Fintech Firms Splintered in D.C. as Regulatory Scrutiny Heats Up

  • Small business lenders form lobby to highlight differences
  • New group comes as Congress seeks studies, weighs legislation

As the burgeoning online lending industry braces for a wave of scrutiny from U.S. policy makers, leading financial-technology firms are scrambling in Washington to figure out who’s a friend and who’s a potential foe.

Prominent small business lenders including On Deck Capital Inc., Kabbage Inc. and PayPal Holdings Inc. have formed a group to highlight their differences from other companies. Their alliance is an extension of the payments trade group, the Electronic Transactions Association.

Named the Online Small Business Lending Task Force, the new initiative seeks to promote “the importance of online lending as a source of capital" and “prevent hasty or overly restrictive regulations," according to Scott Talbott, the group’s lobbyist.

Lawmakers from both parties are seeking information on the vast promise and potential risks in financial technology, or fintech, amid the industry’s explosive growth. Online lenders helped arrange more than $20 billion of loans in the U.S. last year and the figure could climb to more than $120 billion by the end of the decade, according to Morgan Stanley research.

Promoting Innovation

U.S. Representative Patrick McHenry, a North Carolina Republican, has drafted a letter to the Government Accountability Office calling for more study of the benefits of fintech startups. McHenry, who is vice chairman of the House Financial Services Committee, is also working on legislation aimed at promoting innovation in the industry.

“Innovation does not thrive when the heavy hand of government stifles creativity and collaboration,” McHenry wrote in a draft copy of the letter obtained by Bloomberg News. His letter is a response to efforts by some Senate Democrats who have expressed concern that the companies could harm borrowers.

Senators including Sherrod Brown of Ohio, Jeff Merkley of Oregon and Jeanne Shaheen of New Hampshire previously asked the GAO and the Treasury Department in letters for more information about marketplace lenders to help determine whether fintech startups may fall “between the cracks” for federal regulators. A lack of oversight could result in “predatory lending, consumer abuse or systemic issues,” their letters said.

The new group led by Talbott plans to show how its members’ business models differ from payday lenders and consumer peer-to-peer companies. The group intends to highlight to agencies including the Consumer Financial Protection Bureau that small business borrowers present a different risk profile than consumers do.

Diverse Models

Because online lenders have diverse business models -- including how they fund loans, measure risk and what kinds of customers they serve -- numerous advocacy groups are being formed.

Earlier this month, marketplace lenders including LendingClub Corp. and Prosper Marketplace Inc. formed their own lobbying group. They aim to advocate for issues specific to companies that arrange loans over the Internet by matching borrowers to investors, opposed to models that use their own balance sheets to fund loans. Another outfit whose members include giant technology firms such as Apple Inc. and Amazon Inc. aims to advocate for "tech-friendly" financial reform.

While many online lending firms set out to compete with banks, the two industries are increasingly becoming partners. For example, JPMorgan Chase & Co. has partnered with On Deck to use their technology to offer small businesses loans to the bank’s customers.

Regulators so far have taken only preliminary steps toward oversight. Treasury kicked off a process to examine online lenders last year. Comptroller of the Currency Thomas Curry said this month that he wants to establish a framework for regulating new financial services technologies and firms. The CFPB is also collecting information.

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