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Prudent regulation is essential for defining the risks and rewards in the evolving partnerships between financial institutions (FIs) and fintech companies. However, current regulatory efforts may be too vague, critics argued at a Congressional hearing held Friday (July 12).
The House Financial Services Subcommittee on Financial Institutions and Monetary Policy conducted a “field hearing” in Kentucky, away from Washington, D.C. The hearing featured testimonies from banking and fintech executives who highlighted the transformative potential of these partnerships in financial services and financial inclusion.
Titled “Financial Institution-Fintech Partnerships: Leveraging Third-Party Relationships to Increase Access to Financial Services,” the hearing showcased various examples of technological advancements fostering financial inclusion. Kirk Chartier, chief strategy officer at online lender Enova, noted that machine learning and analytics have enabled Enova to facilitate $55 billion in loans to consumers and businesses, including those with credit scores around 600 and average incomes of $40,000 annually. Enova also serves community banks as a service provider.
Chartier emphasized that the pace of product innovation and improvements is currently hindered by a patchwork of state laws and regulations that lag behind technological advancements. This regulatory inconsistency affects Enova’s ability to tailor credit products to individuals with lower credit scores and small businesses with limited assets for loan security. He stressed that Enova’s tech platforms and data analytics undergo regular audits, attracting banks to expand their lending to new populations.
However, he warned that consumer and small business advantages from competitively priced bank loans are at risk in several states due to out-of-state activists leveraging novel legal theories to interfere with a bank’s right to offer its products and services. This interference creates uncertainty for both Enova and banks, deterring them from offering loans to riskier customers.
Chartier cited examples of regulatory “overreach” by agencies like the Consumer Financial Protection Bureau (CFPB). He urged Congress to enact the CFPB Transparency and Accountability Reform Act to provide certainty and facilitate innovation and high-quality financial services for consumers and small businesses.
Barr’s Remarks
Chairman Andy Barr, Ky.-R, noted that partnerships between FIs and fintechs can enable more efficient financial services for consumers and businesses. However, he stressed the importance of risk management and due diligence, calling for a balance between innovation and safety. Barr argued that joint recommendations from the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and Federal Reserve might create ambiguity for banks in assessing risk and overseeing third-party relationships.
“The guidance was too vague to provide an executable roadmap discerning what activities regulators would find acceptable or not,” Barr contended, warning that this could stifle innovation.
Mutually Beneficial Relationships
Steve Trager, executive chair of Republic Bank & Trust Company, testified that the bank offers small-dollar consumer credit products through fintech program managers, including installment and line of credit loans, as well as medical debt financing products. In the Banking-as-a-Service model, each party benefits from the other’s strengths, fostering innovation and competitive consumer services. Trager highlighted that Republic’s 47 branches serve approximately 120,000 customers, and without fintech partnerships, they wouldn’t have reached a client base of 3 million customers.
Mike de Vere, CEO of AI-powered lender Zest AI, emphasized that equitable lending access is best achieved through collaboration. He called on regulators to promote transparency, fairness, and innovation. Karen Harbin, president and CEO of Commonwealth Credit Union, reported that partnering with Zest AI allowed 83% of consumer loan decisions to be automated, leading to over $372 million in approved loans with lower delinquency rates than industry metrics.
Amy Roberti, head of global policy at Stripe, discussed her firm’s partnerships with banks, which extend financial services to underserved businesses. These partnerships improve loan underwriting, with Stripe Capital helping businesses grow significantly. Stripe’s partnerships facilitate processing $1 trillion in payment volume, equivalent to 1% of global GDP. Roberti urged for thoughtful regulation and industry cooperation to clarify roles and develop best practices for consistency in supervisory expectations.
Overall, the hearing underscored the need for clearer regulatory guidelines to foster innovation while ensuring the safety and efficacy of financial services provided through fintech-FI partnerships.
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