Trump’s victory unlikely to stop crackdown on BAAS and fintech

Years of regulatory restrictions on relationships between banks and fintech companies have intensified since the collapse of baas intermediary Synapse, and are unlikely to end even if a new administration takes office in January, banking-as-a-service and fintech leaders say.

“I don’t expect immediate changes as it will take some time for changes to take place at the senior level,” said one baas banker, who did not want to be named for fear of regulatory retaliation. “Consequently, we may have a short-term period of lull in enforcement activity. In actual practice and enforcement, things move slowly.”

Jason Henrichs, CEO of banking consortium Alloy Labs Alliance, agreed that the new administration’s impact on banking-as-a-service will be limited.

“Most of the enforcement actions we see are related to existing laws and regulations,” Henrichs said. “I think the appointment of a new FDIC chief will be the biggest change in regulatory policy that needs to happen regardless of the administration.”

Some of the pressure on banking-as-a-service comes from Congress. In a September letter, Sen. Elizabeth Warren, who was re-elected to her post representing Massachusetts this week, called on bank regulators to directly supervise fintech companies that offer financial products to consumers and to have smaller fintech companies shoulder the full regulatory burden that they face. charter banks. .

“It’s simply not possible,” said a baas banker. “They are not equipped for this and do not think so. The economy is not working. Investors (fintech companies) will leave. So it’s just a completely ridiculous question.”

Of course, not all fintech companies are suffering. And the Trump administration’s pro-market, anti-regulatory stance could help fintech companies like Chime that plan to go public next year.

Banking-as-a-service bank and fintech leaders are worried about what will be lost as a result of the ongoing regulatory crackdown.

That could “cut off a whole range of industries that serve much of America,” said the former CEO of a banking-as-a-service bank. “And that’s a bad result.”

Tighter scrutiny and consent orders against baas banks have already affected some bank-dependent fintech companies.

“Our current system is really hurting fintech,” Rodney Williams, co-founder and president of SoLo Funds, said in an interview. “Companies are suffering. Fintech funding is down 80%.” Los Angeles-based SoLo operates a lending marketplace in which participants borrow money from each other. Consumer Financial Protection Bureau sued SoLo Funds in May for charging large fees on loans, failing to disclose loan costs, and lending without a license in states that require one; the company vowed to fight back.

Innovation

One consequence of restrictions on banking as a service is a reduction in financial innovation.

“Fintech companies are ready to push the boundaries of creativity because they are trying to meet market demand as they are not regulated,” said the baas bank CEO. “That way they’re not so constrained in thinking about, oh no, this might cause problems X, Y and Z.”

One example is Chime, which was one of the first companies to offer payroll access two days earlier. This is an innovation with little risk: payroll providers typically transfer salaries into bank accounts two days before the official payday.

However, some say regulators are lumping such products with more sketchy offerings. “There is no differentiation, there is no difference between good operators and the synapses of the world,” said the baas banker. “Right now, regulators are essentially saying that everything related to fintech, everything related to so-called innovation, is risky.”

Access to subprime credit

Some fintech companies cater to people who can’t get credit elsewhere because they don’t have a FICO score or have a low score. These lenders end up charging more than a traditional bank, and in some cases, exceeding the 36% interest rate cap set by several states, which the CFPB has supported. But they typically charge less than alternatives such as check cashers.

According to a former baas banker, an annual interest rate of 36% is the cost of safe and secure lending to about 40% of Americans. “What part of America do you think lacks access to credit? Which one? Is it the bottom 50%? I don’t know how you can decide which people in a country should not be allowed access to credit.”

He worries about the millions of people who are borrowing from subprime fintech lenders today.

“What will they do tomorrow if they don’t have these loans? What will happen to them? – he said.

Some fintech lenders, including SoLo Funds, offer loans for a fee or “tip” rather than an interest rate.

“It’s pretty clear that fintech is significantly cheaper, and we’re not the only ones,” Williams said.

SoLo Funds ordered a study Last year it showed that some banks’ subprime credit cards cost more than SoLo Funds loans. The tip that borrowers pay is equal to the average cost of 17%.

“Nobody has done a thorough enough study to figure out what works best for consumers,” said a former baas banker. “Consumers seem to like products that they can simply pay a fee for. The idea, ‘I can pay five dollars next month so I can have $100 right now to solve this problem,’ seems to resonate.”

Thought and research are needed to analyze the cost of fintech compared to traditional banking products, as well as how fintech should be regulated, he said.

“I know a lot of people who are thinking about leaving this space because they feel like they can’t win,” he said.