Fintech companies continue to face increased scrutiny as regulators seek to ensure tech intermediaries don’t force consumers to pay excessive fees, monitor transactions and engage in anti-competitive practices.
Speech in Washington Semaphore events Last week, Rohit Chopra, director of the Consumer Financial Protection Bureau, said the activities of fintech intermediaries, especially those with database-based business models, would continue to come under increased scrutiny.
“We’re looking out for people who are trying to be gatekeepers and charge tolls across the system,” he said. “We want to determine who is misusing, exploiting and abusing data. And we’re also looking for people who are actually building businesses, not just regulatory arbitrage.”
The CFPB is watching for companies that “pile themselves into the middle class as an essential resource for everyone and then try to jack up the prices like crazy,” Chopra said, adding that the phenomenon is widespread. He cited credit scoring and credit reporting companies, which operate with little competition, taking advantage of consumers’ need for credit information and credit scores.
Here are six takeaways from Chopra’s remarks:
1. Strengthening supervision and guidance of fintech
Chopra argued that the rules by which fintech companies operate need to be simpler and shouldn’t just benefit incumbents. Clearer guidelines would allow companies to avoid “pressure on the lawyers” as they try to navigate uncertainty.
“We’re inheriting laws that Congress has enacted,” Chopra said, “and they’re often written for very specific circumstances, but sometimes they’re written very broadly, and we have to deal with that.”
He said the CFPB has long had issues with the “rent-a-bank” partnership model.
“A lot of banks are marketing themselves as the bank of choice for fintechs, but sometimes that leads to a ‘move fast and break things’ mentality and things not being neatly wrapped up,” he said. Citing the recent collapse of fintech intermediary Synapse as an example, Chopra argued that bank-fintech partnerships, if not executed well, could cause significant harm to consumers.
“When you have a company that has no idea how to record their account ledgers, it can really do devastating, incredible damage to people,” he said. “We were thinking about ways to protect our accounts even before this whole fiasco happened.”
He declined to comment on whether enforcement action would be taken based on the Synapse case, but said it was a serious error of judgment.
2. Realizing Open Banking
The CFPB: Open Banking Chopra said the rule will go into effect by October, adding that he hopes its implementation will increase competition for consumers. The CFPB is accepting applications for the standard-setter role.
The initial rules will apply to transactional accounts, deposit accounts, digital wallets, and other products. The CFPB also plans to introduce additional rules “to address different types of problems.” For example, the CFPB is considering introducing rules next year on steps mortgage lenders can take to help the mortgage market serve more people.
“In the mortgage lending industry, there are a lot of very powerful gatekeepers and technology companies that essentially charge a fee for every mortgage transaction,” he said. Mortgage lenders have to “pay someone to do employment verification,” he said.
“They have to pay a lot of money over and over again for FICO and their credit reports, so we’re trying to figure out what to do. [are] “We’re looking at ways to lower costs for lenders and ultimately help consumers,” Chopra said.
The agency is also looking at ways consumers can give third parties access to their pay information, he added.
3. Buy now, pay later guardrails
In May, the CFPB issued an interpretive rule reviewing buy now, pay later lenders. Credit card providers Therefore, they must offer consumer protections similar to those offered by credit cards.
Chopra said the CFPB issued the rule to be transparent about how the agency is interpreting the law and to eliminate the need for companies to continually hire legal counsel on the issue.
“We want to be clear that we view this as a significant competitive offering to credit cards and other offerings, but we’re not seeking to engage in any sort of legal arbitrage,” he said. The department “want to be clear that there are certain laws that apply to this, and we’re trying to make that clear.”
4. Challenge big tech companies’ control over payment tools
Chopra called Meta’s ill-fated effort to introduce the Libra digital currency in 2019 a “total nightmare,” arguing that large tech companies’ excessive control over payments transactions could limit competition and blur the line between commerce and banking.
“We remain concerned that large tech companies will use their existing platform power to issue their own currencies, essentially vertically integrating and completely eliminating a lot of innovation,” he said.
The agency also said that these platforms Monitoring Overpaying gives you the leverage to deploy personalized pricing or pursue other business activities based on insights gained from the data.
“We’re looking at the convergence of payments and commerce and the extent to which the very large players can use that to break down the barriers between banking and commerce,” he said.
5. Closing the gap in privacy and surveillance laws
Privacy protections for consumers’ financial data are typically subject to state privacy laws, which can create compliance gaps.
“State-level privacy laws may apply to parts of the financial industry, but the nation’s largest banks sometimes don’t have to comply with them, so we really need to reform financial privacy and anti-surveillance laws,” Chopra said.
Consumer trust is at stake and, unless privacy and surveillance laws are updated, there is a risk of slipping towards a business model like WeChat and Alipay, where “two companies control all payments and have all the information on all of us,” he added.
6. Potential for increased litigation over rulemaking
The Supreme Court recently Flipped Chevron Rule for Decades: Since 1984, courts have followed the regulatory interpretation of the statute.
In the financial services sector, the withdrawal of deference to Chevron would not be a pure positive for new entrants, but it could benefit incumbents who have a business model and want to “lobby away from liability,” Chopra said.
The result, he argued, could be uncertainty about the rules and increased litigation.
“We’re going to see more things litigated in court,” he said. “There’s going to be more division of opinion and more uncertainty about what the rules of the road are.”
