Payments 3.0: CFPB To Fintechs: No Special Favors

A series of recent actions by the Consumer Financial Protection Bureau gives the fintech industry some clues for navigating the new regulatory environment.

The upshot is that the Bureau has been putting the pieces in place for a new approach to regulating any company that provides a financial product to consumers. Another takeaway: financial-services companies are now on their own when it comes to compliance and innovation, and they had better be ready to justify their existence.

Here’s a look at the details and some of the possible implications of the Bureau’s actions.

In late May, the Bureau announced that it replaced its Office of Innovation with an Office of Competition and Innovation. The change ends the Compliance Assistance Sandbox (which helps companies launch new products) and replaces it with a “broader initiative by the CFPB to analyze obstacles to open markets, better understand how big players are squeezing out smaller players, host incubation events, and, in general, make it easier for people to switch financial providers.”

This comes on the heels of an interpretive rule released by the Bureau earlier in May that encourages states to enforce federal consumer-protection laws and says CFPB actions do not end state actions. Both follow the April announcement that the Bureau will use its enforcement authority with nonbank financial-services companies.

All of this adds up to a situation where the Bureau is saying, in effect, that it, along with the states, will be watching companies, but will not offer innovators any help navigating the regulatory rapids. Instead, it plans to find ways to make it easier for customers to switch providers. Another way to put it: The Bureau’s expectation is that fintechs and financial-services providers justify their existence by clearly explaining their benefits to their customers.

This is not necessarily a bad thing. While forward-thinking management teams recognize that customers are another stakeholder group, everyone in the industry will need to realize that the extended sphere of stakeholders includes investors, customers, employees, business partners, and, yes, regulators. Companies that can clearly explain the benefits of their products and how they work will do better than those that cannot.

The Bureau has not entirely abandoned the notion of benefits from financial services. In the announcement of its new office of competition, it says it wants to help small companies gain access to data held by large banks and examine how big tech might have an upper hand in launching new products.

Of course, the danger in all of this is that the Bureau, instead of the market, could end up picking winners and losers. While this would be a blow to competition, it has bigger implications because small players and large companies do not exist independently of one another. Innovation happens when different players in the value chain combine to bring a new product to market.

While individual companies need to make this case, the payments industry as a whole also needs to play a part in educating regulators, legislators, and the general public about how the industry benefits consumers and how companies collaborate to make products work.

Thinking competitively is an important part of any company’s success, but so is thinking cooperatively. Of course, antitrust rules must be followed, but the industry needs to be able speak with a unified voice so it can develop consensus opinions by sharing experiences with the effects of regulations.

By coming together, the industry can avoid having concerns dismissed as isolated incidents that affect only one company. And by sharing experiences and expertise, the industry can propose solutions that work for all stakeholders.

—Ben Jackson, bjackson@ipa.org