Crackdown on bank-fintech partnerships would hurt subprime borrowers
Partnerships between fintech firms and banks provide access to safe and affordable credit to more than 160 million Americans.
These are people who have generally been excluded from traditional financial institutions because they have a nonprime credit score of less than 700.
For nonprime Americans, a surprise expense like a car breakdown or an important medical attention could mean relying on costly, predatory loan providers. This is exactly why regulators have long supported bank-fintech partnerships that allow FDIC-insured banks to lend to nonprime Americans in a safe, convenient and responsible way.
Just as technology companies are providing revolutionary, on-demand food delivery and transportation services, financial technology companies are partnering with traditional banking institutions to improve customer experience and increase access to financial products and services.
Federal regulators recognize the need for policies that reflect technological advances and online services, but some legislators and consumer groups cannot seem to understand why these partnerships exist or how the consumer is safer with them than without them.
There are four reasons why these partnerships are worth supporting: options, innovation, cost of doing business and legality.
Borrowing options are very limited for nonprime customers. Most find themselves using loan sharks, pawn shops and other forms of very high-cost lenders to meet short-term credit needs, only to find themselves in deeper long-term financial trouble.
Partnerships between fintech firms and banks are central to bringing down the cost of borrowing for nonprime customers.
Fintech companies are innovators by definition, using analytical capabilities to assess customer risk and ensure borrowers can responsibly pay back their loans.
Most fintechs use complex algorithms to calculate credit scores that leverage alternative data sources and machine learning — something traditional credit bureaus and scorers don't do. Additionally, these companies build their products for online and mobile audiences, which makes the customer experience and access to services much easier and more transparent.
Banks have access to capital and an existing base of customers: the two biggest costs of doing business for a fintech company. When the cost of doing business is lowered, it can change the business model, allowing these companies in partnership with FDIC-chartered banks to lend to nonprime consumers at lower rates.
Some pundits have questioned the legality of these arrangements or suggested they thwart states' rights. However, regulators have been clear on these issues.
The federal rate cap preemption ensures that banks that operate nationally can seamlessly serve customers across all states — not just those located in the state they are chartered.
This makes sense in today's technology-driven world where most people get loans online rather than in a physical bank branch. Just last year, the FDIC filed an amicus brief in a Colorado federal district court affirming this fundamental bank right under the National Bank Act.
I'm pleased federal regulatory agencies understand the importance of, and need for, these partnerships. And I applaud FDIC Chairman Jelena McWilliams, whose agency has upheld policies that enable lending for those in need, even in the face of attacks that falsely allege bank partnerships exist only to avoid federal rate cap laws.
On the contrary, in the vast majority of cases, these partnerships are true partnerships. The fintech companies license their unique underwriting technology to banks, who are then able to serve millions of nonprime Americans, including many of their customers for which they don't have viable credit products.
Both work together to deliver safer, more transparent, lower cost and more convenient financial products and services to customers.
The critics say they also want that outcome. But I fail to understand how they don't see these partnerships as key to a better future for tens of millions of nonprime customers.
Without these partnerships, nonprime Americans would be without access to safe credit and instead left with predatory lenders. I strongly urge legislators and consumer groups alike to not only take a closer look at these partnerships, but to hear directly from the consumers who need them.