January 27, 2022

Fintech Policy Preview

Regulators Play Catchup with Fintechs

Fintech companies, which have sped their pace of innovation amid the COVID-19 pandemic, will
face an accelerated pace of regulation in 2022 as President Biden’s team begins addressing its
priorities.

• Key regulators will push forward two key rulemakings on consumer financial data
ownership and small business lending data collection.

• The CFPB will ramp up efforts to monitor payments innovations and scrutinize the buy now,
pay later (BNPL) industry and large tech payment platforms.

• Regulators will further define what kinds of fintech-banking relationships are appropriate
and clarify the scope for fintech bank chartering opportunities.

Major Themes With Director Rohit Chopra now installed at

the CFPB and reasserting the bureau’s
expansive authority, Capstone expects
CFPB and Prudential Regulators to progress on multiple key rulemakings in
Expand Rulemaking 2022.

Open Banking: Intuit Inc. (INTU), Commercial Lending Demographic

Robinhood Markets Inc. (HOOD), Disclosure Targets Discrimination
Winners
Block Inc. (SQ), PayPal Holdings
Section 1071 of the Dodd-Frank Act
Inc. (PYPL)
mandates that the CFPB collect and report
Small business demographic on small business lending demographic
data: Enova International Inc. data to facilitate the enforcement of fair
Losers (ENVA), Live Oak Bancshares Inc. lending laws. However, rulemaking under
Inc. (LOB) Funding Circle Holdings Section 1071 has languished for nearly a
Plc (FCH on the London exchange) decade until a legal settlement forced the
The Biden administration took office with a bureau to accelerate the process. This led to
narrow Democratic legislative majority, a notice of proposed rulemaking (NPRM) in
which—combined with President Biden’s September to require all financial
preference for nominating partisan institutions that originated at least 25
regulators—meant the administration faced credit transactions for small businesses in
prolonged battles to win appointee the preceding two years to collect
confirmations. The delay in the confirmation demographic data on prospective borrowers
for a new director at the CFPB slowed that submit written or oral requests for
rulemaking processes that have significant credit.
implications for the fintech industry.
This rulemaking is important for creditors,
as demographic data collection is likely to
reveal discrimination in small business
lending. We believe such findings are likely
to trigger fair lending enforcement actions

January 2022 2
 Fintech Policy Preview

under Regulation B of the Equal Credit We believe the UK’s experience

Opportunity Act (ECOA), which prohibits implementing its open banking directive
discrimination in credit decisioning. There is can help us predict impacts in the US. In the
ample academic evidence to suggest that UK, the open banking application
minority- and women-owned businesses programming interface (API) was slow to
have a harder time getting credit than materialize but has rapidly accelerated in
comparably situated white business owners. the past year. UK data show beneficiaries
include institutions that provide financial
Capstone expects that the finalized rule will advice and investment opportunities. If
be released by the end of Q3 2022 and will those patterns persist in the US, as
go into effect in early 2024. Capstone expects, then open banking
regulation would benefit Mint and Credit
Slower Progress with Open-Banking Karma, both units of Intuit Inc. (INTU), as
Regulation well as fintechs Chime, Goin, Simpli.fi, and
others that design financial planning tools
In July 2021, President Biden issued an
for consumers.
executive order focused on competition
policy in which he encouraged the CFPB to Data portability will make it easier
accelerate its rulemaking process related to for customers interested in retail investing
Section 1033 of Dodd-Frank. Under Section to move money from traditional checking
1033, financial institutions are required to accounts to platforms such as Acorn,
make consumer financial data more readily Robinhood Markets Inc. (HOOD), Block Inc.
available and portable. Biden’s comments (SQ), and PayPal Holdings Inc. (PYPL) that
were interpreted as an endorsement of an offer or plan to offer stock-trading
“open banking” system that would give opportunities.
customers greater control over their
financial data and increase competition We also believe firms such as the data
among financial institutions. transfer company Plaid, which recently
announced a foray into payments
Despite the White House’s push, the pace of processing, stand to benefit significantly
CFPB rulemaking appears to be anything but from open banking reforms. With greater
urgent. The bureau’s 2021 Fall Agenda data portability and consumer financial
indicated any 1033 regulation was still in a data ownership, Plaid can expand
“prerule” stage and the next update will connectivity and data sharing networks
come in April 2022. Capstone expects that between financial institutions and help
an NPRM will likely be delayed beyond then support and expansion of direct account-to-
given the bureau’s acknowledgment that a account and business-to-business
small business review panel will have to payments.
assess potential impacts—a step required
for large rulemakings that may delay the Mastercard Inc. (MC) and Visa Inc. (V)—which
process. tried to acquire Plaid but was blocked by the
US Department of Justice—have sought to
The eventual impact of open banking reform rapidly expand their API capabilities to
will be significant, with consumers gaining better support open banking payments.
autonomy over their financial data,
increasing competition for financial services
companies.

January 2022 3
 Fintech Policy Preview

Payments Company Innovations Spur fees even as the Fed tries to alleviate that
Rulemaking and Enforcement strain.

A2A payments facilitators and Capstone expects that retailers will continue
partners: Plaid, MX, PayPal, Block pushing regulators to amend Durbin even as
Winners Regulation II changes are finalized in early
Unaffiliated card networks, Star
Network, Accel 2022. Additionally, as merchants continue to
PayPal, Affirm Holdings Inc. chafe at the cost of interchange, we expect
(AFRM), Block, Meta Platforms Inc. more will try establishing direct account-to-
Losers (MVRS), Alphabet Inc. (GOOGL), account (A2A) payment options.
Apple Inc. (AAPL), Amazon.com Inc.
Direct account-to-account payments already
(AMZN)
took off in 2021 under the guise of buy now,
COVID-19 rapidly accelerated the transition pay later offerings. BNPL exploded in the US
to online and digital payments, a trend we in 2021 amid a frenzy of deal-making,
expect to continue throughout 2022. product rollouts, and news coverage. The
Bloomberg forecasts that digital wallets’ CFPB took note, with initial consumer
share of consumer payments could grow to guidance this summer followed recently by
20% in 2022 and digital payment methods letters to major BNPL companies inquiring
will be used for more in-person purchases. about their business model. Affirm Holdings
Regulators have taken note of this shift and Inc. (AFRM), Afterpay Ltd. (APT on the
are monitoring e-commerce payment Australian exchange), Klarna (KLAR on the
methods more closely. Swedish exchange), Zip, and PayPal all
received requests for information.
In June 2021, the Federal Reserve (Fed)
proposed changes to the Durbin The CFPB inquiry highlights the bureau’s
Amendment’s Regulation II, which would concerns with the industry’s underwriting,
require debit card issuers to enable two data collection, compliance, and customer
unaffiliated networks for card-not-present protections. Capstone expects that the CFPB
transactions. That regulatory “clarification,” will initiate enforcement actions or potential
as the Fed termed it, would allow merchants rulemaking activity for BNPL firms in late
to route online transactions across payment March 2022, following the inquiry response
networks offering less expensive deadline.
interchange rates than the dominant card
networks, Visa and MasterCard. While Finally, the CFPB recently sent letters of
merchants welcome the change, they still inquiry to six large tech companies and
argue that interchange fees are too high and payment platforms, Block Inc. (SQ), Alphabet
have encouraged the Fed to reduce the Inc. (GOOGL), Meta Platforms Inc. (FB), Apple
interchange limits for exempt and Inc. (AAPL), Amazon, and PayPal inquiring
nonexempt banks. about their financial products, payment
offerings, and consumer protections. CFPB
The most relevant example of merchant Director Chopra has expressed concern
frustration comes from Amazon.com Inc. about consolidation in the payments sector,
(AMZN), which said it will stop accepting use of customer data, consumer protections
Visa cards in the UK because of fee hikes. under the Electronic Funds Transfer Act, and
While we expect Visa and Amazon will the Gramm-Leach-Bliley Act. We expect the
resolve their differences, the dispute speaks CFPB to use this fact-finding mission as a
to merchant frustration with card-based basis for potential future enforcement
action or larger participant rulemakings.

January 2022 4
 Fintech Policy Preview

The OCC announced in July 2018 that it

Banking Regulatory Perimeter would accept applications for a special
Redefined purpose national banking charter that
would allow fintechs to become chartered
Fintechs with bank charters: banks without accepting deposits (thereby
LendingClub Corp. (LC), Nelnet avoiding direct FDIC supervision). This
Winners special charter has been at the center of
(NNI), SoFi Technologies Inc.
(SOFI), Varo Bank, Block legal disputes since its formulation, facing
Large fintechs considering challenges brought by the Conference of
Losers banking charters: Chime, State Bank Supervisors (CSBS). Capstone
Revolut, Brex believes the OCC, after agreeing to pause
litigation to review the charter, is likely to
In comments to the American Fintech withdraw the fintech charter as an avenue
Council in November 2021, acting for gaining bank status.
Comptroller of the Currency Michael Hsu
said the “cornerstones of banking” are being In his remarks, Hsu focused on the three key
reassembled “outside of the bank regulatory functions of banks: taking deposits, making
perimeter.” Hsu noted two specific concerns loans, and facilitating payments. The idea
about fintechs operating outside this behind the fintech charter was to allow an
envisioned regulatory perimeter: the entity to become a bank without fulfilling a
potential for consumer harm from bank’s traditional deposit-taking
regulatory arbitrage and run risk. responsibilities. Industry leaders remain
concerned that even if the OCC moves
Despite the concerns about fintechs’ forward, the CSBS would continue to
operation outside the banking regulatory challenge such charters with the goal of
perimeter, we believe the Federal Deposit having them invalidated in court.
Insurance Corp. (FDIC) and the Office of the
Comptroller of the Currency (OCC) are Fintechs and other commercial firms have
reluctant to give fintechs non-traditional also shown a renewed interest in pursuing
bank charters that could be perceived as an industrial loan company (ILC) banking
having less burdensome compliance charter. In 2020, after more than 10 years
requirements than traditional bank charters. without an ILC approval, the FDIC approved
Additionally, we believe the FDIC, the OCC, charters for both Square (now Block) and
and the Fed will finalize interagency Nelnet Inc. (NNI). With the recently
guidance governing fintech relationships announced resignation of FDIC Chair Jelena
with banks. This move would force banks to McWilliams, we believe that the FDIC board
carefully scrutinize partners and improve is unlikely to grant further ILC charters in
the compliance and consumer protection the near term. Board member Martin
capabilities of fintechs. Gruenberg voted against Square’s ILC
charter, and we believe other Democrat-
appointed board members, most notably
The OCC is likely to withdraw Rohit Chopra, are likely to share Gruenberg’s
outlook.
the bank charter as an
avenue for gaining bank While ILCs or special charters are relatively
unlikely to be granted to fintechs, we still
status. see a path for fintechs to become chartered
banks through acquisition. By purchasing
existing state- and OCC-chartered and

January 2022 5
 Fintech Policy Preview

regulated institutions, fintechs can absorb, portability and consumer ownership over
rather than develop, the more robust financial data.
compliance capabilities of their targets and
allay the concerns of some critics. In a moment of bipartisan agreement,
LendingClub Corp. (LC) successfully pursued Congress expressed similar interest in
this strategy through its acquisition of increasing portability and consumer control
Radius Bank, and we believe the OCC will over financial data. In a September 2021
approve SoFi Technologies Inc.’s (SOFI) House Financial Services hearing,
acquisition of Golden Pacific Bank. Democratic and Republican representatives
called for tighter privacy regulation of
Finally, we expect that the FDIC, OCC, and consumer data sharing between big tech
Federal Reserve will finalize their and financial firms and encouraged safer
interagency guidance on third-party sharing of data to allow consumers to shop
relationships in 2022. The proposed for financial products more effectively.
guidance encourages banks to vet the Committee members also emphasized the
financial condition, compliance capabilities, need for strong APIs to securely share
information security, and risk management permissioned consumer data.
procedures of fintechs fully before formally
entering a partnership. Although it does not
provide a path to bank status, the guidance
will reduce regulatory concerns about The emphasis on data
banking-as-a-service (BaaS) relationships
by forcing fintechs to improve internal sharing and portability
compliance and security controls before represents an opportunity for
engaging in partnerships.
firms that are adding
financial services to their
Fintech platforms.
Opportunities
Support for Portability Bolsters Digital Capstone believes this emphasis on data
Wallet Share and Payments Providers sharing and portability represents an
opportunity for firms such as Block and
PayPal, Block, Apple, Meta, PayPal that are adding financial services to
Winners their platforms with the goal of building so-
Alphabet, Amazon
Traditional banks (facing called super apps that centralize all
disintermediation), data consumer financial activity on a single
Losers platform. Both companies offer digital
aggregators that rely on screen
scraping wallets (including their traditional A2A
payments capabilities), have built or
The pace of open banking rulemaking is recently acquired BNPL products, and are
progressing slowly. While we believe an assembling retail stock trading capability
NPRM is unlikely until at least Q3 2022 and and crypto exchanges. As consumer
a small business review panel for any financial data becomes more easily
rulemaking may be necessary, the CFPB is portable, apps such as Square and PayPal
likely preparing to guarantee greater could displace traditional banking
relationships and potentially let consumers

January 2022 6
 Fintech Policy Preview

handle all their financial services through a industry guidance issued in 2020, is
single integrated platform. unlikely to be subject to regulatory scrutiny
in the near term thanks to product features
Major tech companies including Amazon, that limit the potential for consumer harm.
Apple, Meta, and Google also are poised to Direct-to-employer EWA providers recoup
benefit. As consumer financial data advanced wages through payroll deductions
becomes more portable, the companies can and advertise their services as
build financial platforms that allow “nonrecourse,” or without the ability to
consumers to unify their ‘financial lives’ recover outstanding obligations directly
under a single umbrella. from consumers. By self-limiting their
collections capabilities, direct-to-employer
While the CFPB is monitoring these major EWA providers bill themselves as a
industry actors, we expect that the trend consumer-friendly employee benefit.
toward financial data portability to present
an opportunity for established financial Conversely, the direct-to-consumer EWA
apps to consolidate services and develop a model, which does not involve an employer
full suite of integrated financial offerings. intermediary, is likely to be viewed less
favorably by regulators. The direct-to-
Earned Wage Access Poised to Grow; employer EWA providers link to consumer
Direct-to-Employer Providers Best bank accounts and recover advances
Positioned through direct debits. Another difference is
many direct-to-consumer EWA providers
DailyPay, PayActiv, other direct-to- utilize voluntary payments, using “tipping,”
Winners
employer EWA providers to generate revenue. These EWA providers
Losers Earnin, Dave, payday lenders ask consumers to contribute a “tip” to the
company after successfully utilizing their
We believe companies that facilitate earned cash advance services. Consumer
wage access (EWA) cash advances using the advocates note that tipping features are
direct-to-employer model are well- difficult to opt out of, and average tip sizes,
positioned relative to direct-to-consumer when calculated as APRs, can exceed 100%.
EWA providers in the coming year.
While both models will face the risk that
Consumer advocates have taken the their product is reclassified as credit,
position that finance charges that EWA subjecting them to a host of federal and
companies assess are too high. Were the state lending laws, we believe the direct-to-
fees represented as annual percentage employer model is better suited to weather
rates, they would far exceed the 36% interest regulatory scrutiny. As the CFPB continues to
rate cap in the Military Lending Act, which limit payday lending while still providing
many consumer advocates would like to see opportunities for other providers of short-
extended to the broader consumer term financing, we believe PayActiv and
population. While advocates have recently DailyPay, direct-to-employer EWA providers
encouraged the CFPB to look into the with large retailer relationships, are
industry, we believe regulators are drawing a particularly likely to benefit.
sharp distinction between direct-to-
employer and direct-to-consumer business Conversely, Earnin and Dave (which plans to
models. go public soon via a special purpose
acquisition company, or SPAC), follow the
We believe the direct-to-employer business more controversial direct-to-consumer
model, which the CFPB defended in narrow business model, including tipping, and are

January 2022 7
 Fintech Policy Preview

more likely to be the targets of regulatory However, Congress rescinded the rule in
scrutiny as EWA gains traction. 2021, meaning ambiguity about acceptable
lending relationships between banks and

Fintech Risks fintechs remains. Given AG Racine’s recent

success and renewed calls from consumer
advocates to aggressively pursue litigation,
Certain Bank Partnerships Under Fire; Capstone expects there will be additional
Exporting Interest Rates and Third- challenges to certain fintech-bank lending
Party Guidance partnerships.

Community banks, bank- In addition to the continued ambiguity

about their ability to work with banks to
Winners chartered fintechs, LendingClub,
Green Dot Corp. (GDOT) offer higher-cost lending products, fintechs
will have to deal with new guidance for bank
Major Paycheck Protection partnerships coming from the OCC, FDIC,
Program fintech lenders, OppFi and Federal Reserve. Their joint guidance on
Losers
Inc. (OPFI), other fintechs that third-party relationships will help banks
export interest rates address risks associated with fintech
Following an attorney general’s (AG) recent partnerships, and we expect it will
settlement in Washington, DC, and the encourage a more aggressive review of
repeal of the OCC’s True Lender Rule, we partnerships arrangements, with a
expect that state AGs will be emboldened to particular focus on fintech compliance
bring additional lawsuits against fintechs capabilities, information security, and
that partner with banks to provide credit financial stability. The guidance is meant to
products with finance charges that exceed improve the strength, security, and
local lending caps. We also expect resilience of partnerships between banks
interagency guidance on third-party and fintech companies and is likely
relationships to be finalized, with the considering evidence that Paycheck
potential to create compliance and Protection Program (PPP) loans facilitated
partnership hurdles moving forward. via fintechs were far more likely to be
fraudulent than those issued directly
On November 30, 2021, DC AG Karl Racine through banks.
announced that OppFi Inc. (OPFI) agreed to a
nearly $2.4 million settlement to resolve The Select Subcommittee on the
allegations that it violated Washington, DC’s Coronavirus Crisis launched inquiries into
usury laws by offering loan products with the PPP lending activities of Kabbage Inc.
fees that exceeded the district’s 24% and BlueVine, and more recently expanded
interest rate cap. This fight is not new. that probe to include Blue Acorn and
Several lawsuits have challenged the legality Womply. While the stringency of the
of partnerships (or simply a relationship guidance is yet to be determined, Capstone
with a debt buyer, in the case of Madden v. believes it again highlights regulators’
Midland) that rely on state interest rate interest in bank relationships with third
preemption to offer credit products that parties, including fintechs.
exceed local interest rate caps. The issue
appeared settled by the OCC when its True
Lender Rule took effect in late 2020.

January 2022 8
 Fintech Policy Preview

Growth in BNPL, Size of New Players missed payments and impacts on credit
Likely to Attract Enforcement Actions scores; 2) assessment of late fees and their
interaction with overdraft charges; 3)
Credit card networks including underwriting policies and rates of
Visa Inc. (V), Mastercard Inc. (MA), delinquency; and 4) fair lending compliance.
Winners The CFPB set a March 1, 2022, deadline for
American Express Co. (AXP),
Discover Financial Services (DFS) responses, leading us to expect further CFPB
action in the BNPL space, particularly
Affirm, PayPal, Klarna, Afterpay potential enforcement following that
Losers
(and Square), Zip, Sezzle Inc. submission deadline.
Consumer use and retailer interest in BNPL
In addition to bringing enforcement action
exploded in the past year, with media
to address any of the above, Capstone
coverage and acquisition activity surging
believes that the CFPB may utilize the
over the summer and early fall. Since June
inquiry as part of a future rule-making or
2021, Affirm and Amazon partnered; Square
larger participant rulemaking to bring BNPL
agreed to acquire Afterpay; PayPal
under the CFPB’s supervisory authority.
purchased Paidy; and Goldman Sachs Group
While both of those potential oversight
Inc. (GS) announced a BNPL partnership with
activities are long-term initiatives, Capstone
Apple and its acquisition of GreenSky Inc.
believes that the current inquiry will lead to
(GSKY), a fintech lender targeting the home
more immediate enforcement action in the
improvement market. Other banks and card
coming year to try and curtail any practices
companies announced that they were
which the bureau views as significantly
developing their own BNPL offerings and
harmful to consumers.
APIs. While deal activity and customer use
grew, the CFPB kept mum on the topic
outside of a single bulletin intended to
educate consumers about BNPL products.
Major Questions
However, that changed on December 16th,
when the CFPB sent letters to Affirm, Klarna,
Will Bank Regulators Jointly Overhaul
PayPal, Afterpay, and Zip, asking for the Community Reinvestment Act in
information on their policies and business 2022?
practices, including underwriting, fees, loan
performance, and consumer protections. In late July, the Fed, FDIC, and OCC issued a
Capstone believes this inquiry sets the statement committing to modernize and
stage for enforcement action in the short update the Community Reinvestment Act
term and possible rulemaking in the long (CRA). Then, throughout the fall, the OCC
term. took steps to formally rescind the agency’s
2020 update to CRA—a move that consumer
BNPL companies bill their product as a advocates widely applauded. While the
consumer-friendly credit alternative to other federal banking agencies have promised to
point-of-sale and credit card financing work together to overhaul the CRA, the
options. Yet, recent consumer data on rising timeline and specifics of their reform effort
delinquency rates among BNPL users and are unclear.
negative credit impacts has increased
interest in tighter industry regulation. Based Broadly, the CRA was developed when digital
on the CFPB’s announcement and letters, we banking was nonexistent and the current
believe the bureau is focused on the CRA evaluative framework does not consider
following: 1) BNPL disclosures related to the impact of online banking. Industry

January 2022 9
 Fintech Policy Preview

critics of the current CRA also suggest that intelligence (AI), machine learning (ML), and
bank scores are not sufficiently alternative data as a means for expanding
differentiated to give insight into CRA credit access against the potential for these
performance, and they would like to see a tools to reinforce systemic biases. Last
more quantitative and objective evaluation spring, the CFPB, Fed, National Credit Union
framework developed. Additionally, some Administration, FDIC, and OCC put forth a
consumer advocates would like to see CRA request for information to gather industry
evaluations applied to non-bank lenders, a and community perspectives on the use of
reform we believe is unlikely. AI/ML by financial institutions.

Reaching an interagency agreement on CRA Many lenders see benefits from using AI and
modernization, however, will be challenging, alternative data to increase credit access
as evidenced by the OCC and Fed’s decision and improve racial equity within the
to pursue unilateral CRA updates during the financial system. Fannie Mae (FNMA in over-
past several years. Acting Comptroller Hsu the-counter trading) recently announced
observed that updated rulemaking will likely that it would begin using a form of
be time-consuming because modernization alternative credit data, evaluating the rental
issues are “complex.” One potential hurdle histories of homebuyers as part of its
to CRA overhaul, ideological disagreement assessment of their creditworthiness. The
over the purposes of CRA reform, is likely Biden administration, however, has
removed following the announced promised to increase enforcement of fair
resignation of Jelena McWilliams, a Trump lending statutes to root out racial inequality
appointee and current FDIC chair. We viewed in the financial system. Lenders and credit
her leadership at the FDIC as a possible agencies that incorporate artificial
barrier to interagency agreement on reform intelligence may be exposed to enforcement
and expect that her departure will make it efforts from the CFPB if their underwriting
easier for the FDIC, OCC, and Fed to come to systems result in predictably differentiated
agreement on a new CRA framework. outcomes for protected minority groups.

While the exact nature of the reform efforts We believe consumer and banking agencies
is unclear, Capstone expects that a CRA can take multiple steps to alleviate
overhaul will present opportunities for regulatory ambiguity that financial
fintechs that facilitate bank lending. Any institutions face as they expand their use of
overhaul effort is likely to emphasize both AI/ML and alternative data. Banking
the dollar volume and quantity of loans regulators could update the Model Risk
issued to low- and middle-income (LMI) Management Guidance to provide explicit
individuals and communities. As banks AI/ML considerations. Additionally, the
increasingly close branches, partnerships agencies could expand the use of no-action
with fintech firms may be critical to banks letters and regulatory sandboxes to explore
remain in compliance with the CRA and are the impact of new underwriting
trying to reach LMI populations. technologies and inform future rulemaking,
though progressives have traditionally
How will regulators assess artificial opposed such measures. Similarly,
intelligence and machine learning in regulators could provide sample data to help
underwriting? financial institutions build and test models
that limit the potential for discrimination or
The CFPB and banking regulators are provide guidance to lenders to evaluate
carefully weighing the benefits of artificial third-party underwriting tools.

January 2022 10
Research Disclaimer

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27, 2022
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