Hey, CFPB: There's a reason fintechs have exploded in popularity

Recently, the Consumer Financial Protection Bureau — an agency created after the Great Recession to take on the big banks — revealed it had a new target in its sights: fintech services. In a little-noticed announcement, the consumer watchdog said that it would use a long overlooked legal provision to put fintech companies under regulatory scrutiny, a move that could have serious consumer consequences.

Fintech apps and products exploded in popularity among underrepresented consumers during the pandemic, in part because they offer better services and lower fees. Now, CFPB Director Rohit Chopra and other regulators have proposed slapping old bank rules on the new services.

In order to align financial policy with the interests of consumers, the agency should first consider why these services have caught on and remember to keep a lane open for innovation.

Fintech services — which combine financial services with innovative technology — bridge gaps in traditional financial services by providing increased access and inclusion across the financial industry.

As more and more consumers, especially younger people and those historically left behind by traditional banking, struggle with strained budgets, they're finding they need more control over their financial lives. And new financial technology services are a crucial part of the solution.

Take, for example, the outdated, punitive practice of overdraft fees, which take $15 billion out of the pockets of Americans annually. Combine these predatory practices with the fastest rise in inflation in four decades and it's hard to overestimate how stretched Americans are feeling right now.

Fintech services have broadly eliminated overdraft and account maintenance fees, providing relief to the 64% of Americans living paycheck to paycheck, and putting pressure on traditional financial institutions to follow suit.

By design, the flexibility and innovation of fintech services mean these companies are able to serve members from communities that have historically been excluded from, or negatively impacted by, traditional financial services firms, like those in the LGBTQ+ community and Black Americans.

They also appeal to younger demographics, people more likely to embrace technology and enable product offerings that can grow with them as their financial outlooks evolve. These firms cover a diverse customer base, meeting people where they are and addressing sometimes challenging and unmet needs.

But nonbank fintech services aren't stopping there. In addition to not charging overdraft fees, one company, Chime, recently helped provide access to $1.5 billion in Child Tax Credits at least two days early last year and, so far in this tax filing season, has provided early access to $4.7 billion in tax refunds for customers — a service you won't find at a traditional bank. For many Americans, access to these sorts of funds cannot come fast enough.

Americans are noticing the benefits of fintechs' flexibility and innovation. Between 2020 and 2021, the portion of U.S. consumers using fintech services grew from 58% to 88%, while 78% of users said fintechs save them money.

As their popularity grows, fintech services are increasingly becoming people's primary banking mechanisms. In fact, fintech services are proving so appealing to consumers that several traditional banks have started their own digital-only imitation platforms to try to keep up with the competition.

But we can’t take the future growth of these services for granted — we need smart public policies in place to make sure consumers have access to more fintech innovations.

Fintech companies are offering a solution for consumers looking to avoid predatory banking practices like junk fees. Part of the success of fintech services is their ability to quickly adapt to meet customer needs as they evolve, as was highlighted when use of fintech services skyrocketed during the pandemic because they provided users access to banking services while stuck at home.

We also shouldn't apply one-size-fits-all rules and outdated regulatory regimes to a new generation of financial providers and products. Doing so could stifle competition, reducing innovation and consumer choice while increasing costs for the millions of Americans who have been left behind by traditional banking and who have found relief in fintech services.

During a time of economic turbulence and uncertainty, fintech services have provided a life raft, buoying millions of consumers who might have otherwise been left to tread water. Granted, these companies don’t provide every service a large bank offers — but just because a life raft doesn’t have all the amenities of a cruise ship doesn’t mean you should let the air out.

If the goal of the consumer protection agencies is to push against overdraft fees and put consumers' interests in the captain’s seat, they should consider why fintech services are in demand. And new regulations should strengthen innovations in fintech, not cripple them.