An efficient banking and financial services system has always been a cornerstone of the global economy, yet financial inclusion and consumer protection continue to be a challenge where issues of imperfect information, income disparity, and disparate treatment/impact affect segments of the U.S. population.
FinTechs Open New Doors for Financial Inclusion
Growing up in Brazil, I saw firsthand the impacts of limited access to personal loans due to astronomical interest rates on everyday life. Real estate and autos were purchased with cash in Brazil, and the shallow lending market was reserved for the ultra-wealthy who could withstand hyper-inflation. Yet, as with any other structural challenge, this presented an opportunity for market participants to offer a solution. Within this context, some could say Brazil was at the forefront of the buy now, pay later (BNPL) space through innovative financing schemes for consumer goods-everything from tires to t-shirts-where merchants would allow consumers to divide a purchase into multiple equal payments, with the first due at checkout.
While these payment plan offerings provide the “inclusion” needed by the underserved population, the process came with very little consumer education and disclosures in terms of the actual costs, financing charges, or associated fees to the consumer. There are similar structural challenges here in the U.S., where the legacy financial system hasn’t always been able to provide adequate access to segments of the population that have limited financing options or remain unbanked, either by choice or by structural impediment (e.g., no retail bank in the neighborhood). But, the COVID-19 pandemic has accelerated the financial system’s “digitization,” allowing consumers and businesses greater access, convenience, capabilities, and an increase in opportunities, all as a result of this intensified financial innovation.
Fintechs are at the crest of the digitization and innovation wave, and their partnerships with banks and others are now playing a critical role in our financial system. These partnerships promise the expansion of access to credit and provide a competitive solution as the financial sector evolves, but one of the most important considerations for these relationships is the consumer experience, and how those consumers are being educated and protected. Acting Comptroller Michael Hsu of the OCC recently said at the American Fintech Council’s Annual Summit “a common mantra in tech is ‘move fast and break things,” but Hsu pointed out, “in the financial services context, it is important to remember that those ‘things’ are people and their money.”
The consumer experience-is there adequate protection?
So what does “protection” mean for consumers-especially those previously underbanked or historically left with fewer alternative financing sources? Let me take you back nearly 40 years ago when a family of immigrants, my family, moved to the U.S., speaking no English and having little financial education. While numbers are numbers, there was an entire world of financial products and services (and their associated perils) to navigate. Products that were not adequately described, especially to those with little ability to understand the English language, and exacerbated by sophisticated finance verbiage. While my family and I have come a long way since those days, some things have not changed much in terms of the language used and the risks posed to consumers in underserved and disadvantaged communities. Recently though, U.S. regulators have made clear their intentions of addressing those issues through increased rulemaking and aggressive enforcement of the law.
While the partnerships between banks and fintechs can promise financial inclusion, there is a growing concern that fintech products can skirt certain consumer protection laws (e.g. when is a bank a “bank” or a lender a “lender”?). There are questions about to what extent fintechs and their partners are responsible for providing the consumer with the appropriate information and disclosures necessary to make sound decisions. Given that most fintechs operate via a mobile device, there is typically no paper record of agreement or paper statements to call attention to fees and other charges, which may leave consumers with inadequate information of what they have agreed to and what they may end up paying.
There are other hot-button consumer protection issues beyond disclosures but unfair, deceptive, and abusive acts or practices (known as “UDAAP”) are of particular importance for fintechs interfacing directly with consumers. UDAAP violations are often used as a tag-along to regulatory enforcement actions, especially since the Dodd-Frank Act was passed in 2010.
While consumer demographics of those using certain products can fluctuate, the user will always require the same level of information and understanding that my family and I needed as we sought to realize the “American Dream.” Given that the U.S. Hispanic population is one of the country’s fastest-growing population segments, this service may also require special attention to culture and language capabilities.
Leveraging Technology
Regulators are watching and analyzing the data closely to understand the sales and marketing practices of all of the players in this ecosystem, as well as the level of complaints from consumers. With technology, we have made the financial system better and with it, we can also proactively monitor and audit the practices of all of the players in this robust (and lucrative) partnership model so that we can ensure the consumer has adequate and accurate information to make sound decisions.
Compliance Management is Key to Consumer Protection
At PerformLine, we know that a strong and proactive compliance management system is key to consumer protection. PerformLine’s omni-channel solution was built to automate the monitoring and remediation of regulatory and brand compliance violations, on all internal and partner channels including web, calls, emails, messages, documents, and social media. Our turn-key industry rulebooks are built on years of experience by working with regulators and industry clients.
Speak to one of our experts today to learn more about mitigating your risk and ensuring brand safety.
John Zanzarella