Introduction

The report examines how fintech companies exploit partnerships with banks to engage in high-cost lending. This practice disproportionately affects vulnerable households in the United States, particularly those already facing financial fragility. The report also outlines the federal deregulation efforts that have enabled fintechs to bypass state-level protections.

Fintech, banking, and financial fragility

Fintech companies present themselves as offering innovative credit solutions to underserved households. Before the pandemic, many households were already struggling financially due to stagnant wages and limited savings. The COVID-19 pandemic worsened this situation, driving more people towards high-cost loans from fintech companies. These loans often carry exorbitant interest rates, well over 100%, and are designed to sidestep state-level consumer protection laws through federal deregulatory measures. The lack of regulation enables fintechs to target vulnerable consumers, particularly low-income and minority communities.

Bank-fintech partnerships: A case study

The report uses Elevate Credit as a case study to highlight how these partnerships operate. Elevate works with banks like FinWise and Republic Bank to offer high-interest loans through products like the “Elastic” line of credit. Despite marketing its services as “responsible credit,” Elevate’s APRs often exceed 100%, with rates reaching 251% in 2013. Such partnerships allow fintechs to exploit bank charters to bypass state usury laws, offering credit products in states with stricter regulations. The report also notes that these partnerships pose long-term reputational risks for banks, as their involvement in predatory lending could result in significant regulatory backlash and damage to their public image.

Problems in dual banking and the law of finance

The dual banking system in the US, where both state and federal regulators oversee banking, allows fintech companies to operate in legal grey areas. By partnering with banks, fintechs can take advantage of federal banking laws to offer high-cost credit nationwide, bypassing state restrictions. These partnerships often operate in an opaque manner, making it difficult for regulators and consumers to understand the true cost of the loans being offered. This federal preemption weakens consumer protection and shifts the burden onto states, which have less power to regulate these practices.

Policy implications and recommendations

The report suggests two key policy actions to address predatory fintech lending. In the short term, the Federal Deposit Insurance Corporation (FDIC) should take action against these fintech-bank partnerships, given its oversight of the banks involved. The FDIC has the legal authority to regulate these partnerships under its mandate to ensure safe and sound banking practices. Long-term reforms are also recommended, including rethinking how consumer finance is regulated to prevent the exploitation of legal loopholes by nonbank entities. The creation of a national consumer finance commission is proposed to modernise financial regulations and ensure better protection for consumers.

Conclusion

The growth of fintech lending highlights significant regulatory challenges. Without stronger oversight, these practices will continue to burden financially vulnerable households, exacerbating existing inequalities. The FDIC and other regulators must act swiftly to address these issues and protect consumers from predatory lending practices. Additionally, banks face long-term risks to their reputation and regulatory standing if these practices continue unchecked. The report underscores the need for comprehensive reforms in consumer finance, particularly as fintech continues to reshape the lending landscape in the digital age.