10 immediate election takeaways for the payments industry

November 13, 2020 10:12 AM

President-elect Joe Biden’s victory has cleared uncertainty over White House policies that impact fintechs and payment firms, revealing clues as to how the regulatory environment will be different in 2021.

The election was not a “blue wave,” meaning that as of early November, Biden and the Democrats lack full control over the legislative and regulatory agenda. But there is policy Biden can set unilaterally that changes conditions for financial services and payment companies in a way that’s a clear break from Trump’s policies.

In some cases, Biden's approach will federalize regulatory policy for emerging technology that has largely been in state hands thus far, providing more consistency for rules — even if firms don’t like the rules in all cases.

There are also campaign pledges, general policy positions and transition team additions that aren’t directly related to payments, yet will still impact the operating environment for these businesses, often in the direction of stricter supervision, rules designed to protect consumer interests and measures to eliminate bias.

Payday

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One major and likely early impact of Biden’s presidency is ironically linked to attempts by Trump and Republicans to dilute the Consumer Financial Protection Bureau. The Supreme Court in June gave Trump more authority to change leadership at the CFPB at will, though the court did not abolish the bureau entirely.

The court, of course, gave this authority to whoever occupies the White House, so Biden will have more power over the CFPB than Obama had during his administration, when the CFPB was created. Biden would use this power to give the agency wider enforcement priorities, according to the New York-based law firm Shearman and Sterling.

That has ramifications for dozens of financial products, ranging from auto loans to mortgages. One area where Biden’s influence will be most noticeable is in restricting payday lending, which was deregulated during the Trump years.

Tighter rules for payday lenders will open opportunities for fintechs that use blockchain and other emerging technologies as a lower-cost alternative to the more controversial payday lenders. These fintechs were already attractive to VCs, and that’s likely to continue as payday lenders face more scrutiny.

Crypto regs

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Cryptocurrency regulation is still mostly relegated to the states, though a recent move by President-elect Biden signals a stronger regulatory posture for bitcoin and other crypto in the new administration.

Gary Gensler has volunteered to lead Federal Reserve, Banking and Securities policy for the Biden transition team. Gensler is the former chair of the Commodity Futures Trading Commission, serving during the Obama Administration and leading derivatives reform following the 2008 financial crisis.

More recently, Gensler has advised MIT’s digital currency research and has taught a course on digital currency at MIT.

Gensler is an advocate for strong regulation of cryptocurrency, which the crypto industry mostly favors since national regulations are easier to comply with than a hodgepodge of state regs — and federal oversight is seen as legitimizing crypto. Gensler has also said most initial coin offering tokens should be regulated as securities, a stance that firms such as Ripple oppose enough that they threaten to leave the U.S.

Public and private currency

Chris Ratcliffe/Bloomberg

The Facebook-affiliated Libra stablecoin is still in the works after more than a year of controversy and pushback from politicians with different ideologies from different parts of the world.

Biden has not taken a detailed stand on Libra, so the administration's policy toward the project could be based on the president-elect's appointments.

Sen. Elizabeth Warren (D-Mass), for example, has taken a strong stance on the influence of firms such as Facebook, and would continue that policy as a hypothetical Treasury secretary, though it would be difficult to get Warren confirmed in a split or Republican-controlled Senate.

That means the Treasury secretary will probably be a more entrist pick who is able to negotiate with Republicans. Libra has made changes to its structure to assuage regulators, though there's still skepticism from both Republicans and Democrats, and the project faces an uphill battle.

Lael Brainard, the Federal Reserve Governor, is also among the candidates for Treasury Secretary, according to The Washington Post. Brainard has worked with MIT on a project designed to determine use cases for a potential U.S. central bank digital currency. Brainard could help the Biden administration accelerate work on a central bank digital currency, in line with trends in other countries.

CRA

David Paul Morris/Bloomberg

Biden favors strengthening the Community Reinvestment Act, and proposes policies that create a greater role for non-bank lenders, which would boost opportunities for fintechs and other firms that provide liquidity for small businesses in underserved communities.

The president-elect’s CRA position favors expanding the CRA to fill in loopholes that have allowed financial institutions to “circumvent” the regulations, according to research from Waller, a Nashville-based law firm.

Biden has also proposed strengthening the Dodd-Frank law, though Waller says that would depend on appointments to federal agencies and the eventual balance of power in Congress.

Immigration

Bing Guan/Bloomberg

Biden will loosen restrictions on H1-B visas, and remove restrictions on visas for employers, a reversal of a Trump policy that created complications for at least one U.S. fintech attempting to transfer non-U.S. staff to the U.S.

The H1-B visas cover skilled workers, including a large number of developers from India—the Economic Times in India estimates tens of thousands of skilled workers from India join companies in the U.S. each year. Trump had lowered the quotas for yearly H1-B visas based on a conservative view that the visas lower wages for U.S. technology workers.

Biden plans to increase the limits in H1-B visas and completely overturn other restrictions on employment-based visas, according to Bloomberg, which cited Biden campaign documents.

The Trump policy caused U.S. fintechs to turn to gig workers for non-U.S. work, which created an opening for American payment companies to process payroll for international contractors. At the same time, many payment and financial technology firms also rely on skilled programmers and engineers from outside the U.S.

New score

Mark Kauzlarich/Bloomberg

Part of Biden’s campaign focused on mitigating systemic bias in several areas, including credit decisions. Biden has proposed a federally-backed credit bureau that’s designed to reduce discrimination in credit scoring, as well as open scoring to other more agnostic data such as rent and utility bill payments.

This bureau would be housed inside the CFPB and would be a requirement for all federal lenders. This would increase competition for the existing credit bureaus, which were already under pressure from fintech lenders that use non-credit data for scoring.

Experian, for example, has added subscription payments to its scoring system, and banks such as Capital One have expanded data sourcing for credit scores.

The public option for credit scoring could also indirectly boost a growing market of fintechs that are offering alternative data for lending decisions.

Net neutrality

Zach Gibson/Bloomberg

Biden will likely restore net neutrality, which can be done without an act of Congress, since the president appoints FCC commissioners.

Most large technology companies are in favor of net neutrality, which is designed to ensure equal access to the internet and is often cited as helpful to developers who construct new payment and financial projects. Other ways to ease fintech development have emerged recently, such as sandboxes that temporarily ease regulations to encourage innovation.

The Trump Administration ended net neutrality in 2017, reversing a policy that dated to the Obama Administration.

Georgia's impact

Elijah Nouvelage/Bloomberg

Biden is limited in what he can change through executive orders, so a lot of the changes in banking, payments and fintech regulations will require Congressional action. And that election isn't over yet.

The Democrats retained control of the House of Representatives, and it's likely Rep. Maxine Waters (D-Calif.) will still be chair of the House Committee on Financial Services. But there are also two Senate elections scheduled for Jan 5, both in Georgia. Incumbent Republican David Perdue will face Democrat Jon Ossoff in one race, while incumbent Kelly Loeffer will face Democrat Rapheal Warnock in the other race.

The polling favors the Republican candidates. The Georgia elections will determine the balance of power in the Senate, and thus whether both Congress and the White House are fully in Democratic hands or if there is split government.

That will determine Senate leadership, committee chairs and the pace of regulation since the party in control also guides the schedule. A Republican-controlled Senate could slow parts of Biden's agenda that require Congressional approval, or stall it altogether.

Fees

Senator Dick Durbin, a Democrat from Illinois

Bloomberg News

Congress will soon have to consider payment fees, with laws needing an update to accommodate the growth of e-commerce and digital payments.

That evolution has changed the cost of processing payments, and has also brought more competitors into the payment market than existed when the Dodd-Frank law was passed after the 2008 crisis. These competitors have changed the cost structure and created regulatory gaps.

“Payments that are digital, tokenized, or have premium rewards for consumers are more expensive for the merchant to process,” said Krista Tedder, head of payments for Javelin Strategy & Research. “The move of Amazon to ask consumers for checking information, as well as the promotion of payments through PayPal — which can use ACH as a cheaper payment method — will be used more in 2021.

This is also an expected area of legislation in the next few years, as the Card Act and Durbin amendment do not address tokenized or online debit, Tedder said.

“The risk to card networks was also spelled out in the DOJ case against Visa to halt the Plaid acquisition.” Tedder said. “Due to the rapid acceleration of digital payments due to coronavirus, the long term impacts to payments will be expanding non-card based transactions at the point of sale both online and in person.”

Cybersecurity

Like cryptocurrency, data breach and payment fraud is another area where regulations and laws have been mostly relegated to the states.

As the threat and size of incidents increases, that may have to change, says Randy Watkins, chief technology officer at Critical Start, a mobile security company based in Plano, Texas.

The coronavirus pandemic has changed fraud, attracting more bot attacks and boosting ID theft.

That has created a need for stronger protections for consumer data and rules to govern organizations that hold data.

“As these frameworks progress and the threats evolve, the incoming administration will have to push a federally-driven framework,” Watkins said, adding the security challenges are complex enough to require leadership to find expertise. “With a divided Congress these efforts will need outside expertise and bipartisan support.”