Federal and state regulators risk stifling competition as they continue to develop a regulatory regime for fintech relationships with financial institutions, witnesses told a House subcommittee last week.
“We hope that Congress continues to monitor the regulatory agencies to assure that regulation or regulation through enforcement of these relationships and products doesn’t increase unnecessarily,” Steve Trager, executive chair of Republic Bank & Trust Company in Louisville, Ky., told the House Financial Institutions and Monetary Policy Subcommittee during a field hearing in Lexington, Ky. The subcommittee’s chairman, Republican Rep. Andy Barr represents Kentucky.
Trager said that banks benefit from collaborating with fintechs and are able to offer services and products with “better customer experiences, improved efficiencies, and better and faster decision-making through improved technology and data analytics.”
Trager said such relationships often benefit consumers who do not have traditional relationships with banks. “We believe these programs help address the needs of American consumers who often have or choose to have little or no connection to the traditional banking system or in some cases who have nonprime credit ratings,” he said.
Kirk Chartier, chief strategy officer at Enova International, said state governments also are adopting regulatory regimes that hinder companies such as his.
“There is an increasing patchwork of state laws and regulations that are not keeping up with changes in technology, data, and analytics that allow Enova to tailor credit products to individuals with lower credit scores and growing small businesses with limited assets to use as security for loans,” he told the subcommittee. He added that federal courts also have found instances of “regulatory overreach” at agencies such as the CFPB.
Karin Harbin, president and CEO of Commonwealth Credit Union in Kentucky said that regulatory skepticism toward AI could result in decreased competition if the economies of scale needed to meet compliance expectations are only possessed by the largest financial institutions or vendors. She added that a stringent position on the use of AI in the financial sector could disproportionately harm credit unions and smaller institution.
Barr agreed that regulators risk hampering innovation. “Federal and state regulators of banks and credit unions must not reflexively and unnecessarily stifle innovation, especially if motivated by politicized interests,” he said. “Unfortunately, that is what has been occurring far too often recently.”
He cited guidance that the OCC and the FDIC issued establishing principles for banks to consider when they enter into third-party relationships. “The guidance was too vague to provide an executable roadmap discerning what activities regulators would find acceptable or not,” he said.
Ballard Spahr’s Consumer Financial Services Group regularly advises our bank and fintech clients on how best to structure their relationships and will continue to monitor federal and state developments affecting those relationships.