On July 16, the U.S. Treasury Department finally made a move that many fintech professionals have expected – and some dreaded – for years. They issued a Request for Information (RFI) for online marketplaces.
Their goal is to “allow policymakers to study the various business models and products offered by online marketplace lenders, the potential for online marketing lending to expand access to credit to historically underserved borrowers, and how the financial regulatory framework should evolve to support the safe growth of this industry.”
This call for information means that the 800-pound question has finally come to the forefront for the fintech industry. There has been much buzz from my peers in the last few days about what the regulation will look like, as well as how it may affect the pass-through structures of the marketplaces.
This RFI, coupled with a recent court ruling regarding the role of banks renting their licenses out to marketplace lenders, is raising big questions for the industry and the way this industry will continue to evolve.
Don’t Create Uncertainty In The Space
Regulators should be careful about creating uncertainty in this space. Why? For starters, the fintech industry has seen significant innovation with two major IPOs in the past eight months (Lending Club and OnDeck), triple the amount of investment in 2014 to over $12 billion and 900 new startups expected to launch this year.
Secondly, the fintech industry stepped in to fill the credit void left by banks during the recession. Many underserved small business owners would not have received a loan and would not be around today if alternative lenders had not funded them. Banks simply had shut their doors to them, preventing the economic engine of our nation from accessing much-needed growth capital.
Online lending is also democratizing the way consumers and small business owners borrow money, which means that they are less dependent on banks. If the government decides to heavily regulate our industry, these borrowers will suffer.
Bring Clarity To Our Space, Not Heavy Regulation
Regulators often have good intentions, but their strict and often overstepping regulations can have unintended consequences. For example, the introduction of the Dodd Frank Act created a massive regulatory overhang over the banking sector and led to the emergence of online lending.
We have also seen that law of unintended consequences work in the past when the Sarbanes-Oxley Act was passed after the dot-com bust. The regulators should focus on bringing more clarity in this space instead of trying to regulate the industry to make sure that the economy and borrowers do not feel negative consequences from regulation.
Consider Us Technology Companies
Also, regulators should treat online lending marketplaces more like technology companies, which should lower the cost of administering critical credit for underserved markets. These technology companies also can bring more transparency in the overall market while fostering greater competition.
A good example is the retail industry where the states gave ample time to online retailers before imposing sales taxes on online transactions. In this case, the government allowed the convenience and lower costs of online retailers to gain prominence before they increased fees.
The key role for regulators in this connected economy is to keep fostering innovation and focus on more important issues like strengthening the economic recovery as well as fostering more tech talent in the country. Unfortunately, access to credit for small businesses is still way below the pre-recession levels while the economic activity has picked up.
Historically, nearly 8 out of 10 small businesses for example are denied bank loans. Much of this stifling of our Main Street businesses is largely based on a broken banking system, one void of technology innovation and the ability to properly evaluate the creditworthiness of a small business. If regulators impose less strict standards for now, it will allow fintech to keep growing organically and keep serving consumers and small business owners.
It will also allow fintech companies to continue to forge strategic partnerships with the banks that are now seeing the enormous value fintech can bring to their own operations.