Congress Debates Bank-Fintech Partnerships as Regulators Struggle to Keep Pace
By Juliegrace Brufke | Quincy News Correspondent
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Washington (Quincy News) — The debate over how tightly Washington should police the partnerships between banks and financial technology firms landed before a House subcommittee Wednesday, where lawmakers and industry witnesses agreed on little beyond the view that the current framework is falling short.
Sheetal Parikh, general counsel and chief compliance officer at Treasury Prime, a fintech infrastructure company, said regulatory pressure had already taken a toll. By the second quarter of 2024, roughly 35% of all bank consent orders were directed at institutions engaged in fintech partnerships, a trend she said has discouraged community banks from entering the space.
“A regulatory posture that inadvertently discourages community banks from these partnerships does not inherently make banking safer,” Parikh told the panel. “Displacing activity to less regulated corners of the system is not consumer protection. It’s risk transfer with no net gain.”
Rep. Stephen Lynch (D-Mass.) was not persuaded. He said decades of financial regulation were built in direct response to market failures, from the Great Depression to the 2008 financial crisis, and questioned whether the technology industry shared that sense of institutional memory.
“They come here and they fight regulation like hell. They do not want to be regulated, and they spend millions and millions of dollars trying to persuade members of Congress to give light-touch regulation or no regulation,” he said.
Several witnesses said the fintech firms they work with have very little interest in circumventing the rules. Without a bank partner, they noted, most could not operate at all.
Witnesses repeatedly returned to cost as the central argument for these partnerships. Erica Khalili, co-founder and chief legal and risk officer of Lead Bank, a Kansas City, Missouri-based community bank, said digital distribution reduces customer acquisition costs from as much as $200 to as little as $5, making it economically viable to reach consumers that traditional banks have not served.
Parikh pointed to a fintech on Treasury Prime’s platform that offers a zero-percent APR credit card to consumers with no credit history through a partnership with Academy Bank. She said more than 100,000 people have used the product, with the average user gaining 50 credit score points in the first year.
Rep. Sylvia Garcia (D-Texas) said access alone is not enough. With 4.2% of Americans unbanked in 2023 and another 14.2% underbanked, she said Congress should be focused on whether the products reaching those communities are safe and affordable.
Rep. Bill Huizenga (R-Mich.) raised a separate concern: that regulators do not understand what they are overseeing. A recent trip through Silicon Valley, he said, had deepened his skepticism about Washington’s ability to keep pace with the industry.
Alexandra Steinberg Barrage, a partner at Morrison Foerster and former FDIC official, acknowledged the gap is most likely solidified. “Technology moves in real time, and our regulatory agencies do not,” she told lawmakers. “Closing that gap is perhaps the wrong goal. Addressing that gap robustly and thoughtfully is the goal.”
Khalili flagged a court fight that she said could quietly reshape the entire landscape. A 10th U.S. Circuit Court of Appeals ruling held that out-of-state banks must comply with Colorado’s interest rate caps when lending to state residents. If other states follow, she warned, the patchwork of state rules could make the state bank charter far less attractive. She said Lead Bank supports the American Lending Fairness Act, backed by Rep. Warren Davidson (R-Ohio) and Sen. Bernie Moreno (R-Ohio), as a way to address the issue.
Rep. Sam Liccardo (D-Calif.) used his time to promote the Payments Access and Consumer Efficiency Act, or PACE Act, a bill from Rep. Young Kim (R-Calif.) that would give fintechs a federal license for direct access to payment networks. Liccardo said the bill would reduce fees on everything from rent payments to international remittances.
Full committee Chairman French Hill (R-Ark.) brought the discussion back to fundamentals. Hill, who spent much of his career in banking, said the partnerships that fail tend to do so for a reason that no legislation can address: a board that was not doing its job.
The subcommittee set a June 24 deadline for witnesses to respond to additional written questions.
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