Why are fintechs getting a regulatory pass?

Over a seven-year period, a new industry has given rise to 3,300 new firms, increased their financing thirteenfold to $22 billion and increased their percentage of the personal loan market from 1% to 36%.

The new entrant — fintech.

From marketplace lending, to person-to-person payments, to insurance, the financial services industry is undergoing an intense period of disruption and rapid, transformative change — most of which can be good news for consumers and competition.

But with great power comes great responsibility.

While this new and budding industry presents opportunities and innovations, ill-supervised and underregulated industries can present sizable risks for consumers and the financial marketplace as a whole. As new players begin offering alternative banking models, they may prioritize disruption over proper risk management protocols and regulatory know-how, as several high ranking officials at the Federal Reserve have warned. Even St. Louis Fed President James Bullard noted his concern that fintech will be the “source of the next crisis.”

Today, some digital financial services serve around 80 million members, while consumer data aggregators can serve more than 21 million customers, according to a report from the Treasury Department. That is a significant number of consumers served and a hefty amount of financial and personal information at risk.

These services, in many cases, have proven beneficial, but Washington policymakers must act to protect consumers from devious marketplace actors by ensuring fintechs are subject to the same data security standards and necessary consumer protections as credit unions and banks.

For consumers, there are plenty of online or mobile applications that allow them to consolidate their financial accounts — including retirement, savings and checking accounts — to better manage their funds. However, these conveniences come with their own set of fraud risks as fintechs, depending on the nature of their business model, can avoid the full scope of regulatory supervision, Bank Secrecy Act protocols and consumer protections that apply to traditional financial institutions.

Data thieves are champing at the bit to obtain consumers’ personal financial data by exploiting vulnerabilities in unsecure systems. In 2018 alone, more than 446 million consumer records were exposed. That same year, the Identify Theft Resource Center also found a 126% year-over-year increase in the number of records that contained sensitive personally identifiable information.

Fintechs, which house the same sensitive financial and personal information as credit unions and banks, albeit with less rigorous standards, are a high-level target for data thieves. Given this fact, they must be held to the same robust data security standards.

Make no mistake, competition in our financial marketplace is good for consumers. But when that competition is ill supervised and companies are able to skirt the regulatory rulebook — intentionally or unintentionally — consumers become exposed to financial harm.

Recently, Robinhood, a fintech startup, mislead roughly 6 million American consumers about the terms, conditions and liabilities of their version of traditional savings and checking accounts. The company wrongfully claimed these consumers’ accounts would be federally insured by the Securities Investor Protection Corp. In turn, SIPC balked, as it covers only brokerage accounts — not savings or checking accounts.

This is the type of harmful behavior that policymakers must prevent. Had Robinhood been supervised in the same manner as a credit union or a bank, consumers could have steered clear and this mess could have been avoided.

Credit unions and banks go to great lengths to ensure their products are in compliance with the law, that they meet all supervisory guidelines and, most important, that they adhere to necessary consumer protections. For the benefit of consumers, fintechs must be held to these same standards.

Notably, Senate Banking Chairman Mike Crapo, R-Idaho, and House Financial Services Chairwoman Maxine Waters, D-Calif., have each cited fintech as a priority for the 116^th Congress. It is important that lawmakers implement policies that welcome consumer-friendly innovation but also protects consumers from financial harm.

To this end, the National Association of Federally-Insured Credit Unions will continue to work to ensure fintechs are subject to the same data security and consumer protection standards as traditional financial institutions. Otherwise, more consumers and potentially the economy at large could be put at risk.