In November 2020, major news outlets reported Joe Biden and Kamala Harris as the US president-elect and vice president-elect. As the Biden administration releases its transition plan and objectives for the next four years, its agenda and ambition for a stronger regulatory position will likely have significant impacts on the financial services industry. Digital payments companies, which have previously been regulated largely by the states, are now expected to gain unprecedented federal attention and should be prepared to meet new requirements and expectations.
Guidehouse has identified changes the new administration will possibly bring to digital payments in the coming years. Below are the seven major events we expect to see happen under the Biden presidency and the impacts these events will likely have on consumer payments, cryptocurrency regulation, digital payments fraud, and mergers and acquisitions.
The Consumer Financial Protection Bureau (CFPB) will likely have a new director
President-elect Biden will have greater power over the CFPB than former President Obama had during his administration, due to a Supreme Court ruling in June that determined the US president can replace and appoint directors of the CFPB. We expect the Biden administration will support a rejuvenated and empowered CFPB, which has already alluded to possibly proposing rulings on open banking—a sign of more to come for fintechs and data aggregators. However, it is possible that a Republican-controlled Senate will refuse to approve the new nominee.
Payday Lending Back in the Regulatory Crosshairs
Although payday lending was deregulated during the Trump administration, the Biden administration’s expected increased scrutiny of payday lending is likely to increase chances for fintechs using blockchain to appeal as lower-cost alternatives to controversial payday lenders. Such fintechs have already been garnering attention from venture capital firms, as seen with Balderton Capital’s $19 million Series A funding in Wagestream, a UK startup that provides payroll technology and allows consumers to avoid payday loans. An increase in regulatory attention on payday lenders will likely lead to increased costs associated with keeping these lenders compliant and avoiding enforcement action, further incentivizing venture capital firms to find cost-benefit value in these fintechs.
A Federally Backed Credit Bureau housed in the CFPB could reduce discrimination in credit scoring and increase credit availability
Recently we have seen companies begin to seek alternatives to previous approaches to credit scoring, such as Experian’s decision to consider subscription payments during credit scoring and Capital One expanding its data sourcing. More flexible credit scoring increases credit availability by allowing more consumers to improve their financial standing. As the Biden administration seeks to reduce discrimination in credit scoring, we project there will be even greater competition for credit bureaus that are already facing lenders that use non-credit data for credit scoring and an increase in credit availability for consumers.
Payment Fees Scrutiny Caused by the Accelerated Growth of Digital Payments and New Cost Structures for Payment Processing
COVID-19 acted as a stimulus for the acceleration of digital payments. This led to a shift in the cost structure for payment processing, and created a regulatory gap yet to be fully addressed. We project the Biden administration will seek to fill the regulatory gap and propose regulation on payment fees.
Previously the chair of the Commodity Futures Trading Commission for the Obama administration, Gensler has voiced his support for greater cryptocurrency regulation and support for most initial coin offering tokens to be regulated as securities. We expect Gensler will continue to advocate for a shift from cryptocurrency being regulated at the state level to the federal level.
Even further potential relief comes from the Conference of State Bank Supervisors announcing plans for payments companies operating in several states to undergo only one comprehensive examination that would satisfy all state examination requirements. These plans are expected to be enacted in 2021.
Expected Impacts to Digital Payments Fraud—The Biden Administration may Release a Federal Framework for Addressing Digital Payments Fraud
Guidehouse has seen the incidence of fraud in the financial services industry grow during the COVID-19 pandemic. More and more, fraud is driven by bot attacks and instances of identity theft are increasing. In the past, payment fraud was an area addressed by the individual states. When financial institutions make things easier for customers, it generally also makes things easier for fraudsters. However, as the threats and incidents of payment fraud continue to increase, Guidehouse expects the Biden administration will be encouraged to wield increased scrutiny on financial institutions to enhance their fraud controls and fraud-detection technology.
Expected Impacts to M&A—Increased Regulatory Scrutiny may Lead to Increased Costs Associated with Maintaining Regulatory Compliance and Shifting Economies of Scale
The costs associated with meeting stronger regulatory requirements present the opportunity to pursue M&A and partnerships to achieve new economies of scale. Combined with the previously discussed opportunity for fintechs to become even greater competitors in the marketplace during the Biden administration, the digital payments industry will look for new competitive advantages through M&A.
The Biden administration is expected to maintain a stronger regulatory presence than the Trump administration, especially in the digital-payments industry. Our Guidehouse experts expect this to mean those dealing in digital payments should be prepared to comply with additional requirements to avoid regulatory penalties and to maintain competitive advantages. Whether this is through implementing revamped compliance and risk management, process improvement, or M&A—Guidehouse can help organizations strategically deal with these expected changes.