How Would a Biden Presidency Impact Fintech?
Credit Scores Hit A High, Startups & User Trust, Fintech Rebundling
Imagining a Biden Approach to Regulation
With the election ending in just nine days (PSA: please vote!), what might a hypothetical Biden administration mean for financial services and fintech? While he hasn’t said much about fintech specifically, there are some clues.
The scope and specifics of any changes will also depend on if Democrats win control of the Senate and the appointments Biden might make. But despite Biden’s historic record (or maybe because of it), which is largely viewed as bank-friendly, a Biden administration is sure to be more “pro-consumer” than a Trump administration, but it is also likely to encourage innovation and increased competition as a way of achieving that outcome.
Image via Vox
A Biden CFPB
Under Trump, the CFPB took a markedly softer approach than it had under Obama, with past Trump CFPB Director Mick Mulvaney taking a more pro-business “collaborative” approach (he also famously referred to the CFPB as a “sick, sad joke” and asked for a $0 budget the first quarter he ran the agency).
Chart Image via Wall Street Journal
It’s safe to say a Biden CFPB would look more like “CFPB classic”. While a new director would require Senate confirmation, ramping up enforcement actions and rule making can be done more quickly than legislative changes.
WSJ reports that a Biden CFPB “would issue more fines, try to recover more money for consumers and give priority to protecting people hurt by the coronavirus recession.”
On the rule making side, focus areas could include revisiting the original underwriting provisions that were rescinded from the Final Rule on Small Dollar Lending.
A Biden CFPB could also impact proposed rulemaking to develop regulations to implement Section 1033 of Dodd-Frank, which provides for a consumer right to access their financial data (a kind of the US equivalent of “open banking”).
The implementing regulations will impact what data FIs must make available and with what requirements, and could provide opportunities for new fintech business models and to win customers from incumbent banks.
Other Areas of Note
OCC fintech charter: mixed bag. While a Biden admin may be pro-innovation and pro-competition, advocates argue a national fintech charter erodes state-level consumer protections, particularly on permissible interest rates; this may make it a non-starter for a Biden administration.
A policy document released in July also called for the creation of a public credit reporting agency to compete with Equifax, Experian, and TransUnion; offering banking services through the US Postal Service; and reimposing Glass-Steagall to force a separation of retail and investment banking. None of these are particularly likely.
More likely, especially with a Democratic Senate, could be a reversal of Trump’s rollback of which banks are considered “too big too fail” and those that must comply with the Volcker Rule.
Bottom Line
The reality is, if Biden wins, the overwhelming focus of at least the first year of his administration will be coronavirus-related. Any change in regulatory focus or new legislation is likely to be part of a broader agenda addressing COVID-19 and its economic impact.
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Despite Pandemic-Led Recession, Average Credit Scores Hit A High
Average US credit scores have hit a high - in the midst of a pandemic-induced recession - causing many in fintech to cry, "See! Traditional credit scoring is broken" or "It's time for cash flow-based underwriting!"
Reality is more complicated:
Credit scores are a ranking (relative) score, not absolute - meaning a 700 FICO score in 2020 doesn’t necessarily indicate the same level of risk as the same score in 2018.
Scores are a trailing indicator. Macroeconomic pain takes time to translate into layoffs and then late payments/defaults.
Massive government stimulus (stimulus checks, extra $600 unemployment, Paycheck Protection Program loans) has delayed but not eliminated this pain.
Stimulus actually increased average scores, as many used it to pay down debt. With Congress stalled on additional aid, signs of consumer stress are showing.
CARES Act changes to credit reporting requirements obscure what's happening, as furnishers report accounts with an accommodation as "Current".
This federally-mandated change to the definition/accuracy of bureau data is the bigger unknown, as it impacts how lenders use this data to underwrite.
Lenders with larger portfolios will have better visibility into how different risk segments are performing without relying on bureau data impacted by the change.
Subprime lenders, who are underwriting customers who likely already have delinquencies or charge offs in their credit history, may also be less impacted, as their models and pricing should be less sensitive to an account with an accommodation reported as “Current”.
Cash flow data can be predictive of ability to pay (eg, verifying income/employment) -- but not necessarily WILLINGNESS to pay (h/t to Frank Rotman, who routinely makes this point).
Do Startups Deserve User Trust?
The financial services industry and government have spent considerable time, effort, and money to build systems, policies, and regulation to cement user trust.
Users trust that when something goes wrong, they will be made whole, and that their money is safe.
Fintech startups dramatically benefit from this perception. But there have been a number of interesting scam, hacking, and IT failure incidents in the past few months:
Robinhood user accounts hacked and repeated service outages
Cash App users defrauded via p2p payments
Credit Karma savings account users unable to withdraw funds
Chime outage leaving customers unable to access their funds
Common startup practices that may be contributing to these problems:
Relentless drive to "minimize friction". Minimizing friction is good for business (lower CAC, higher revenue), but may also make it easier to execute scams and fraud.
Especially in p2p payments, where sending a payment is exceedingly easy - but reversing an erroneous payment is nearly impossible.
Minimal customer service options. This often leaves users in a purgatory of unhelpful FAQs, support tickets, and (maybe) a live chat (if they're lucky!) when something goes wrong.
The Great Fintech Re-bundling
I wrote this post a couple months ago, but after reading Crunchbase’s post this week on fintech rebundling, decided to include it in this week’s newsletter. Note that even since I wrote this, Credit Karma announced a debit card product as well.
Witness the great "rebundling" in financial services. When 'fintech' was an emerging trend in 2015, it was all about UN-bundling - what specific product/service could a new entrant offer an improved (and often cheaper, VC-subsidized) version of?
Fast forward 5 years, and it feels like every fintech is offering a transactional account (aka a debit card).
Why? The sudden focus on profitability is making fintech startups focus on the same goals that have always driven FI product and marketing strategy:
desire to be top of wallet
share of wallet
cross-sell
These companies have an uphill battle - this is now a very crowded space with many companies competing for the very few customers who are willing to change their primary banking relationship.