Fintech firms continue to face scrutiny as regulators work to ensure tech intermediaries aren’t subjecting consumers to high fees, surveillance of transactions and anti-competitive activities.
Speaking in Washington at a Semafor event in July, Consumer Financial Protection Bureau Director Rohit Chopra said the activities of fintech middlemen — particularly those with data-based business models — will continue to be the subject of rigorous oversight.
“We are on the lookout for people who want to be gatekeepers and charge tolls through the whole system,” he said. “We want to see who's exploiting, misusing, abusing data. And we also want people to build businesses on something real, not just regulatory arbitrage.”
The CFPB is watching for companies “trying to insert themselves into the middle as a must-have resource for everyone, and then totally price-gouge people,” Chopra said, adding that the phenomenon is widespread. He cited the example of credit scoring and reporting companies that take advantage of consumers’ need for credit reporting information and scores, which operate with minimal competition.
Here are six takeaways from Chopra’s remarks:
1. Stronger oversight and guidance for fintechs
The rules under which fintechs operate need to be simpler and shouldn’t only benefit incumbents, Chopra argued. Clearer guidance means companies avoid a “shakedown of lawyers” as they strive to navigate uncertainty.
“We inherit laws that are written by Congress,” Chopra said. “They're often written sometimes for very specific circumstances; sometimes they're written just very, very broadly, and we have to deal with that.”
The CFPB, he said, has long had an issue with “rent-a-bank” partnership models.
“Many banks are marketing themselves as the bank of choice for fintechs, and sometimes that leads to situations where there is a kind of ‘move fast and break things’ mentality, or things aren't really buttoned up,” he said. Citing the consequences of the recent collapse of fintech intermediary Synapse as an example, Chopra argued that bank-fintech partnerships that aren’t well executed can cause significant harm to consumers.
“When you have certain firms that don't even really know how the accounts are ledgered, I mean, this causes really catastrophic and monstrous harm to people,” he said. “We certainly are looking … even before this fiasco, about ways to safeguard it.”
He declined to comment on whether enforcement action would be coming based on the Synapse case, but said it represented a serious lapse in judgment.
2. Enabling open banking
The CFPB will finalize its open banking rule by October, Chopra said, adding that he hopes its rollout will increase competition for consumers. The CFPB is taking applications for standard-setting bodies.
The first rule will cover transaction accounts, deposit accounts, digital wallets and other products. The agency will also roll out additional rules “to solve different types of problems,” he said. For example, the CFPB is considering a rule that could be rolled out next year on actions mortgage lenders can take that could allow the mortgage market to serve more people.
“What you see in mortgage lending is a lot of very powerful gatekeepers and tech companies who basically are charging a toll for every single mortgage transaction,” he said. Mortgage lenders need to “pay off someone to do an employment verification,” he said.
“They’ve got to pay big bucks to FICO and the credit reports over and over and over again, so we're trying to figure out what [are] the ways in which we can lower the costs for lenders and ultimately help consumers,” Chopra said.
The agency is also looking at ways consumers can grant permission to third parties to access payroll information, he added.
3. ‘Buy now, pay later’ guardrails
In May, the CFPB issued an interpretive rule that confirmed buy now, pay later lenders are credit card providers and therefore must provide similar consumer protections to credit cards.
The CFPB issued the rule to be transparent about how the agency interprets the law, and spare companies the need to continually engage legal counsel on the matter, Chopra said.
“We're interested in making sure that it's clear we do see this as an important competitive offering to credit cards and other things … but we don't want to build on some legal arbitrage,” he said. The agency wants to confirm “that there are certain laws that do apply to it and we try to make that clear.”
4. Combating big tech control of payment tools
Calling Meta’s ill-fated effort to roll out digital currency Libra in 2019 “a total nightmare,” Chopra argued that too much big tech control of payment transactions could limit competition and blur the lines between commerce and banking.
“We are continuing to be worried about big tech companies using their existing platform power to mint their own currency and essentially vertically integrate in ways that will totally stomp out a lot of innovation,” he said.
The agency is also looking at underlying business models, including whether these platforms will engage in surveillance over payments as a way to roll out personalized pricing or pursue other business activities based on insights from the data.
“We are looking a lot at the convergence of payments and commerce and the extent to which a very big player could use that to shatter that wall between banking and commerce,” he said.
5. Closing gaps on privacy and surveillance laws
Safeguards for the privacy of consumer financial data typically fall under state privacy laws, which can result in compliance gaps.
“You may have all these state privacy laws that apply to some parts of the financial world, but then the biggest banks in the country don't have to follow it sometimes, so we do need real updates to financial privacy and anti-surveillance laws,” Chopra said.
Consumer trust is at stake, and without updated privacy and surveillance laws, it could be a slippery slope toward a WeChat- or Alipay-style business model, in which “two companies control all payments and have full information about all of us,” he added.
6. Increased litigation on rulemaking is likely
The Supreme Court recently overturned the decades-old Chevron doctrine, which since 1984 had courts deferring to the regulatory interpretation of statutes.
In the financial services sector, the rollback of Chevron deference will not likely be a net positive for new market entrants, but it might benefit incumbents who have a business model and may want to “lobby their way out of accountability,” Chopra said.
It could result in uncertainty around rules, with an increase in litigation, he argued.
“You're going to see a lot more things being litigated in the courts,” he said. “There's going to be more split opinions and less finality to what the rules of the road are.”
