Digital payment products and alternative credit took off rapidly during the pandemic — and while they may have outpaced regulation, these technologies did not escape regulators' notice.
New fintech and payment services are likely to face tougher rules under the Biden administration, but the market is moving so fast that regulators can't keep up, according to a panel of financial technology legal experts at American Banker's Card Forum, taking place this week as a virtual event.
"Some of these [payment] products didn't exist five years ago," said Brian Tate, president and CEO of the Innovative Payments Association, a Washington, D.C.-based trade group. "We're in a pandemic, which strains resources, so it's much easier for regulators to focus on what they [already] know."
The pace of innovation has created regulatory gaps in which certain products don't have set rules, while other products are adhering to older rules that don't address current conditions, according to Eric Goldberg, a partner specializing in consumer financial services at the Washington, D.C.-based law firm Akerman. Earlier in his career, Goldberg was managing counsel for regulations at the Consumer Financial Protection Bureau during the Obama Administration.
One area of possible concern is the fintechs that perform bank-like functions without bank regulation.
Most fintechs partner with smaller banks, which are not subject to caps on debit interchange fees under the Durbin amendment to the Dodd Frank law. This allows the fintechs to charge lower fees to consumers, and recoup those losses through higher interchange, an arrangement that has drawn ire from executives at large banks. Regulations are likely to change, Goldberg said, but the direction is still unclear, — and any such change can toss fintech finances into disarray.
"There's a lot of companies that built their model around this exemption that have gained huge valuations recently because of the growth in special purpose acquisition company deals," Goldberg said of Special Purpose Acquisition Companies, or SPACs, which take fintechs public through acquisition rather than a separate public offering. SPACs have become popular with fintechs and payment technology companies, which have expanded quickly during the past year's rush to digital payments.
The Federal Reserve has proposed changes to the Durbin amendment to accommodate an increase in e-commerce transactions and digital payments by making banks and credit unions add new debit-routing options for online transactions. Card issuers contend this will add costs and erode interchange revenue. "Even if you aren't impacted by these [potential changes to Durbin], I guarantee one of your business partner is," Tate said.
Financial services innovations that rely on digital payments, such as buy now/pay later, early wage access, cryptocurrency and fintech/bank partnerships also need more regulatory clarity, according to Tate.
That leaves a crowded docket for regulators such as Rohit Chopra, the Biden administration's pick to lead the Consumer Financial Protection Agency, and other regulators, such as the Federal Trade Commission. "If and when Chopra is confirmed, there will be a lot of activity," Tate said, adding the lack of final approval for Chopra has hindered CFPB rulings on new payment products.
Regulators are considering whether early wage access, which is largely regulated by states, and buy now/pay later, which is largely unregulated at the federal level, should face the same regulatory scrutiny as bank loans. Studies in Australia and the U.K. have found higher debt risk for BNPL users, sparking what will likely be heavier regulation of BNPL lending.
The CFPB under Chopra will likely take a harder line on buy now/pay later and early wage access, according to Tate.
"Toward the end of the prior administration, there was enforcement from the CFPB, but it was mostly bread-and-butter rules," Tate said. "[After Chopra's confirmation] you'll see broader investigations, similar to the early investigations that followed the Wells Fargo fake account scandal. So if you are in the financial services industry that will give you pause."
That scrutiny is likely to extend to data and privacy, Tate said. The U.S. does not have rules governing open banking, but there is usually bipartisan support for regulations or legislation that provides consumers with more control over how their data is used, according to Tate, adding that could create restrictions or guidance on the cross-institutional data sharing that drives open banking.
"Open banking is different in the U.S. where the market forces have taken hold," said Radha Suvarna, head of enterprise payments strategy and innovation at Citizens, during a separate panel. "In other markets regulators are in control."
Citizens' Survarna is looking for opportunities in open banking, which broadly refers to the use of open technology to enable data sharing between banks and third parties such as payment apps. Citizens is in the early stages of development, Suvarna said, but he's already noted differences in how open banking is managed in Europe, where the revised Payment Services Directive (PSD2) regulation provides specific guidance for open banking. In the U.S., the lack of open-banking regulations or a law has sparked debate over what constitutes open banking.
"There are capabilities like [account aggregator Plaid] that make the client experience seamless, but we're in the early days of development with open banking," Suvarna said.
