September 9, 2020 at 5:00 am ET
Much has been made recently of the trend in which banks develop vendor relationships with financial technology companies to offer an expanded suite of services to consumers — both those who are in good credit standing as well as the nonprime consumers who have traditionally been underserved by the banking system.
Notably, the U.S. Treasury Department has been a strong advocate of such relationships, seeing them as a path toward greater efficiency and innovation in the financial sector. And recently, the Office of the Comptroller of the Currency proposed a rule that would promote bank-fintech vendor relationships by specifying that a bank is the “true lender” if it is named as the lender in the loan agreement or funds the loan, ending a long period of uncertainty and confusion.
According to Federal Reserve studies, nearly 40 percent of Americans would struggle to cover an unanticipated $400 expense with cash or a credit card which could be paid off in the next billing cycle. While this number has been slowly and steadily decreasing over the last several years from 50 percent in 2013, it still leaves 37 percent in need of credit access when unexpected needs arise.
For many of these financially challenged consumers, bank-fintech vendor relationships provide more options in the marketplace and allow innovative approaches to design products that best meet consumers’ individual needs. In addition to promoting choice, a greater diversity of options drives competition. Competition influences pricing, and consumers benefit all around.
As matter of fact, according to reviews posted on Trust Pilot, more and more consumers are choosing fintech loan products instead of depending on more traditional bank products, like overdrafts. “The application process was easy and funds deposited to my account quick. Saved me from having to pay hundreds of dollars in overdraft fees,” one customer wrote in June.
It is also reported that banks are starting to see the consumer shift away from overdraft fee income and competing with fintech firms by offering alternatives to overdrafts with longer term, manageable loans. US Bank’s Simple Loan is one such product, allowing direct deposit customers to borrow up to $1,000 for less than 71% APR. Key Bank has followed with a similar offering.
Small and regional banks, working with fintech companies, can compete with US Bank and Key Bank products — but only if they can leverage fintech’s proprietary technologies to expand banks’ customer base into nonprime and offer services that would otherwise be impossible or financially implausible to offer on their own.
Policymakers need to understand and appreciate the various elements that go into offering financial products or making lending decisions to risk-based nonprime consumers, all of which come at a cost to the lender. This includes marketing to attract a larger breadth of customers, underwriting technology to evaluate nontraditional applicants, and the capital to make and manage the loans. It also fails to account for higher default rates within this credit sector, which also makes loan costs higher than for prime customers.
In other words, while banks can offer the balance sheet and lending framework, they need fintechs’ marketing and underwriting technologies, particularly with the class of underserved consumer seeking immediate funds at lower amounts than the average bank loan.
Finally, regulators also see a noteworthy benefit as bank-fintech relationships result in products subject to bank supervision by regulatory agencies, including the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.
One example of this is the depth of due diligence and review by federal regulators, like the FDIC, into both the proposed program between the bank and the third party fintech service provider, as well as into the fintech entity itself. Not only is the initial review, diligence, and comment period incredibly thorough and time consuming, it does not end with the consummation of the program. Instead, it’s just the beginning of a continuous exam cycle conducted by both the bank and its regulators on the fintech partner and the program.
Furthermore, banks traditionally require the fintech partner to be subject to third party audits, which ensures compliance and execution with the program as intended by the bank. This results in existing products continuously being refined, the development of new products, and exposure to regulators who can constantly evaluate the program and products to ensure they satisfy the bank’s safety and soundness rigors while complying with consumer laws in a safe, secure, and regulated manner.
We all agree that every consumer — prime and nonprime alike — deserves access to safe, affordable and well-regulated credit, as well as education about lending and financial services more generally. And when banks hire fintech companies as a service vendor, they make important strides toward achieving this goal while benefiting everyone in the financial services ecosystem.
It’s truly unfortunate that some have chosen to demonize these relationships, seeking to discredit them instead of recognizing the positive impact that they are having and can continue to have on consumers’ financial health. From consumers, to banks, to fintechs, to regulators, the benefits are immense. We should be encouraging them — and studying consumer outcomes — so that consumers who have been consistently turned away from bank loans can finally have credit options when they need them.
Mary Jackson is CEO of the Online Lenders Alliance, the center for lending, technology, and innovation that represents the growing online lending industry; OLA members abide by a list of best practices and a code of conduct to ensure their customers are fully informed and fairly treated.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.