Partnerships drive financial inclusion for non-prime borrowers
In February, the House of Representatives' Financial Services Committee convened a hearing targeting bank partnerships with non-bank fintech companies, deriding them as "rent-a-bank schemes" designed primarily to "evade state consumer protections and interest rate caps."
Unfortunately, this portrayal of bank-fintech partnerships is inaccurate, ignoring many of the facts about how these partnerships work, what they aim to achieve and how they contribute to financial inclusion for the millions of Americans with nonprime credit scores who are otherwise considered too risky for most lenders. My organization represents companies throughout this space - those who offer loans directly to consumers, those who provide their proprietary technology to banks, and everywhere in between. Our members hear directly from consumers about how financial inclusion has helped them and how access to credit has changed their lives for the better.
And despite opponents' characterization of these partnerships as a way to get around state laws, in reality, they have long existed for many types of loans. That's because banks rely on the technologies developed by fintech companies to expand their product offerings with innovative financial tools - and the Department of the Treasury has encouraged banks to partner with fintech platforms for this very reason.
In a July 2018 report, the Treasury Department highlighted several ways in which non-bank fintech companies are positively contributing to the financial services industry. This includes expanding access to credit and financial services, namely by "developing business models that take advantage of new types of data and credit analysis, potentially serving consumer and small business borrower segments that may not otherwise have access to credit through traditional underwriting approaches."
The Treasury report also noted that nonbank fintech companies also offer "expanded speed, convenience, and security," as well as a "reduced cost of services and operational efficiencies." These are all outcomes that arise from decades of dedicated work developing technology and honing algorithms.
Furthermore, they are outcomes that banks want but often lack the technology in-house to achieve.