Regulators should robustly supervise bank-FinTech relationships, Treasury report shows

By Puja Sharma

FinTech Industry Needs Additional Oversight to Close Gaps, Prevent Abuses and Protect Consumers, According to the US Treasury report.

The U.S. Department of the Treasury, in consultation with the White House Competition Council, has released a report entitled “Assessing Impacts of New Entrant Non-bank Firms on Competition in Consumer Finance Markets.”

The report finds that, while concentration among federally insured banks is growing, new entrant non-bank firms, in particular “FinTech” firms, are adding significantly to the number of firms and business models competing in core consumer finance markets and appear to be contributing to competitive pressure.

While these FinTech firms are enabling new capabilities, they are also creating new risks to consumer protection and market integrity, such as risks related to data privacy and regulatory arbitrage. To protect consumers in these rapidly changing markets and enable sustainable competition, among other recommendations, the report calls for enhanced oversight of the consumer financial activities of non-bank firms.

In some consumer finance markets, additional measures of competition suggest that non-bank firms are increasing competitive pressure. Increasingly, nonbank firms have entered core consumer finance markets and are managing the points of consumer access to financial services and products. In the payments and consumer credit markets, this trend has been particularly acute.

Despite limited entry through bank charters into core consumer finance markets, FinTech firms are increasingly entering the market. Within a decade of the global financial crisis, more than 1,200 FinTech companies emerged focused on consumer deposits, lending, and payments.

In the mortgage market, FinTech and other non-bank originations rose from approximately 30% of the market in 2007 to 50% by 2015.9 Additionally, FinTech funding has grown, with an average of 1,200 general fintech funding deals completed each year between 2015 and 2021.10 Over this period, the annual total funding for the industry increased from $10.7 billion in 2015 to $62.9 billion in 2021.

FinTech funding has faltered in 2022, largely in response to macroeconomic trends and conditions, though the investment capacity of U.S. FinTech investors remains high.12 There have also been increasing investments in technology by IDIs.13 Collectively, the relatively high levels of new entry by non-bank firms, investment in such firms, and investment in technology by IDIs suggest competitive pressure from new entrant non-bank firms.

A healthy economy relies on innovation and competition, according to U.S. Treasury Secretary Janet L. Yellen.

“While non-bank firms’ entrance into core consumer finance markets has increased competition and innovation, it has not come without additional risks to consumer protection and market integrity. This report lays out actions that would maintain fair, transparent, and competitive markets while encouraging responsible innovation that benefits consumers. With existing authorities, regulators can encourage competition and innovation while further safeguarding and protecting consumers.” Yellen added.

The report is a product of President Biden’s July 2021 Executive Order, “Promoting Competition in the American Economy,” and is the final in a series of reports assessing competition in various aspects of the economy, including the alcohol industry and the labor market. Today’s report recommends a series of steps to encourage fair and responsible competition that benefits consumers and their financial well-being:

• To address market integrity and safety and soundness concerns, regulators should provide a clear and consistently applied supervisory framework for bank-FinTech relationships. A bank-FinTech relationship that delivers consumer financial services provided by an insured depository institution (IDI) must operate in compliance with the laws, regulations, and risk management standards applicable to the IDI.

• To protect consumers, regulators should robustly supervise bank-FinTech lending relationships for compliance with consumer protection laws and their impact on consumers’ financial well-being.
• To encourage consumer-beneficial innovation, regulators should support innovations in consumer credit underwriting designed to increase credit visibility, reduce bias, and prudently expand credit to underserved consumers.