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This is a big day in Washington and on Wall Street. Congressional Republicans just unveiled a sweeping overhaul to the nation’s tax code and are also discussing an ambitious deregulatory agenda. Meanwhile, President Trump just named a new Federal Reserve Chair, and the Director of the Consumer Finance Protection Bureau has become so unpopular on the right that a Wall Street Journal op-ed claims that Trump has cause to fire him.
While some may consider this news most relevant to Beltway and Walt Street insiders, the reality is that it has huge implications for the rest of the country, from Main Street to Silicon Valley.
I’ll defer to others to opine on the importance of regulations to protect consumers from the type of fraud that occurred at Wells Fargo, but as a fintech executive with first-hand experience with regulation, I’d like to dismantle an argument often used to justify deregulation — namely that regulation kills innovation.
As someone who worked in fintech both before and after Dodd-Frank’s enactment, I can attest that while it can be frustrating and cumbersome, regulation adds significant value to the financial ecosystem — and not just to consumers. The innovation economy gains far more from regulation than it loses; in fact, regulation actually enables and facilitates innovation.
Let me be clear: Regulations are a pain. When I worked at LifeLock, Mastercard, and my own fintech startups, I lost hours of my life wading through regulatory guidelines. So many forms. So many procedures. And yet, here I am, just a few years later, supporting regulation, as long as it’s properly scoped and enforced.
A brief history
To understand my evolution from critic to cheerleader, let’s review some history. The Consumer Financial Protection Bureau (CFPB) was part of the Dodd–Frank Wall Street Reform and Consumer Protection Act created in response to the financial crisis, which drove the country into recession. The average American household lost $100,000 from declining stock and home values, according to the Pew Charitable Trusts.
Loosened regulations allowed big banks to create subpar new products (without sufficient oversight). Aggressive bankers were compensated handsomely for being fast and loose with lending practices and overly risk-seeking with new products and services. Bank portfolios became absolutely massive. When individual pieces started crumbling, the ensuing domino effect brought our financial institutions to the brink of ruin.
The Dodd-Frank regulations, including the CFPB, aimed to reign in the big banks’ reach and force them to keep risk in check. Almost as soon as these regulations were passed, some conservatives and many operators on Wall Street sought to weaken them. Now some officials are exploring firing the agency’s head, removing its independence by granting Congress control over its budget (and thus allowing Congress, not regulators, to determine its priorities), and even dismantling it altogether.
The CFPB helps fintech startups compete with the big banks
Regulations forcing the banks out of certain markets created a void enterprising fintech entrepreneurs have been eager to fill. Fintech startups created new products to serve what had become underserved markets, such as small businesses, student loan refinancing, and thin file credit (a kind of sub-prime). SoFi swept into the void and offered selective lending for student loan refinancing in a way the big banks never could have and is now valued at more than $4 billion despite a sexual harassment scandal that led to the departure of its CEO.
When I worked in fintech, the only practices I saw the CFPB target were those harming consumers on a large scale, like at Wells Fargo. The very existence of a powerful CFPB provides incentives to big bank executives to tread carefully in risky waters. Having regulators focused on the big banks provides fintech startups the runway to innovate without worry of being trampled by their wealthy, established competitors.
The CFPB further supports startups through its chartering authority. Financial startups entering markets entrenched by the big banks need a charter to have any hope of competing. Without CFPB charters, it would take many years to secure charters through other means, fatally altering the economic viability for many fintech startups.
Beyond chartering, the CFPB conducts (at times painful) due diligence to players in the fintech startup ecosystem. That’s a pretty important thing when people’s life savings are at stake. With a nod from the CFPB, responsible fintech startups can distinguish themselves from the many scams out there, and consumers know which organizations to trust.
The CFPB is also a thought leader
The CFPB works to unlock innovation, not deter it. It actively pursues and promotes promising fintech startups. One company I advised was supported in this manner by the CFPB, and it helped them substantially.
On a larger scale, CFPB’s Project Catalyst is a significant investment in the promotion of consumer-friendly financial innovation. Through this initiative, it partners with the fintech ecosystem to address real consumer needs, such as expanding access to credit, supporting safe access to consumer financial records, addressing student loan refinancing, and encouraging consumer savings.
Fix, don’t nix
The CFPB is far from perfect. If steps are taken to clarify its mandate, which is too big and undefined, the major legitimate criticism against it would melt away. The unpredictable, amorphous nature of its jurisdiction fuels the criticisms against it. Financial professionals know what to expect from the SEC or OCC. When the CFPB calls, no one knows what to expect. It’s analogous to restaurateurs who expect cleanliness and food safety inspections. If they were fined for something unrelated to those factors, they’d be angry — not because regulation is unreasonable, but because the guidelines and scope weren’t clear. Regulations work with clear expectations and consistent reinforcement.
Where to go from here
If the CFPB and other Dodd-Frank protections are weakened or scrapped, fintech startups will take a hit, as will consumers. Without guidance from regulators, consumers would be unable to discern quality from shady financial vendors. And freed from the shackles of oversight, large financial institutions would have little deterrence from re-engaging in risky behavior. This, of course, is how we ended up in a financial crisis to begin with.
If lawmakers do weaken regulations, I hope financial firms will choose to prioritize consumers, even if they’re not forced to. Responsible financial services and fintech startups could create industry-wide best practices, which they’d opt into following. Self-regulation is toothless and far from ideal, but if consumer protections are weakened, it may be the best option available both for consumers and for the innovation professionals who want to serve them.
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