Fintechs need to be more proactive about regulatory compliance

In the wake of Synapse’s collapse and multiple enforcement actions against banks involved in fintech partnerships, regulators and legislators are stepping up demands for stricter oversight and clearer guidelines to ensure better accountability in the industry. The Federal Reserve’s recent enforcement action against Evolve serves as a stark reminder of why appropriate focus on the “fin” part of fintech is critical — and what can happen when banks and fintechs drop the ball.

The rapid evolution of fintech has changed the way consumers and businesses access financial services, offering convenience, speed and innovation. Partnerships between fintechs and banks have helped modernize our financial system and increase access to credit and other financial products and services. These partnerships also provide smaller community financial institutions with the tools and technology they need to compete and serve today’s consumer. Around 73% of the world’s interactions with banks now take place through digital channels, which has allowed the expansion of financial services to underserved consumers. 

While modernization and technology have had an undeniably positive impact, challenges remain that must be addressed by clear guidance from legislatures, thoughtful regulation and — most importantly — clear industry standards. At the top of that list is the need for innovators to commit to meeting the regulatory requirements of advanced financial systems and to work with legislators to modernize laws. 

U.S. Representative Andy Barr, current chairman of the Financial Institutions and Monetary Policy subcommittee, recently held a hearing on this issue where banks, credit unions and fintechs discussed this critical issue. A cornerstone of better compliance is a commitment to full transparency by the bank and fintech teams: Consumers and businesses should always have all the information they need, presented in a clear and simple fashion, to understand the terms and fees associated with any financial product or service. In short, they need a complete picture of what they are agreeing to, what they’ll receive and what their obligations are. 

A lack of transparency is not only a risk to consumers, but a risk to the future of fintech. The Government Accountability Office, or GAO, recently highlighted the risk of fintech products and services to consumers, and it should be a wake-up call to the industry. The GAO understands that ambiguity erodes trust, and the rules of the road must be well-defined. Fintechs should understand this, too.

The bottom line is that consumers need to know who handles what — what fees are involved, interest rates, who holds their data and who is responsible for decision-making at each stage of the process.

In online lending, transparency is not only a legal requirement — it is crucial to building trust with customers, regulators and partners. Lenders must follow the Truth In Lending Act, or TILA, which requires lenders to present loan APRs upfront and clearly disclose required fees like late fees, origination fees and late payment penalties. Regulators provide sample forms for disclosure of loan terms to comply with TILA for consumer loans as well as other required information like notices of adverse action or changes in a credit card’s interest rate. These are requirements for lenders, whether they are bank or nonbank entities, and the lender has a responsibility to ensure that its service providers comply with the lender’s responsibilities under law.

However, recent Supreme Court rulings, like Loper v. Commerce and SEC v. Jarksey, have restricted executive branch agency interpretations of statutes, putting the burden on Congress to provide clear guidance and increasing the value of industry leaders implementing independent standards. This provides the fintech industry an opportunity to lead from within, proactively creating industry standards and norms that promote transparency along every step of the process. 

Regulation is still an important part of the solution to ensure the safety and soundness of the financial system; however, it should be applied in a targeted way to weed out bad actors and ensure customers don’t fall victim to rogue actors. Several critical federal and state rules have been tied up in court with legal challenges including rules on consumer lending, small-business lending data collection and bank preemption rights. It is important for fintech businesses to collectively establish common standards that can be used to provide guidance and clear examples to alleviate the legal gridlock.

As fintechs continue to disrupt the archaic systems and processes within traditional financial institutions, they must recognize that compliance with existing law — rooted in transparency — is the best defense against overregulation that stifles innovation and weakens the quality of financial products for millions of underserved Americans. 

Acknowledging the need for good regulations based on market data and current practices is necessary for fintechs to lead in developing and delivering trustworthy financial services and products. Fintechs must provide industry standards and collaborate with legislatures in modernizing laws to continue America’s leadership in financial services.