While recent efforts by the Consumer Financial Protection Bureau to crack down on payday lenders and other providers of high-interest loans have many consumer advocates cheering, many lower income and high-risk borrowers may be left with limited access to capital.
Enter the financial technology (fintech) companies that say this new rule brings more competition into the lending space, offering greater opportunities for the unbanked and underbanked borrowers traditionally served by the payday lending industry. If history has taught us anything, with increased competition comes greater oversight; effectively, this weeds out bad actors and creates an opportunity for new companies.
As the CFPB looks at additional regulations ranging from arbitration clauses to student and small business lending, fintech companies will likely soon find themselves in the crosshairs. This industry continues to grow even after investments shrunk in Q4 of 2015. According to a report by KPMG and CB Insights, investment in fintech reached $19.1 billion in 2015, with nearly $14 billion invested in VC-backed companies, a 106 percent increase compared to 2014. However, as these companies are watching the CFPB roll out greater scrutiny among traditional lenders, they continue to push back on regulators who eye what could be described the “wild west” of finance: the current fintech space. Many of these companies are built on new technologies that leave current regulations antiquated and unenforceable.
Many fintech companies are already having conversations with regulators and policymakers. A report by PwC found that 86 percent of financial services CEOs are worried about facing burdensome and substantial regulation as the word in Washington continues to be “fintech.” Washington is only the first layer. These companies are likely to come under substantial scrutiny in nearly every state, as they require different licensing based on transmitting and lending practices. Complying with state regulations can cost companies more than $1 million annually.
For now, fintech companies, as well as traditional companies eyeing breakthroughs or potential partnerships within the space, are walking a fine line with federal and state regulators. As the industry gains greater visibility, so does the threat from legislators, regulators and watchdog groups who will try to close existing regulatory loopholes. Like Uber, Airbnb and many other industry disruptors before them, fintech companies and their supporters will continue to make the case that it’s critical to not over-regulate these new products before they are fully to market and have had a chance to demonstrate whether there is a need for further regulation.
While the CFPB rule does provide the fintech industry with new opportunities to provide consumers with access to innovative technologies, “what’s past is prologue.” Additional regulation may very well be on its way for the fintech industry.
Brian Rose is an associate vice president with DDC Public Affairs.