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 Dept. Treasury on the state of competition in the fintech marketplace. While cautioning that it can be hard to get good data on this fast-changing marketplace. Whatsmore 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. Also, 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. The Treasury Report is the final report in a series of reports assessing competition in various sectors of the economy.
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. 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.
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:
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 oversight and supervision that should be applied to these partnerships in order to support application consumer protections.
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 perimete. 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.
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. This could cause complications for regulators, particularly given the lack of consolidated supervision. The Treasury Report also highlights other concerns about the concentration of financial, economic, and political power more generally with the mixing of commerce and banking.
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.
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.
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. 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.
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.