On March 26, 2018, Federal Reserve Vice Chairman for Supervision Randal K. Quarles provided some insights on fintech developments in a speech he gave entitled “The Roles of Consumer Protection and Small Business Access to Credit in Financial Inclusion” at the HOPE Global Forums Annual Meeting in Atlanta, Georgia. His remarks focused on the consumer protection and credit accessibility aspects of financial inclusion, and some of the ways that the Federal Reserve promotes a fair and transparent consumer financial services marketplace.

In discussing small business access to credit, Mr. Quarles highlighted certain shifts in the composition of commercial bank lending to small businesses.  While he noted how large banks’ “share of small business lending has grown” (especially among the smallest loans) in part due to industry consolidation, there also has been an emergence of nonbank online alternative lenders that provide small-dollar business credit.  As an example, he noted that “some of the large technology firms are providing credit, at a rapidly growing pace, to their built-in customer base of merchants.”  He also stated that some businesses have turned to nonbank online lenders after being rejected by banks.  “Some online lenders obtain access to a prospective borrower’s accounting software, merchant accounts, shipping, and payroll data in real time in order to underwrite businesses.  Business owners can receive funds in a couple of days or even hours,” Quarles stated.

Quarles views this emergence of online lenders as part of a broader fintech evolution as seen in the broad range of innovative products and services being offered to both consumers and small businesses.  He discussed how the use of fintech to expand access to credit “has great promise and also associated risks.  For example, online origination platforms and more sophisticated algorithms may enable credit to be underwritten and delivered in a manner that is still prudent but with greater efficiency, convenience, and lower processing costs.”  He stated that the regulators “do not want to unnecessarily restrict innovations that can benefit consumers and small businesses,” but, “at the same time, [the regulators’] interest is in ensuring that banks understand and manage their risks when introducing new technologies or partnering with fintech companies, and that consumers and small businesses remain protected.”

Quarles also discussed how fintech is one of the key factors driving calls for regulators to modernize the Community Reinvestment Act, or CRA, “as technology changes how financial products and services are accessed.”  According to Quarles, “[t]he arrival of new financial technologies, along with significant industry consolidation and other structural changes, has changed the way that financial services are delivered to consumers and the ways in which banks lend in communities.”  He noted that the regulators “continue to study these shifts, and share the common goal of improving the current supervisory and regulatory framework for CRA to further the statute’s core objective of promoting access to credit and financial inclusion.”

We expect for these topics of financial inclusion and access to be credit to remain key discussion points and issues in the broader fintech marketplace and regulatory agenda.  Stay tuned for additional updates!