Trump win unlikely to stop crackdown on BaaS and fintech

Years of regulatory crackdowns on relationships between banks and fintechs accelerated after the collapse of banking-as-a-service intermediary Synapse, and even though a new chairman took over BaaS and fintech leaders in January, that’s unlikely to end.

“I don’t expect any immediate changes as it will take some time for the personnel change at the leadership level to occur,” said one BaaS banker, who asked not to be named for fear of retaliation from regulators. “As a result, we may experience a short-term quiet period on enforcement actions. In actual implementation and enforcement, things are moving slowly.”

Jason Henrichs, CEO of banking consortium Alloy Labs Alliance, acknowledged that the new administration’s impact on BaaS will be limited.

“Most of the enforcement actions we see are related to existing laws and regulations,” Henrichs said. “I think the appointment of a new chairman of the FDIC will be the biggest change in regulatory posture, regardless of administration.”

Some of the pressure on BaaS comes from Congress. Democratic Sen. Elizabeth Warren, who was re-elected this week to represent Massachusetts, called on bank regulators in a September letter to directly supervise fintechs that offer financial products to consumers and ensure that smaller fintechs bear the full regulatory burden that charter banks deal with. .

“This is not possible,” the BaaS banker said. “They’re not equipped to do that and they don’t think like that. The economics aren’t working. (Fintechs’) investors will walk away. So it’s an absolutely ridiculous request.”

Of course, not all fintechs suffer. The Trump administration’s pro-market and anti-regulation stance could help fintechs like Chime, which plans to go public next year.

BaaS bank and fintech leaders worry about what will be lost in regulatory crackdowns.

The former CEO of a BaaS bank said this could “decimate the industry that serves so many Americans.” “And that’s a bad outcome.”

Stricter scrutiny and approval orders for BaaS banks have already affected some bank-dependent fintechs.

“Our current system is really hurting fintech,” Rodney Williams, co-founder and president of SoLo Funds, said in an interview. “Companies are suffering. Fintech funding is down 80%.” Los Angeles-based SoLo operates a lending marketplace where members borrow from each other. Consumer Financial Protection Bureau A lawsuit was filed against SoLo Funds in May charging high fees for loans, failing to disclose loan costs, and lending without a license in states that require licensing; The company vowed to fight back.

Innovation

One consequence of restrictions on BaaS is that financial innovation is restricted.

“Fintechs are willing to push the boundaries to be creative because they are trying to meet market demand because they are unregulated,” the BaaS bank CEO said. “So, oh no, they’re not that constrained in thinking that this might cause problem X, Y, and Z.”

One example of this is Chime, one of the first companies to offer two-day early access to payroll. This is an innovation with little risk; Payroll providers usually deposit salary into bank accounts two days before the official payday.

But some say regulators are bundling such products with cruder offerings. “There is no difference that separates good operators from the Synapses of the world,” the BaaS banker said. “What regulators are doing now is essentially saying that anything that has to do with fintech, anything that has to do with so-called innovation, is risky.”

Access to subprime credit

Some fintechs serve people who cannot get a loan elsewhere because they do not have or have a low FICO score. These lenders charge more than a traditional bank would and, in some cases, exceed the 36% interest rate cap imposed by several CFPB-supported states. But they generally charge less than alternatives like check cashiers.

The former BaaS bank CEO said a 36 percent APR is what it costs to lend money safely and securely to about 40 percent of Americans. “What portion of America should you say is not allowed access to credit? Which ones? The bottom 50%? I don’t know how to decide which population in the country should not be allowed access to credit.”

He worries about the millions of people who borrow from fintech subprime lenders today.

“What will they do tomorrow if they don’t have this credit? What will happen to them?” he said.

Some fintech lenders, including SoLo Funds, offer loans for a fee or “tip” rather than an interest rate.

“It’s very, very clear that fintechs are significantly cheaper, and not just us,” Williams said.

SoLo Funds made a study Last year it showed that subprime credit cards from many banks were more expensive than SoLo Funds loans. The average cost of tips borrowers pay is 17%.

“No one has done enough intentional work to figure out what is better for consumers,” the former BaaS banker said. “Consumers only seem to like products they can pay for. The idea of ​​’I can pay five dollars next month to have $100 now to solve this problem’ resonates.”

He said thought and work needed to be done to analyze the cost of fintech versus traditional bank products, as well as how fintechs should be regulated.

“I know a lot of people who are considering leaving this field because they don’t think they can win,” he said.