The years-long regulatory clampdown on relationships between banks and fintechs picked up after the collapse of banking-as-a-service middleman Synapse, and it's unlikely to let up, even with a new president taking over in January, leaders in BaaS and fintech say.
"I don't anticipate immediate change as it will take some time for the reshuffle of personnel at the leadership level to take place," said one BaaS banker who did not want to be named for fear of retribution from regulators. "Consequently, we may have a short-term quiet period on enforcement actions. Everything moves slowly in actual practice and enforcement."
Jason Henrichs, CEO of bank consortium Alloy Labs Alliance, agreed that the impact of the new administration on BaaS will be limited.
"Most of the enforcement actions we're seeing are related to existing laws and regulations," Henrichs said. "I think the appointment of a new head of the FDIC will be the biggest change in the regulatory posture which is due regardless of administration."
Some of the pressure on BaaS is coming from Congress. In a September letter, Democratic Sen. Elizabeth Warren, who was re-elected to represent Massachusetts this week, urged bank regulators to directly oversee fintechs that offer financial products to consumers and have small fintechs shoulder the full burden of regulation that chartered banks cope with.
"It's just not feasible," the BaaS banker said. "They're not equipped to do that and they don't think like that. The economics doesn't work. The [fintechs'] investors will walk. So that's just an absolutely ludicrous ask."
To be sure, not all fintechs are hurting. And the pro-markets and anti-regulation stance of the Trump administration could help fintechs like Chime that intend to go public next year.
BaaS bank and fintech leaders worry about what gets lost in the regulatory crackdown.
It could "lop off a whole bunch of the industry that serves a whole bunch of America," said a former CEO of a BaaS bank. "And that's a bad outcome."
Tougher examinations and consent orders against BaaS banks have affected some bank-reliant fintechs already.
"Our current system is really, really hurting fintech," said Rodney Williams, co-founder and president of SoLo Funds, in an interview. "Companies are suffering. Fintech funding is down by 80%." Los Angeles-based SoLo runs a lending marketplace in which members borrow from one another. The Consumer Financial Protection Bureau
Innovation
One consequence of restrictions on BaaS is curtailed financial innovation.
"Fintechs are willing to push the boundary to be creative because they're trying to meet the market demand because they're not regulated," the BaaS bank CEO said. "So they're not as restricted in thinking about, oh no, that may cause X, Y, and Z issue."
One example is Chime, which was one of the first companies to offer two-day early access to payroll. It's an innovation with little risk — payroll providers generally deposit the pay in bank accounts two days before the official payday.
But regulators have been lumping products like this together with sketchier offerings, some say. "There's no differentiation, no distinguishing good operators from the Synapses of the world," the BaaS banker said. "Right now, what regulators are doing 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 can't get a loan elsewhere because they have no FICO score or a low score. These lenders end up charging more than a traditional bank would and in some cases surpass the 36% interest rate cap imposed by several states, which the CFPB has supported. But they generally charge less than alternatives like check cashers.
A 36% APR is the cost to safely and soundly lend to about 40% of Americans, the former BaaS bank CEO said. "How much of America should you say is not allowed to access credit? Which ones? Is it the bottom 50%? I don't know how one would decide which of the people in the country should not be allowed to access credit."
He worries about the millions of people who borrow from fintech subprime lenders today.
"What do they do tomorrow if they don't have these loans? What happens 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, not just us," Williams said.
SoLo Funds
"No one's done a deliberate enough study to figure out what works better for consumers," the former BaaS banker said. "It does seem consumers like products where they can just pay a fee. That idea of, 'I can pay five bucks next month to have $100 right now to solve this thing,' seems to resonate."
Thought and study needs to go into analyzing the cost of fintech vs. traditional bank products as well as how fintechs should be regulated, he said.
"I know a lot of people who are considering leaving this space because it feels like they cannot win," he said.
