Yesterday, AFSA responded to a request for information from the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve.

The agencies are interested in learning more about bank-fintech arrangements, especially how these arrangements ensure that consumers are properly protected. AFSA’s response emphasized the positive effects these arrangements can have on American consumers.

Particularly for underbanked customers with a thin credit profile, bank-fintech arrangements can be a way to obtain credit when other creditors may not directly offer credit to them or may not approve such customers for credit. AFSA member companies have shared examples of customers participating in a bank-fintech program after being turned down elsewhere.

For example, during one hurricane season a customer went to purchase a generator but was refused credit by the merchant’s primary lender. The customer then went to a bank-fintech program where the customer was offered competitive credit terms for the purchase of the generator to make it through the hurricane season with a reliable electricity source. Merchants appreciate these programs, too, because the merchants don’t lose customers due to limited financing options.

Some other answers to the questions posed in the request for information include:

• Bank-fintech arrangements in the credit space can have a simpler structure in terms of the number of players involved, but still reflect a diversity of approaches depending on the nature and scope of the arrangement. Some fintechs, for example, act like true “partners” with their bank and are prominently featured in customer-facing materials, while others are best described as mere vendors to the bank, appropriately assisting the bank in the background. Some of the risks highlighted in the preamble of the RFI stem from more complicated bank-fintech arrangements involving non-credit products and services.
• The fintechs involved in bank-fintech arrangements for credit products often are extremely proactive in their engagement with banks to ensure that compliance programs are both complementary and comprehensive. Member companies report designating principal contacts to ensure effective, ongoing communication between the parties, having frequent (sometimes at least weekly) meetings with banks and often daily correspondence with banks, participating in bank audits on a regular basis, and providing quarterly reports to banks to discuss material issues. These active arrangements are intended to ensure proper monitoring for risk and the protection of customers.
• Because of the nature of the typical bank-fintech arrangement, the bank’s loans are subject to both bank and fintech compliance programs and regulations. Fintechs that are also creditors are already subject to rigorous regulatory oversight and regulations, such as the Truth in Lending Act (TILA), which ensures customers’ rights and protections are considered in every transaction. When such a fintech is in a bank-fintech arrangement, the fintech’s comprehensive compliance programs are typically merged with the bank’s compliance programs to ensure that credit transactions follow all relevant laws and regulations.
• Our financial system benefits customers most when there is healthy and safe competition. The introduction of bank-fintech arrangements has helped to increase that competition and to create a more diverse and inclusive financial system in the credit space. A working paper from the Federal Reserve Bank of Philadelphia, for example, states that banks in arrangements with fintechs are more likely to extend personal credit and credit offers to customers who would otherwise have difficulty accessing credit. Further, the working paper explains that following the initial extension of credit, banks in arrangements with fintechs are more likely to provide larger credit-limits for below-prime customers because the banks have a better understanding of the risk profiles of below-prime borrowers.