LEGAL
Promoting Competition ... by Regulation? Really? By Keith Thornburg, Vice President and General Counsel
The Treasury Department issued a 128-page report1 in
November 2022 “assessing the effects of competition on large technology firms’ and other non-bank companies’ entry into consumer financial markets.” Te report was prompted by President Biden’s executive order, “Promoting Competition in the American Economy,” issued July 9, 20212
.
Te Treasury’s executive summary notes the benefits of a “competitive marketplace means more choices, better service and lower prices” and that “by contrast, lack of competition can result in sustained market power and diminished innovation, product quality and access.”
Te executive summary observes the decades-long trend in concentration among federally insured (heavily regulated) banks through mergers, organic growth and limited entry by de novo banks. Amid these trends, new entrant nonbank firms have emerged to compete with banks. From the period of 2008 to 2017, more than 1,200 fintech banking companies formed. Funding deals attracted $10.7 billion in 2015, and this increased to $62.9 billion in 2021. However, only 62 new banks were chartered for the period 2010 to 2021.
Te executive summary states, with no apparent self-awareness of the import of its statement, that “new entrant non-bank firms … are not generally subject to the same oversight for safety and soundness or consumer protection” as insured depository institutions, “which raises various public policy considerations.”
Te “Recommendations” section of the report describes the robust market activities of (less regulated) nonbanks but then questions its charge to promote competition by stating that “competition alone cannot address all policy objectives related to protecting consumers and promoting their financial well- being.”
Te report gives lip service to addressing the regulatory arbitrage that fintech companies enjoy and to any consideration of “policies that maintain a level regulatory playing field.” Four of the five recommendations presented in the report are directed to add more regulations and supervisory focus on insured depository institutions; no framework is proposed to place non-bank companies under a similar regulatory regime for “protecting consumers and promoting their financial well-being.”3
Te report shows — but never states — that the consolidation of banks and the decline of charter activity as compared to the robust capital investment for the formation of fintech companies is because of the difference in regulatory burden, risks and costs, and that regulatory arbitrage is the driver of the competitive advantage that fintech companies enjoy. Te report also shows — but never states — that excessive regulation impedes innovation by incumbent banks in deposits, payments and credit, yielding significant market advantage to fintech companies.
Both banks and consumers do deserve choices, better service and lower prices that true and fair competition brings. Banks and consumers do not deserve to be disadvantaged by an excessive, complicated and unfair regulatory regime.
1
home.treasury.gov/system/files/136/Assessing-the-Impact-of-New-Entrant-
Nonbank-Firms.pdf 2
federalregister.gov/documents/2021/07/14/2021-15069/promoting-
competition-in-the-american-economy 3
Only one of the five recommendations is addressed directly to fintech
companies and particularly to payday lenders, including “wage access” lenders, and buy now, pay later lenders. Even here, the recommendation is for “guidance” and reconsideration of the Consumer Financial Protection Bureau’s hands-off approach and that consideration be given to direct supervision.
THE MISSOURI BANKER 9
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