Overregulating fintech will harm consumers

A too-heated response from Congress could undermine access to affordable financial tools

The fintech trading app Robinhood was at the center of the GameStop controversy that Congress is investigating. But lawmakers should be careful to react appropriately, Flocken and Griffin write.  (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images)
The fintech trading app Robinhood was at the center of the GameStop controversy that Congress is investigating. But lawmakers should be careful to react appropriately, Flocken and Griffin write. (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images)
Posted April 8, 2021 at 5:30am

In late January, just as the 117th Congress was getting underway, the GameStop stock trading frenzy erupted with Robinhood, a fintech trading app, at the center. The debacle received global attention, including from Congress and the new Biden administration. 

The rapidly growing fintech industry, which encompasses a broad array of financial tools from lending to insurance, was already under increased scrutiny, even before the pandemic took hold last year. Suddenly, the spotlight was even harsher.

Congress has held three hearings to investigate what happened with GameStop and will be holding at least one more. The GameStop episode involved only a few companies, but it threatens to cast the entire fintech industry in a negative light as policymakers examine whether wrongdoing happened and, most importantly, whether consumers were properly informed and protected. 

Policymakers must be careful to react appropriately. A too-heated response could undermine consumer access to affordable financial tools.  

Fintech companies are solving critical problems for Americans. Even with a global pandemic and recession, banks still collected an estimated $30 billion in overdraft fees last year, not far from the all-time high of $33.3 billion in 2016. With better tools, many overdrafts could be avoided. If a consumer is paid on Wednesday, she will not see money in her account until Friday. If her $50 water bill is due on Thursday, the consequence will be a $35 overdraft fee — effectively a nonnegotiable 25,550 percent APR loan and possible contender for the worst financial deal since money was invented.  

Fintech, however, is changing this. Companies like Dave.com and Chime, for example, offer zero-fee accounts or provide consumers with protection against fees from their existing banks. And these companies are just getting started. As recently as October 2019, about $16 billion worth of economic rents were returned to the American public in an instant. Schwab, TD Ameritrade, and E-Trade all announced within days of each other that they were cutting trading commissions to zero, citing competitive pressure from fintech startups. All three companies lost a combined $16.4 billion of market value — essentially the market’s estimate of the total wealth transferred from a sclerotic industry back to American consumers. 

There has yet to be a total revolution in overdrafts like we saw in trading commissions, partly because these fintechs are trying to innovate within the bounds of regulations written long before the technology used for these tools even existed. Many of the laws regulating financial services are more than 50 years old. To continue the progress achieved so far, policymakers must prioritize consumer protection while not crushing the marketplace of innovation and propping up the entrenched and costly businesses of old.

Individual consumers know best what their unique financial needs are, and much of their financial pain results not from bad decisions but from the conformity of the tools available to them, which combine often-limited options with high fees. Whether by competing directly or partnering with banks, fintechs are at last beginning to dismantle the arcane confusopoly that has been the mainstay of the financial services industry for the last century. 

As the 117th Congress and the Biden administration examine how to better regulate financial services, particularly in the midst of an economic crisis, their focus should be on bringing more high-quality, low-cost options to consumers rather than stifling innovation in the name of consumer protection. Competition and innovation in the marketplace, along with smart regulation, can best help consumers.

There is no question that consumers’ behavior will change as a result of these disruptions, and not every single change will be for the best. More people than ever can access the stock market due to zero-commission trades, but that accessibility makes it possible for them to make poor financial decisions. Combining more efficient tools with social media also allows everyday traders to do things like engineer short squeezes and create mayhem for certain market participants. This kind of behavior isn’t new; hedge funds have been doing this to each other for years, but it is certainly more accessible now.

There are legitimate criticisms to be levied against new entrants. Some innovators have exploited opportunities and relentlessly prioritized engagement over consumer outcomes. In addition, new technologies themselves can create new risks for consumers, and regulators will need to work to understand these technology developments and be vigilant to ensure that consumers are protected. 

The question for policymakers, however, is whether to recognize that consumers, while not perfect, are best equipped to understand their own financial needs. The alternative is effectively to make the decision for them by eliminating marketplace competition and forcing consumers to utilize a narrow set of more expensive, lower-quality options — or get shut out of the financial services system altogether.

Katherine Flocken, a former Senate staffer, is a senior policy adviser at Allon Advocacy LLC, where she helps fintech and financial services companies navigate complex policy issues. 

Tyler Griffin co-founded Prism Money, a consumer-focused bill payment tool, in 2012 and is now a managing partner at Financial Venture Studio, which invests in fintech startups.