The Takeaway — November 2022
Every first Tuesday of the month we round up some of the most important and interesting embedded finance, fintech, and banking news stories and tell you why they matter. Find last month’s edition of the Takeaway here.
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1. CFPB makes big announcement at Money 20/20:
Among the news made at the largest global fintech event is the Consumer Financial Protection Bureau’s (CFPB) rulemaking on Section 1033 of the Consumer Financial Protection Act. This rulemaking means that financial institutions will have to share consumer data should a consumer request it.
Director of the CFPB, Rohit Chopra took to the Money 20/20 stage to make this announcement, declaring a swift timeline to solidify the rules by 2024 — likely to finalize everything ahead of the next presidential election. This push in the direction of open banking won’t happen overnight. Chopra has set his sights on data transparency via deposit accounts, credit cards, and digital wallets. For Chopra, he sees this move as a matter of encouraging competition and empowering consumers to be more financially flexible and do what’s in their best interest, including leaving their banks.
There’s a lot to unpack with Section 1033 and we’re likely to see more news come out as things continue to take shape.
The Takeaway: The concept of open banking has been a popular one in Europe, but it’s taken a bit more time to take off in the States. At its most fundamental, open banking allows for consumer banking and financial data to be shared, oftentimes through third-party APIs and technology. The aim of open banking is to grant more financial freedom to consumers and create healthy competition among banks of various sizes, possibly driving down fees and making other services and products more accessible — ultimately benefitting consumers and leveling the playing field.
As Chopra pushes for banking in this country to move towards open banking, both fintechs and banks will need to stay vigilant. Globally, open banking is an increasingly popular system for fintechs. Open banking comes with its own risks and technological requirements. A banking as a service provider could prove to be a crucial bridge between both parties, supporting on multiple fronts including compliance, technology, and relationship management. As the regulatory landscape continues to change, it appears that American banking infrastructure will too.
To read our ultimate guide to embedded finance products for B2B SaaS companies, download it here.
2. CFPB faces legal threat:
Meanwhile, the CFPB itself is under fire, with the 5th Circuit Court of Appeals ruling that the way the agency is funded is unconstitutional.
The CFPB is funded by the Federal Reserve thanks to the Dodd-Frank Act. Other government agencies typically must go through a Congressional appropriations process, that is, having a budget approved by the legislature.
This funding structure was cast into the spotlight as part of an argument from two trade groups that brought a lawsuit against the CFPB’s 2017 payday loan rule that lenders must determine if consumers can repay loans that require all or most of the loan to be paid back at one time. The trade groups argued that the ruling should be nullified given the CFPB’s unconstitutional funding process.
With the court’s ruling, experts expect that the CFPB will appeal the decision, though the outcome may force the agency into the traditional congressional funding process.
The Takeaway: With the overturning of its payday lending rule, some fear that other rulings from the CFPB could also be nullified. And with the CFPB possibly going through Congress for its funding, it puts the agency in partisan crosshairs.
With rumblings from the Republican party over the aggressive stance that the CFPB and other regulating agencies have taken, particularly in the fintech space, the CFPB could be in danger of being hamstrung by inadequate funding. Those across the aisles have also expressed fears over this possible outcome as the CFPB is an agency designed to protect American consumers and their best interests.
How this will all shake out remains to be seen, but it underscores how quickly not only regulations can change, but the regulators themselves. Fintechs and banks who are looking to weather any upcoming regulatory upheaval should be taking an active role in their compliance.
Treasury Prime believes in empowering our bank partners and fintech customers to own their compliance. Learn more about compliance product offering here.
3. Fed’s ruling on debit card transactions:
The Federal Reserve has ruled that debit card transactions must be processed on at least two unaffiliated payment card networks (like PIN and signature) for card-not-present transactions (like those made online). The debit card issuer would need to ensure that those two or more networks have been enabled.
While opposed by the American Bankers’ Association for the increased compliance burden, particularly for smaller card issuers, the Fed argues the ruling can increase competition among debit networks with merchants possibly paying a lower interchange fee.
If this ruling is ultimately enforced, it’s unclear what the ramifications will be for everyone who shares in the interchange fee pie.
The Takeaway: Interchange revenue can be an important source of income for many fintechs and enterprises. With the Fed’s ruling, fintechs may be worried about how this could affect their bottom lines.
It’s difficult to predict the ripple effects, but given that this ruling would only affect a subset of debit transactions and that some merchants already negotiate for lower interchange fees, it may become a minor or a non-issue.
No matter if and when the Fed’s ruling is enforced, fintechs should be prepared to harness the revenue potential of interchange fees. Learn more about interchange revenue here.
4. Making Lending Easier for Fintechs:
The Small Business Administration (SBA) is preparing to propose a change to a long-standing rule barring non-banks, like fintechs, to lend government-backed loans.
If approved, fintechs could offer loans that are backed by a $37 million annual program that could provide up to $5 million for small businesses.
For the last four decades, only 14 “small business lending companies” could get the required license to lend through this SBA program. With this possible new ruling, fintech experts say they could help the SBA reach new and underserved audiences and provide loans to business owners who may be otherwise denied.
The Takeaway: Fintechs can play an important role in financial inclusion and lending through the SBA could definitely further that effort. Fintechs, however, need to consider the economics that go into lending, whether it’s peer-to-peer or to a business — lending comes with its own costs and requires extra resourcing to get needed licensing and bolstering internal compliance measures.
Fintechs that are interested in pursuing some sort of lending should work closely with their bank partner to understand the full scope of what it could entail and the possible business ramifications.
5. CFTC comes down on Crypto:
The Commodity Futures Trading Commission reported that 22% of their 82 fiscal year enforcement actions were in the crypto space.
This comes as the CFPB also reports a surge in consumer complaints against crypto-related businesses and platforms. Some 2,700 complaints have been recorded since the beginning of 2020, and while these complaints make up a small portion of the CFPB’s overall complaint volume, regulators are concerned about an upward trend. These complaints are not only against crypto-specific companies, but fintechs and financial institutions that deal with crypto and digital assets.
With the CFPB sharing this data with the CFTC and the Pentagon even assessing the national security risk of crypto, federal agencies seem to be paying even more attention to the already embattled crypto industry.
The Takeaway: As scrutiny continues to grow, crypto players are still seemingly stuck in the middle as regulatory guidance has yet to take shape. Both the CFTC and the Securities and Exchange Commission are laying claim to crypto regulation and legislation continues to be talked about and not fully enforced.
This highlights the importance for fintechs dealing in crypto to stay abreast of changing compliance, owning it, and also finding the right partners — both BaaS providers, who can provide access to a wide network of banks, and banking partners who are aligned with working in an emerging industry like crypto.
Learn more about Treasury Prime’s growing bank network, the largest in the banking as a service industry, by having a 1:1 conversation with our team.
6. Banks v. neobank first-mover advantage:
While neobanks’ market size is expected to hit nearly $67 billion this year, traditional banks are fighting back.
Neobanks experienced a boon as consumer behavior shifted to the digital, with customers more hesitant of visiting physical locations to bank and craving lower fees and more embedded financial services.
However, as VC funding dips, neobanks are faced with issues of innovation and scale, whereas their chartered counterparts are flush with cash and aren’t reliant on outside capital.
Traditional banks are now also encroaching on what made neobanks popular in the first place, improving the online banking experience, eliminating overdraft fees, and providing early access to direct deposits.
With a first-mover advantage, neobanks have captured a market segment, but traditional banks are putting up a good fight to win them back.
The Takeaway: For neobanks it can feel like a David v. Goliath situation — despite the sheer difference in size and resourcing, neobanks have a fighting chance.
We spoke to fintech analyst Simon Taylor about just this issue: how can neobanks make money? A key takeaway is that while traditional banks have the capital, neobanks have the agility and flexibility to quickly pivot. Neobanks looking to offer a differentiated experience for their customers should consider market fit and how providing specific financial services for specific niche audiences could lead to an untapped and loyal customer base. Or think about how the bundling of certain services and products could provide convenience for customers that they didn’t even know they were missing.
Neobanks may run small, but they can certainly run fast.