How Congress Can Support Financial Innovation

The same week that more than 1,000 financial services innovators are converging on New York at the FinovateFall conference, a House subcommittee will convene Thursday for “An Examination of the Availability of Credit for Consumers.”

While members of the subcommittee on Financial Institutions and Consumer Credit would perhaps learn more by attending FinovateFall, it is encouraging that they are examining the need for innovation and diversity in financial products to better serve consumer needs – as well as steps the government can take to help expand underserved consumers’ access to affordable and sustainable credit options.

Over the last two years, it has become evident that the defensive posture of many banks and lenders has drained liquidity for a large number of consumers. Are the “too big to fail” simply “too scared to lend” to worthy consumers, due to the higher costs and risks associated with serving nonprime consumers?

Hundreds of billions of dollars of consumer credit have been removed from the market since the third quarter of 2008. This contraction of consumer credit occurred despite initiatives by federal agencies, including the FDIC, to maintain access to loans and other viable products.

At the same time, demand for consumer credit has grown significantly, influenced in part by an overall population increase and stagnant-to-declining growth in the household income for underserved customers. In May, the National Bureau of Economic Research found that almost half of American consumers are “financially fragile,” believing they would not be able to gain access to $2,000 to cover a financial emergency, even if given a month to do so.

This is incredible when considering that the short-term, small-dollar lending market in the United States reached $40 billion in loan volume in 2010, according to Government Accountability Office estimates.

There is hope, however, as our industry embraces “finovation.” Start-up like BillFloat, Kabbage, LendingClub, OnDeck Capital, PayNearMe, Plastyc, Prosper, Progreso Financiero and Square epitomize finovation at its finest. They share a technology- and market-driven approach that is highly consumer-centric, and they promise not to take their customers for granted. They offer consumer and business customers, who are underserved yet financially responsible, reasonable fees, transparent terms, and the professional support of personnel who are compassionate and straightforward in their dealings with them.

None are asking for any federal funding, loan guarantees or any other handouts. They're backed by our country’s energetic and forward-looking community of venture capital and angel investors who have invested more than $1.6 billion in 231 privately held financial services companies since 2008, according to PricewaterhouseCoopers and the National Venture Capital Association.

At Thursday's hearing, the subcommittee will hear about the challenges facing innovators, including difficulties accessing critical banking infrastructure required for a new service. The start-ups rely on banks, and, to a lesser extent, credit unions and state-licensed financial services providers, to launch most alternative finance products demanded by underserved consumers – from credit products to prepaid cards.

Ask any finovator and you'll hear that the same banks that are not serving underserved consumers are not supporting technology and financial services innovators either. Of the thousands of banks in the United States, fewer than ten have made an active and concerted effort to support third-party innovation efforts, and none of these banks are the household names that consumers rely on every day. 

There are signs of progress coming out of the committee. Rep. Joe Baca has sponsored a bill that would create a federal charter for nonbanks that provide credit alternatives to the underbanked. “Federal financial services and credit companies” would be regulated by the Office of the Comptroller of the Currency and would enjoy the same advantages national banks have, such as preemption. As such they would not need to go through banks to offer their products nationwide.  

The bill's pro-consumer requirements will hold all nationally chartered nonbanks to clear standards for credit disclosure, account access, financial literacy and breadth of product offerings.

We have heard consumers clearly. They want access to fast and convenient financial services from reputable and trustworthy providers. By removing reliance on third parties and enabling national business and operating plans, finovators chartered under proposals like Rep. Baca's will have the opportunity to innovate and serve all consumers, and have an immediate positive impact for everyday American consumers, and the economy as a whole.

Ryan Gilbert is CEO of BillFloat Inc., a PayPal-backed bill-payments provider offering cash-strapped consumers "more time to pay" recurring bills.