Giving the middle class credit: New bill a step in right direction

Consumers need access to credit, and bank-fintech partnerships are one way to meet their needs. Indeed, bank-fintech partnerships are good for both consumers and banks. 

A couple of weeks ago, during a hearing on the opportunities and challenges in the fintech marketplace, I explained how these partnerships work to Congress.

As I noted, consumers benefit because banks can use fintech to deliver safer, more transparent, lower-cost and more convenient financial products and services over the internet and mobile devices.

Banks benefit because fintech companies can leverage big data and technology, offering the infrastructure banks need to serve and welcome more people into the financial system. 

For instance, fintech companies can provide access to a broader range of data and analytics, potentially helping banks to provide more consumer loans responsibly. Richard Cordray, the former director of the Consumer Finance Protection Bureau (CFPB), noted how “alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources.” 

Additionally, as a recent article in the American Banker explains, point-of-sale lending is popular with millennials, who are reluctant to take on credit-card debt but are comfortable borrowing for specific purchases.

Point-of-sale lending is being fueled by fintech firms, which have the necessary technology and also have relationships with thousands of merchants and can connect banks with borrowers.

Point-of-sale loans have become a “key driver of consumer loan growth” for banks “at a time when many are tapping the brakes on car lending and demand for home equity loans has weakened.” Community banks especially can become overexposed to specific market segments, particularly commercial real estate, and these types of personal loans help to diversify their risk. 

Furthermore, as was recently reported in the Wall Street Journal, banks are closing branches at the fastest rate on record — 1700 branches in the last 12 months alone. Clearly, the future of banking is the internet, and brick-and-mortar is the past.

Community banks need to partner with fintech firms to keep up with the big Wall Street banks. More to the point, without fintech partnerships, community banks may wither and die, a risk that we cannot afford to take. 

An excellent example of community banks using fintech to compete with the Wall Street banks is Radius Bank, a $1-billion asset institution in Boston, which according to news reports is establishing “long-term relationships” with fintech providers, and is finding them to be “mutually beneficial.”

The bank is serving more customers, and “standing out from the crowd” by partnering with technology firms. The bank is trying to become the Amazon of banking, but according to the article, “It’s hard for banks to reach Amazon-like levels of usability on their own.”

To ensure these bank-fintech partnerships are safe and work for consumers and the economy generally, the federal banking agencies supervise banks and their service providers to ensure that activities that occur outside of the bank are examined to the same extent as if they were being conducted by the bank itself, thereby protecting consumers and the financial system.

Bank-sponsored lending programs with fintech firms are no exception, and the FDIC has published detailed guidance as to how these relationships should be managed and supervised.

New and inconsistent court decisions, however, threaten to undermine bank partnerships with fintech providers and jeopardize the ability of community banks to expand access to credit. Legislative inaction creates uncertainty that can stifle innovation and leave millions of people with even fewer credit options, pushing them to the fringes of the economy in order to make ends meet. 

Thankfully, Congress has already taken an important bipartisan first step toward closing the regulatory hole courts have left on this key issue.

Co-sponsored by Representatives Trey Hollingsworth (R-Ind.), Alcee Hastings (D-Fla.), Blaine Luetkemeyer (R-Mo.) and Henry Cuellar (D-Texas), the Modernizing Borrower Credit Opportunities Act of 2017, clarifies that banks, as the loan originators, are the “true lenders,” enabling these partnerships to continue helping credit-constrained consumers around the country find responsible credit offered and underwritten by a federally supervised bank.

Andrew Smith is a partner at Covington where he advises clients, including fintech firms, on retail financial services, credit reporting, privacy, technology and e-commerce issues.