Fintech firms and other non-bank companies have "augmented consumer finance markets" and "accelerat[ed] an evolution in consumer financial products and services." Evidence also suggests that these firms have expanded consumer access to credit, payment solutions, and low-cost bank and transaction accounts. That's the overall assessment of a recent report put out by the US Department of the Treasury ("Treasury") on the state of competition in the fintech marketplace ("Treasury Report"). While cautioning that it can be hard to get good data on this fast-changing marketplace, and noting that some new entrants might be "sidestepping" comprehensive regulatory supervision, the Treasury Report concludes that these new entrants could increase competition in consumer financial services and that there is potential for this competition to benefit consumers by lowering prices, improving convenience, and leveraging more advanced technology. The Treasury Report also offers several suggestions to enhance and streamline supervision of the fintech sector.
The Treasury Department prepared the report in response to President Biden's Executive Order on promoting competition in the US economy ("Competition EO"). Pursuant to the Competition EO, the Treasury Report focuses on fintech and other new entrant non-bank firms directly involved in the provision of digital financial products and services in core consumer finance markets—namely, deposits, payments, and credit.1 The Treasury Report is the final report in a series of reports assessing competition in various sectors of the economy.2
In this Legal Update, we summarize the key findings and recommendations in the Treasury Report.
Key Benefits Identified in the Treasury Report
The Treasury Report highlights how non-bank firms' entry into and participation in consumer financial services markets presents opportunities and benefits for consumers. The Treasury Report notes that across market segments, fintech firms are challenging market incumbents using new business models, new technology, and newly available data. These innovations enable non-banks to compete by offering differentiated products that are often more personalized and accessible and, in doing so, change the provision of financial services and how firms compete.3 The Treasury Report emphasizes how the entrance of non-bank firms in consumer finance markets provides benefits such as increased competition, improved products and services, consumer cost savings, expanded financial infrastructure to increase reach to underserved and unserved individuals, enhanced approaches to overcome discrimination, and improved consumer financial well-being.4
Key Concerns Identified in the Treasury Report
While the Treasury Report acknowledges a number of opportunities and benefits associated with the entry of non-bank firms in the consumer finance market, the Treasury Report also raises several concerns:
- Regulatory Arbitrage. The Treasury Report draws attention to how non-bank firms offering unbundled functions of traditional banking, such as deposits, payments, and credit, have not been subject to the same comprehensive supervision and regulation as banks. The Treasury Report expresses a concern that some non-bank firms may seek or create relationships with banks and small credit card issuers primarily to avoid consumer protections and engage in harmful lending practices. Alternatively, non-bank firms may obtain certain exemptions or otherwise avoid application of certain regulations through these partnerships. In either case, the Treasury questions the level of oversight and supervision that should be applied to these partnerships in order to support application of, and compliance with, consumer protections.5
- Prudential Concerns. The Treasury Report notes that as the consumer finance and banking market has evolved and non-bank entrants have matured, there has been some movement toward re-bundling of services. The Treasury Report includes a concern that the presence of non-bank firms outside the bank regulatory perimeter—while offering a similar set of products and services that pose similar prudential risks as banks, such as deposit-taking and making loans and extensions of credit—poses a risk.6
- Mix of Commerce and Banking. The Treasury Report is concerned that depository institutions owned by non-bank firms would be subject to the risks of their commercial affiliates, which could cause complications for regulators, particularly given the lack of consolidated supervision. The Treasury Report also highlights other concerns about conflicts of interest and the concentration of financial, economic, and political power more generally with the mixing of commerce and banking.7
- Reliability and Fraud. The Treasury Report notes that new entrant non-bank firms generally focus on digital channels for the provision of financial services and may be particularly exposed to issues with reliability and fraud.8
- Data Privacy and Security. The Treasury Report emphasizes how non-bank firms generally access consumer financial account data through data aggregators, which leads to concerns about the aggregators' on-going, unlimited access to consumer financial information and the lack of supervision over them. The Treasury Report also mentions general concerns about data privacy and surveillance.9
- Bias and Discrimination. The Treasury Report discusses how non-bank firms have leveraged advances in technologies—including artificial intelligence/machine learning ("AI/ML")—to enable enhanced underwriting and expanded access to credit to those with thin credit files or who reside in underserved areas.10 At the same time, the Treasury Report highlights how the use of AI/ML technologies by non-bank firms presents new challenges to ensuring transparency and fairness—particularly as it relates to credit underwriting—and new forms of discrimination risk.11
- Consumer Financial Well-being. The Treasury Report also includes a concern that some non-bank firms may extend credit without sufficiently considering a consumer's financial capabilities and ability to repay or may exploit information asymmetries to market products that are unfair, deceptive, or abusive.12
In light of the risks mentioned above, the Treasury Report provides a list of recommendations for federal regulators to enable competition in the delivery of consumer financial services and promote regulatory oversight across financial institutions that is commensurate to the activities and risks associated with non-bank firms.13 The Treasury Report makes the following recommendations:
1. Encouraging Enhanced Measures of Competition and Review of Concentration in Banking.
The Treasury Report encourages the DOJ and federal banking agencies to review bank merger oversight policies in light of ongoing consolidation and the potential waning utility of certain traditional measurements of competition due to the evolving marketplace and limitations of official data sources.14
2. Enabling Competition in Responsible Consumer Credit Underwriting.
The Treasury Report recommends that federal banking regulators, in consultation with the Consumer Financial Protection Bureau ("CFPB") and other federal agencies, support responsible consumer credit underwriting approaches that are designed to increase credit visibility, reduce bias, and prudently expand access to credit to US consumers.15
3. Enabling Effective Oversight of Bank-Fintech Relationships.
The Treasury Report recommends that federal banking regulators implement a clear and consistently applied supervisory framework for bank-fintech relationships. The Treasury Report notes that federal banking regulators recently proposed interagency guidance on managing risks presented by relationships between banks and non-bank third parties ("TPRM Guidance"), which, if finalized, would replace each agency's current guidance, and provide a uniform framework for banks to manage their third-party relationships. The Treasury Report recommends that federal banking regulators finalize the TRPM Guidance.16
The Treasury Report also states that contractual arrangements underlying a bank-fintech relationship should support a robust, risk-based approach to reviewing a bank's activities. The Treasury Report specifically recommends that as federal banking regulators finalize the TPRM Guidance, they should include language to help encourage banks to negotiate effective oversight provisions in their contracts with fintech firms and other third-party service providers that align with the bank's internal oversight and risk management of its consumer banking activities, including those activities performed on behalf of the bank by a fintech firm or another non-bank.17
4. Encouraging Competition in Responsible Small-Dollar Lending.
With respect to bank-fintech lending relationships, the Treasury Report recommends that federal banking regulators review and, as appropriate, revise supervisory practices with respect to the Interagency Lending Principles for Offering Responsible Small-Dollar Loans ("SD Lending Guidance") to address (i) coverage for larger loans (e.g., $10,000 or more) and, (ii) with greater specificity, the ways in which the SD Lending Guidance applies to a bank-fintech lending relationship, including the activities performed by a fintech firm or other third-party with or on behalf of a bank lender.18 The Treasury Report also recommends that federal banking regulators endeavor through these and other actions to continue providing banks with sufficient specificity on how they can provide small-dollar loan products or related products while operating in compliance with applicable laws and regulations.19
With respect to alternative forms of non-bank lending, the Treasury Report recommends that the CFPB continue to investigate and monitor developments related to small-dollar installment loan products and consider what guidance might be appropriate and possible for the agency to provide. Additionally, the Treasury Report recommends that the CFPB review its authorities to consider if and how the agency might provide direct supervision of larger non-bank consumer lenders, including buy now, pay later ("BNPL") and installment loan providers. Finally, the Treasury Report recommends that the CFPB revisit its 2020 advisory opinion regarding earned wage access programs and review whether earned wage access products meeting the requirements specified by the advisory opinion should not be considered credit products subject to requirements under the Truth In Lending Act and Regulation Z.20 (Please see our previous Legal Update for a discussion of the CFPB's 2020 advisory addressing earned wage access programs.)
5. Enabling Secure Data Sharing.
The Treasury Report recommends that federal banking regulators and the CFPB help promote a more unified approach to oversight of consumer-authorized data sharing.
First, consistent with the Competition EO, the Treasury Report recommends that the CFPB finalize its ongoing rulemaking implementing Section 1033 of the Dodd-Frank Act, which provides that a consumer financial services provider must make available to a consumer information in the control or possession of the provider concerning the consumer financial product or service that the consumer obtained from the provider. The CFPB has publicly indicated that it would issue a proposed rule in 2023 with a final rule to follow in 2024.
Second, the Treasury Report recommends that the CFPB determine whether it has the legal authority to supervise data aggregators and, if so, exercise its authority to supervise data aggregators with a level of scrutiny that is commensurate with the activities conducted with respect to consumer financial data and at a level comparable to the supervision applicable to banks for the handing of similar financial data.21
The Treasury Report recognizes that 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 contribute to positive competitive pressure.22 At the same time, the Treasury Report raises a number of concerns it has about new entrant non-bank firms and emphasizes how these firms are generally not subject to the same oversight for safety and soundness or consumer protection as banks.23
Although the Treasury Report addresses federal regulators, many of the concerns it expresses will be familiar to the states as well, and states are sure to welcome the report's publication. Increasingly, state financial services regulators have shared Treasury's concerns in recent years and have sought to fill a perceived regulatory vacuum for fintech firms that partner with banks to offer financial services to state consumers. Several states have entered settlements with, and initiated litigation against, fintech firms participating in bank partnership programs, alleging licensing, usury, deceptiveness, and other violations of state law. In addition, a number of states have enacted "anti-evasion" laws that seek to regulate these programs by recharacterizing the non-bank partner in the program as the "true lender" under any of a variety of tests—laws intended to regulate bank activities indirectly where the states do not have the authority to regulate the banks directly.
The Treasury Report's findings and recommendations indicate that non-bank firms' relationships with banks will continue to be an area of interest for the regulators. Based on the statements—and recent enforcement—by the federal regulators, this focus will include third-party vendor risk management and the oversight of fintechs performing services for banks as part of any bank-fintech partnership. Thus, fintech firms engaging in a variety of consumer financial services activities should continue to have appropriate compliance procedures in place and understand the expectations of the regulators regarding non-bank firm relationships with banks. Finally, as noted above, in light of the regulators' growing interest in bank-fintech partnerships, banks should ensure they have effective oversight and compliance management programs in place for their relationships with non-bank firms.
1 U.S. Dept. of the Treasury, Assessing the Impact of New Entrant Non-bank Firms on Competition in Consumer Finance Markets, at 1 (Nov. 2022), https://home.treasury.gov/system/files/136/Assessing-the-Impact-of-New-Entrant-Nonbank-Firms.pdf.
2 Press Release, U.S. Dept. of the Treasury, "New Treasury Report Shows Fintech Industry Requires Additional Oversight to Close Gaps, Prevent Abuses and Protect Consumers," (Nov. 16, 2022), https://home.treasury.gov/news/press-releases/jy1105.
3 U.S. Dept. of the Treasury, Assessing the Impact of New Entrant Non-bank Firms on Competition in Consumer Finance Markets, at 74-75.
4 Id. at 73.
5 Id. at 81.
6 Id. at 83-84.
7 Id. at 84.
9 Id. at 87-88.
10 Id. at 75-76.
11 Id. at 88-90.
12 Id. at 90-91.
13 U.S. Dept. of the Treasury, Assessing the Impact of New Entrant Non-bank Firms on Competition in Consumer Finance Markets, at 102.
14 Id. at 103-106.
15 Id. at 106-109.
16 Id. at 111.
17 Id. at 111-112.
18 Id. at 114.
19 Id. at 114-115.
20 Id. at 115.
21 Id. at 115-117.
22 Press Release, U.S. Dept. of the Treasury, "New Treasury Report Shows Fintech Industry Requires Additional Oversight to Close Gaps, Prevent Abuses and Protect Consumers."
23 U.S. Dept. of the Treasury, Assessing the Impact of New Entrant Non-bank Firms on Competition in Consumer Finance Markets, at 1.
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