Big banks. Credit card companies. Payday lenders. For years, Democrats have railed against the stranglehold these companies had over our financial system, decrying predatory practices like overdraft fees and astronomical interest rates.
Partly due to a lack of competition, big banks were able to harm consumers while dodging economic and regulatory consequences. As Sen. Elizabeth Warren put it in a 2013 congressional hearing, "Too big to fail has become too big for trial."
The good news is that more competition is here. The bad news is that Democrats are primed to squelch it in its infancy.
Consumers seeking banking services are no longer at the mercy of Wall Street giants like Chase or Bank of America. They can open an account with branchless "neobanks."
They no longer have to sign up for credit cards to be able to afford a big new purchase. They can use "buy now pay later services" with no fees or interest rates.
And when they want to access their earnings a bit early, they no longer have to pay sky-high interest rates to payday lenders. They can use earned wage access (EWA) services to get paid early, with apps that tap directly into their companies' payroll systems.
For many, these services have become a lifeline, providing a better alternative to what big banks had previously offered.
Take, for example, a working mother whose kid has an earache. Visiting the doctor can be expensive, and if bills have already eaten up the last paycheck, this working mom might try to wait out her child's earache until another paycheck hits. Earned wage access lets that same parent transfer money she's already earned to pay for the doctor. No loan, no interest, no debt.
Recent research shows the powerful impact that EWA services can have for working families. One recent study by the Financial Health Network found that participants often use EWA for the first time because their daily expenses are compounded by financial shocks, and that most first-time users have no issues with their account and plan to continue accessing their paycheck through EWA services. Respondents also ranked EWA as a better solution than short-term credit options, such as payday loans, incurring late fees, and borrowing from friends and family.
The consumer-friendly terms of these services are also pushing the incumbents to improve. Fintechs like Chime have challenged traditional banks to drop junk overdraft fees. Fee-free investment apps, like Robinhood, created competition for institutions like Charles-Schwab, forcing older companies to drop trading fees.
Consumers are finding that these new services are better than what they were locked into before. So why are Democrats—and particularly the Biden Administration's Consumer Financial Protection Bureau (CFPB)—trying to squelch fintech services that have big banks on the ropes?
The CFPB appears set to issue non-binding guidance determining that earned wage access programs should be regulated under the Truth in Lending Act (TILA) unless they are free. TILA is a 1968 statute, enacted even before the internet (or any fintech company) existed.
Moreover, the CFPB's strategy of issuing non-binding guidance is effectively "regulation by press release." It takes a page out of the Republicans' playbook, asserting regulatory norms without public consensus, stakeholder input, or an understanding of the stakes for consumers.
Instead of applying antiquated statutes to the new services providing an alternative to payday loans, the CFPB should be focused on a more tailored regulatory approach.
Take Nevada, for example. Last year, the Battle Born State passed thoughtful legislation (SB 290) creating a state licensing regime that enables access to earned wage access products while also protecting consumers.
As Americans struggle in the post-pandemic economy—especially Black and Brown Americans who face disproportionate barriers to traditional banking—people want more control and options in their financial lives. Instead of treating these new competitive services just the same as incumbent financial services, CFPB Director Rohit Chopra should hit the pause button, seek the public's input, and craft new rules that recognize the value of new services.
With a presidential election on the horizon, executive agencies should be especially cognizant of what legacy they are creating for the Biden Administration. With so much accomplished—including a reduction in overdraft fees, a reduction in bounced check fees, and over $140 million returned to consumers from illegal banking charges—the CFPB should be careful not to undercut its record by limiting access to safer products providing consumers with an alternative.
