Banks Don't Need Protection from Startups — But Consumers Sure Do
Former Treasury Secretary Larry Summers, who sits on Lending Club's board, said in a speech Wednesday that such technology-focused marketplace lenders should be given a fair chance to compete.April 15
The simmering controversy over American Express' Bluebird card typifies a classic debate: When do regulations that ostensibly protect the public from shady operators really just protect incumbent businesses from competition?October 22
Mike Cagney of Social Finance, honored Wednesday at LendIt's innovator of the year, chalks up his success to his company's "relationship-driven" model.April 15
Former Treasury secretary Lawrence Summers urged regulators not to "give incumbents an unfair advantage" in a speech at the marketplace lending conference LendIt on April 15. I agree wholeheartedly: banks should not be protected from the competition. I also believe that new entrants also shouldn't receive an unfair advantage. But at the moment, they do.
Banks provide extensive protections to consumers on all of the products and services they offer. They are required to ensure that consumers can pay back loans before extending credit. If an unauthorized payment is made from a consumer's account, it is the bank that restores the money. All of this is ensured by a strict regulatory framework that ensures compliance and instills confidence.
Consumers have come to expect this level of protection from all of their financial services providers. But many new technology-focused companies offer little in the way of consumer protection. They do not have to establish ability to repay before making loans or offer protection from unauthorized payments. This lack of regulation can create instability. During the financial crisis, fly-by-night nonbank mortgage lenders quickly vanished when the problems they created came to light.
Contrary to Mr. Summers comments, I would argue that startups like the firms he is paid to support have a significant advantage over banks. This is particularly true given the costs associated with providing consumer protections. We should not create a two-tiered system that encourages consumers to seek financial services with fewer protections. The only way to ensure that consumers have equal access to fair, secure financial services is to create a level regulatory playing field.
Consumers must receive the same level of protection whether they choose to do business with a bank or with marketplace lenders and other challengers. Regulatory requirements that help customers should apply to all service providers. If there are any regulations that interfere with serving customers, those rules should be revised or removed not used to give nonbanks a market advantage over banks.
Banks and financial startups should be able to agree that protecting consumers is our mutual goal. Consistent rules are critical to achieving it.
Frank Keating is president and chief executive of the American Bankers Association and former two-term governor of Oklahoma.