Several initiatives by the Consumer Financial Protection Bureau (CFPB) seem poised to increase competition between traditional financial services providers and fintechs.
An effort to regulate nonbanks has gained support from banks and credit unions. Still, the CFPB’s plan to make it easier for consumers to move accounts will pressure traditional financial institutions to offer more products and better services.
These initiatives are coming when the agency is scrutinizing overdraft and nonsufficient funds (NSF) fees, the CARD Act, and the terms and disclosures of Buy Now, Pay Later (BNPL) offerings – the latter a topic SRM recently wrote a report on.
All signs point to the need for banks and credit unions to buckle up in coming months. These expected changes will likely bring fintech even more into the mainstream and raise the stakes when it comes to recruiting and retaining clients.
Fintech scrutiny intensifies
The CFBP said in late April that it would start regulating nonbanks that present a risk to consumers – with a focus on fintech.
“Given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to,” Rohit Chopra, the agency’s director, said in a press release.
“This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads,” Chopra added.
Banks and credit unions have long complained that a lack of oversight had created an unfair advantage for fintech firms, particularly with terms and disclosures.
CFPB scrutiny, whether in the form of comprehensive policies or individual fines, should bring more balance to competition. It could also encourage more fintechs to follow the route of Varo, Square, and others that have obtained bank charters.
Feeding the itch to switch
The agency announced on May 24 that it would create an office to encourage competition in financial services by making it easier for consumers to change providers.
The Office of Competition and Innovation is “part of a new approach to help spur innovation…by promoting competition and identifying stumbling blocks for new market entrants,” the CFPB said in a press release.
The office will analyze obstacles to open markets and look to better understand how big players squeeze out smaller ones. It will host incubation events and evaluate ways to remove barriers to switching accounts.
This effort merits scrutiny, especially among large and midsize banks. While fintechs excel at fast customer onboarding through digital channels, the challenge for many consumers has involved closing accounts at their existing financial services provider.
In this case, the best offense for financial institutions is a superior defense.
Banks and credit unions must be diligent about offering products and services consumers want. This could include improvements to traditional loan and deposit offerings or expansion into areas such as digital assets and BNPL. Striking the right balance between physical locations, in-person service, and AI will also be critical.
The Bottom Line
The CFPB appears determined to reshape the landscape of financial services in 2022 by giving more scrutiny to fintech while at the same time making it easier for them to lure business from traditional providers.
Banks and credit unions can score victories and remain relevant in this evolving environment. Watch what happens with the CFPB’s probe into fintech’s BNPL practices. Be prepared to defend overdraft policies. And develop an innovation mindset that places an even greater focus on meeting shifts in consumer demands.
Know that SRM can help you navigate the choppy waters ahead, with capabilities to help you evaluate revenue opportunities, improve vendor partnerships, and enhance your technology strategy to maintain relevance and momentum in the age of fintech.