer banking activities, including those
activities performed on behalf of the bank by a fintech firm or
another non-bank.17
4. Encouraging Competition in Responsible Small-Dollar
Lending.
With respect to bank-fintech lending relationships, the Treasury
Report recommends that federal banking regulators review and, as
appropriate, revise supervisory practices with respect to the
Interagency Lending Principles for Offering Responsible
Small-Dollar Loans (“SD Lending Guidance”) to address (i)
coverage for larger loans (e.g., $10,000 or more) and, (ii) with
greater specificity, the ways in which the SD Lending Guidance
applies to a bank-fintech lending relationship, including the
activities performed by a fintech firm or other third-party with or
on behalf of a bank lender.18 The Treasury Report also
recommends that federal banking regulators endeavor through these
and other actions to continue providing banks with sufficient
specificity on how they can provide small-dollar loan products or
related products while operating in compliance with applicable laws
and regulations.19
With respect to alternative forms of non-bank lending, the
Treasury Report recommends that the CFPB continue to investigate
and monitor developments related to small-dollar installment loan
products and consider what guidance might be appropriate and
possible for the agency to provide. Additionally, the Treasury
Report recommends that the CFPB review its authorities to consider
if and how the agency might provide direct supervision of larger
non-bank consumer lenders, including buy now, pay later
(“BNPL”) and installment loan providers. Finally, the
Treasury Report recommends that the CFPB revisit its 2020 advisory
opinion regarding earned wage access programs and review whether
earned wage access products meeting the requirements specified by
the advisory opinion should not be considered credit products
subject to requirements under the Truth In Lending Act and
Regulation Z.20 (Please see our previous Legal Update for a discussion of the
CFPB’s 2020 advisory addressing earned wage access
programs.)
5. Enabling Secure Data Sharing.
The Treasury Report recommends that federal banking regulators
and the CFPB help promote a more unified approach to oversight of
consumer-authorized data sharing.
First, consistent with the Competition EO, the Treasury Report
recommends that the CFPB finalize its ongoing rulemaking
implementing Section 1033 of the Dodd-Frank Act, which provides
that a consumer financial services provider must make available to
a consumer information in the control or possession of the provider
concerning the consumer financial product or service that the
consumer obtained from the provider. The CFPB has publicly
indicated that it would issue a proposed rule in 2023 with a final
rule to follow in 2024.
Second, the Treasury Report recommends that the CFPB determine
whether it has the legal authority to supervise data aggregators
and, if so, exercise its authority to supervise data aggregators
with a level of scrutiny that is commensurate with the activities
conducted with respect to consumer financial data and at a level
comparable to the supervision applicable to banks for the handing
of similar financial data.21
Conclusion
The Treasury Report recognizes that new entrant non-bank
firms—in particular, fintech firms—are adding
significantly to the number of firms and business models competing
in core consumer finance markets and contribute to positive
competitive pressure.22 At the same time, the Treasury
Report raises a number of concerns it has about new entrant
non-bank firms and emphasizes how these firms are generally not
subject to the same oversight for safety and soundness or consumer
protection as banks.23
Although the Treasury Report addresses federal regulators, many
of the concerns it expresses will be familiar to the states as
well, and states are sure to welcome the report’s publication.
Increasingly, state financial services regulators have shared
Treasury’s concerns in recent years and have sought to fill a
perceived regulatory vacuum for fintech firms that partner with
banks to offer financial services to state consumers. Several
states have entered settlements with, and initiated litigation
against, fintech firms participating in bank partnership programs,
alleging licensing, usury, deceptiveness, and other violations of
state law. In addition, a number of states have enacted
“anti-evasion” laws that seek to regulate these programs
by recharacterizing the non-bank partner in the program as the
“true lender” under any of a variety of tests—laws
intended to regulate bank activities indirectly where the states do
not have the authority to regulate the banks directly.
The Treasury Report’s findings and recommendations indicate
that non-bank firms’ relationships with banks will continue to
be an area of interest for the regulators. Based on the
statements—and recent enforcement—by the federal
regulators, this focus will include third-party vendor risk
management and the oversight of fintechs performing services for
banks as part of any bank-fintech partnership. Thus, fintech firms
engaging in a variety of consumer financial services activities
should continue to have appropriate compliance procedures in place
and understand the expectations of the regulators regarding
non-bank firm relationships with banks. Finally, as noted above, in
light of the regulators’ growing interest in bank-fintech
partnerships, banks should ensure they have effective oversight and
compliance management programs in place for their relationships
with non-bank firms.
Footnotes
1 U.S. Dept. of the Treasury, Assessing the Impact of
New Entrant Non-bank Firms on Competition in Consumer Finance
Markets, at 1 (Nov. 2022), https://home.treasury.gov/system/files/136/Assessing-the-Impact-of-New-Entrant-Nonbank-Firms.pdf.
2 Press Release, U.S. Dept. of the Treasury, “New
Treasury Report Shows Fintech Industry Requires Additional
Oversight to Close Gaps, Prevent Abuses and Protect
Consumers,” (Nov. 16, 2022), https://home.treasury.gov/news/press-releases/jy1105.
3 U.S. Dept. of the Treasury, Assessing the Impact of
New Entrant Non-bank Firms on Competition in Consumer Finance
Markets, at 74-75.
4 Id. at 73.
5 Id. at 81.
6 Id. at 83-84.
7 Id. at 84.
8 Id.
9 Id. at 87-88.
10 Id. at 75-76.
11 Id. at 88-90.
12 Id. at 90-91.
13 U.S. Dept. of the Treasury, Assessing the Impact
of New Entrant Non-bank Firms on Competition in Consumer Finance
Markets, at 102.
14 Id. at 103-106.
15 Id. at 106-109.
16 Id. at 111.
17 Id. at 111-112.
18 Id. at 114.
19 Id. at 114-115.
20 Id. at 115.
21 Id. at 115-117.
22 Press Release, U.S. Dept. of the Treasury, “New
Treasury Report Shows Fintech Industry Requires Additional
Oversight to Close Gaps, Prevent Abuses and Protect
Consumers.”
23 U.S. Dept. of the Treasury, Assessing the Impact
of New Entrant Non-bank Firms on Competition in Consumer Finance
Markets, at 1.
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