Fintechs Could Win the Post-CFPB Sweepstakes

Bankers need to prove they can self-regulate to support the trust they need to stay relevant.

Bankers nationwide risk getting overly boastful with all the enthusiastic high-fiving around the water cooler, celebrating the expected death of the Consumer Financial Protection Bureau. No more TRID! Adios to the Qualified Mortgage Rule! Dust off that resume, all you lovely “enforcement officers.”

Bankers look a bit like 17-year-old high school seniors whose parents just announced they finally trust us enough to leave us home alone for the weekend. We nod and keep a straight face, but inside, we are already ordering the kegs. What could go wrong? Bankers aren’t seeming to consider that any negative repercussions from the party (cops, an outsider stealing your girlfriend, stolen family heirlooms, etc.) could outweigh the celebration itself.

Let’s suppose that the CFPB goes away, whether it goes away entirely or is just “right-sized” into the dirt. Which constituent wins: consumers, large banks, small banks/credit unions, or the fintechs?

The fintech group is large and consists of many types of industry players:

• Digital-only “neobanks” and fintechs offering high-yield deposits (SoFi)
• BaaS providers that enable non-banks to hold deposits (Apple Savings)
• Fintechs designed to help consumers bypass banks altogether by receiving direct deposits (Chime)

There is a credible risk that the biggest winners from the CFPB’s demise in the long term could be neobanks and fintechs – all those “partners” that have arbitraged the banking infrastructure while avoiding some of the scrutinous pain.

OK Chachi, let’s just be honest and admit that consumers will be the biggest losers in a post-CFPB world. Some question that statement, but the argument that consumers could be better off without the very agency designed specifically to protect them requires more leaps in faith and logic than I’m prepared to take.

Let’s break it down into who in our industry wins the most stars in a post-CFPB world.

The good news: All banks will have some lessened regulatory scrutiny in the short term. Even if the regulations that the CFPB enforces are farmed out to other agencies such as the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Trade Commission, or state regulators/attorneys general, the tone will change from “guilty until proven innocent” to a more commonly bothersome exam process.

The benefit for small banks is lower than for big banks simply because of their inability to afford the fixed costs of complying with millions of pages of regulations. In the long run, banks should plan for the same regulatory burden no matter the overall regulatory structure.

But Fintechs? Fintechs could become even stronger versus banks. Without CFPB oversight, fintechs will have next to nothing stopping them from even more aggressively developing products and services to beat the banks. Fintechs have proven that they are infinitely nimbler than banks to get innovative products and services to market.

• There is a real possibility that payday lenders and others will have fewer restrictions and fewer worries if they do violate the restrictions, making them even more competitive than they already are.
• It will be much easier for non-bank lenders to get more aggressive and creative with AI-based underwriting and develop more competitive products versus banks.
• Fintechs in general will likely have more freedom to collect, share, and profit from selling consumer data.
• There are already many state and federal regulators that could and probably will take over what the CFPB is leaving behind for banks and credit unions, but the path for oversight of fintechs is far more uncertain. Department of Justice? FTC? Ralph Nader? Do we really think the DOJ will have any real care about payday lenders? Could banks trust the level of scrutiny the brown-ties at the FTC might focus on the likes of LendingClub? This uncertainty will lead to inaction, which ultimately will make it easier for fintechs to beat banks at their own game.

The risks of a CFPB-free world could also be much higher for banks than for fintechs:

• The CFPB makes it more difficult for Fintechs to directly compete with banks. The CFPB does not grant bank charters to fintechs, but it does have influence based on its keen focus on how innovative offerings impact the consumer. The CEOs of SoFi and Varo Bank both stated that convincing the regulators about their commitment to regulatory compliance issues was a major hurdle in achieving their charters.

• With a little nudge from FDIC insurance, we live in an industry that is based on trust. The implication of removing the CFPB is to let the industry regulate itself with input from the market. If banks and credit unions do not self-regulate, the reputation risk to banks from bad players is off the charts. It doesn’t take many large banks going “Predator” on us to wipe out that trust in a hurry.
  
  Fintechs don’t have as much of a trusting reputation with consumers to protect; they are seen as software companies with all the pluses and minuses that go with that. Fintechs just might be better able to get even more aggressive versus banks with less trust at risk, and even move swiftly to arbitrage their powers while the regulatory environment is in flux.
  
• Class action lawsuits should worry banks. Let’s hope that in the long run we don’t end up replacing compliance officers with attorneys.The CFPB currently makes it harder to sue banks because it acts as the arbitrator of what’s fair for the consumer. With oversight roles shifting, there will be more opportunities for aggressive class action law firms or even consumer advocates to attack banks.
  
  Fintechs may also be a litigation target, but lawyers know banks have much deeper pockets. Frankly, it’s a lot easier for a hungry attorney to gin up public support against a “villainous bank” for a tasty lawsuit.
  
• Oversight could get opaquer than it already is. While bank consumer regulatory oversight will become less onerous in the short term after CFPB, some of that supervision will surely get farmed out to other banking regulators. Banks could face more regulators increasing their consumer compliance focus with the departure of the CFPB. Fintechs don’t have that obvious backup regulator, and they could run free almost immediately without a clear end in sight.

As an industry, we watched and mostly did nothing in 2016 as Wells Fargo systematically and publicly screwed its customer base. The CFPB in some ways did our dirty work for us by dropping an unplanned $3 billion noninterest expense on Wells. Now is the time for bankers to prove that the industry can self-regulate to support the special trust that we so desperately need to stay relevant.

The bottom line:

• Bankers will feel some relief because the CFPB took the role of a cantankerous watchdog, even shaking down and distracting some good banks with strong ethical practices. The CFPB’s reach in setting regulated prices on fees also marked a lurch into unhealthy technocracy.
• That said, the end of the CFPB won’t mean the end of consumer compliance and the need for banks to have good management systems and oversight at the executive and board levels. Keep an eye on where this regulatory activity shifts.
• Litigation risk around consumer compliance may end up being higher than regulatory risk in a post-CFPB world.
• The CFPB’s demise is likely to benefit fintechs significantly more than banks. Many fintech regulations could go unenforced, while banks will still have major headaches to contend with from other regulators.

Let’s not let the demise of the CFPB lull us to sleep. Boards and executive teams need to monitor all the natural reactions that occur when the swift actions to shutter the CFPB are complete.

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Scott Hodgins is a senior director at Cornerstone Advisors. Follow him on LinkedIn and X.