November 18, 2022

Treasury Says FinTech Firms Increase Competition but May Hurt Consumers

Steven Lofchie Commentary by Steven Lofchie

In a report to the White House Competition Council, Treasury found that nonbank and large technology firms may increase competition in consumer finance markets, but, without proper regulation, may do more harm than good.

In the report, Treasury found that non-bank technology firms have been rapidly growing across all core consumer finance markets, and have influence over how consumers access certain financial products and services. Treasury said that because nonbank firms are not subject to the same regulations as the established insured depository institutions, these firms may sidestep the safety and soundness of traditional consumer protection laws. Treasury said that operating outside of federal oversight poses increased risk of fraud, reliability and violation of privacy rights.

Treasury recommended that federal regulators (i) take steps to improve transparency and reduce bias in credit underwriting, (ii) implement effective oversight of bank-FinTech relationships and (iii) take a unified approach to oversight to ensure that any regulatory gaps are filled. Treasury said that ongoing projects like the current bank merger policy review and the CFPB's investigation into "Buy Now, Pay Later" products will also help improve federal oversight of non-bank technology firms. Treasury recommended subjecting nonbank firms to applicable federal consumer protection standards and specifically urged the CFPB to take steps to review how it might provide oversight of nonbank firms.


The Treasury report is tinged with nostalgia for a world of numerous small banks that did not face material challenges to survive. That world is past; the number of small banks is declining and will continue to decline. The costs of regulation, and of technology, combined with the economies of scale, make small banking a business model on a downward slope that cannot be reversed. Rather than bemoaning the death of that world, regulators should be thinking about how to make transition into the new one less painful.

It is also worth noting that the regulators routinely criticize banks for failing to provide services to low-income investors, yet they invariably criticize any nonbank with an innovative service used primarily by low-income investors.

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