Last week, new US President Donald Trump signed a directive asking his Treasury secretary to review The Dodd–Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank was signed into law in 2010 by former President Barack Obama and was aimed at preventing another financial crisis like the one that struck the US banking system in 2008.
While preventing another major financial crisis is a sensible goal, Dodd-Frank has been a source of controversy. At more than 2,000 pages, Dodd-Frank is, as one might expect, incredibly complex, and since it became law, it has been blamed for a number of trends, ranging from a decline in community banks to a decline in business lending by banks.
During his campaign, then-candidate Trump promised to do away with Dodd-Frank and his directive last week is the first step in delivering on that promise. While this will almost certainly be a complex process that takes time, it’s not too early for companies in the financial sector to start evaluating how the elimination of Dodd-Frank could affect their businesses.
Specifically, the eventual death of Dodd-Frank could have a significant impact on fintechs, which have been distrupting established financial services institutions. Here’s what it could mean for these financial service upstarts.
Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), which has broad regulatory powers over a number of consumer finance markets. While the CFPB has been largely supportive of innovation in financial services, it has also taken action against fintechs.
For example, it fined both startup payment provider Dwolla over its data security practices and subprime consumer lending startup LendUp for “failing to deliver the promised benefits of its products.”
To be sure, few would argue that fintechs shouldn’t be regulated and held to the same standard as established financial institutions. But if given the choice, most fintechs (and their investors) would probably opt for less regulation instead of more regulation, so to the extent that the repeal of Dodd-Frank results in less regulation, players in the fintech market would probably welcome it.
In addition to the possibility that fintechs will have to deal with less regulation, if big banks are relieved of many of the regulatory burdens that Dodd-Frank has imposed on them, it could conceivably encourage them to more aggressively acquire, invest in or partner with fintechs.
Already, large banks like JP Morgan have made an effort to work with startups as part of their digital transformations, and they could get much closer to those startups if regulatory concerns diminish.
On the other hand, regulatory relief for big banks could put them in a better position to compete with fintechs. This effect could be particularly pronounced in the consumer and business lending markets, as Dodd-Frank has been blamed for significantly decreased bank lending.
The void in the lending markets fueled the rise of non-bank lenders, which include online lenders. If big banks aggressively re-enter the lending markets, the increased competition could make it much more difficult for fintech lenders to generate business.
Other changes could harm a number of wealth management startups that have promoted the use of robo-advisors. President Trump wants to end the so-called fiduciary rule, which requires retirement account advisers to work in the best interests of their clients.
Throwing out the fiduciary rule “will shrink the market for robo-investing” according to one industry executive, which explains why fintech startup Betterment went so far as to take out ads in the New York Times and Wall Street Journal with open letters urging Trump not to undo the rule.
While reduced regulation would probably be welcomed by fintechs, there is one part of Dodd-Frank that many fintechs rely heavily on. Section 1033 of the bill essentially establishes that consumers have the right to their financial data.
Using third-party platforms offered by companies like Yodlee, Intuit and Plaid, many fintech startups make it easy for their customers to connect to their bank and credit accounts to retrieve data. This is used for everything from spending analyses to underwriting of loans.
If Section 1033 is eliminated, large financial institutions, namely banks, would conceivably have the ability to block third-parties from accessing data from customer accounts. If this happens, some fintechs could find it difficult to survive as they would no longer have a viable way to obtain the data they need from their customers’ bank accounts in a quick, secure and automated fashion.