Plaid Policy Pulse: What policy means for business
Welcome to the Plaid Policy Pulse. In this quarterly series, we provide our perspective on public policy developments impacting the fintech community and consumers' access to their data.
The Big Idea 💡
Policy changes can open or close business opportunities. In a fast-moving environment, tech-savvy businesses are well equipped to capture these new openings.
Three recent policy developments inform our thinking:
1. COVID stimulus brings fintech into government spending
2. Updated financial inclusion rules drive banks to adopt more tech
3. Workplaces become financial wellness hubs for employees
COVID stimulus brings fintech into government spending
Shuttered storefronts and a massive government stimulus accelerate finance’s digital transformation
With consumers fearful of entering physical branches, and small businesses increasingly reliant on digital solutions and government recognition, fintech stands to broaden its reach in the COVID aftermath.
In the U.S.: the Paycheck Protection Program, the largest government-originated small business lending program, allowed fintechs to deliver government-backed loans and access Federal Reserve liquidity for the first time. Fintech companies stepped up both as lenders and by partnering with financial institutions to provide loan application interfaces.
Fintech companies also supported direct cash disbursements, with companies offering direct deposit solutions and cash management to help recipients weather the storm. The government sent prepaid debit cards instead of checks to millions of consumers without accounts on file, bringing many into digital finance for the first time with a web login.
In the U.K.: the government’s small business stimulus program also included fintechs, though many struggled to get started due to difficult funding processes. As the U.K. government explores Open Finance as the next horizon, small businesses stand to benefit from greater data access (see Plaid's recent publication with 11FS to learn more).
In Canada: rules left fintechs out of the small business stimulus package. Industry groups fought to be included in order to reach the smallest businesses, but the government shot down their proposal.
In Europe: fintech adoption skyrocketed 72% during COVID-19, despite no direct interactions with government stimulus.
⭐️ Our Takeaway: Consumers are seeing the stark gap between the tech they use in their personal lives and the tech the government uses, which will build immense pressure for the private sector to close that gap.
Financial inclusion rules drive banks to adopt tech
Updated rules requiring banks to serve the underserved bring fintech deeper into financial inclusion
The Community Reinvestment Act (CRA) is a law requiring FDIC-insured banks to serve underserved communities by providing loans and branch locations to poor zip codes. Now regulators are modernizing the CRA to fit a more digital world.
While the new rules are not yet final, it’s likely that CRA updates will allow fintech companies to use their targeted digital reach to help banks meet lending and compliance requirements that cost them $482 billion in 2017.
On the lending front, new guidance issued by the major regulators encourages financial institutions to make small dollar loans. This guidance provides clearance to leverage “new processes, technologies, and automation,” paving the way for more lenders to incorporate alternative data in credit underwriting (see our Q3 2019 Pulse for background).
⭐️ Our Takeaway: These two changes show the Government recognizing banks’ need to adapt more technology to serve underserved markets. Banks will look to fintech to provide digital reach and scalability to meet these demands.
Workplaces become financial wellness hubs for employees
Employee benefits rules adapt as employers look to help their workers build financial security
State governments are building programs to reach the millions who lack access to workplace retirement plans. Since 2016, ten states have passed legislation mandating small employers to enroll their workers in these savings plans. Last year, the Federal Government passed a law allowing small companies to band together to jointly offer plans to their collective employees.
The workplace isn’t just for long-term savings, either; holistic financial well-being is a growing target for employers, including emergency savings and student loan repayment. Wharton’s Pension Research Council wrote an eleven-chapter book on the opportunities that exist to provide financial tools to employees.
With the rise of the gig economy and sole proprietorship, policy changes are bringing banking to non-traditional workers. Proposals to extend benefits to gig workers create new market opportunities for fintech to reach populations whose uneven incomes and daily needs require targeted financial solutions.
⭐️ Our Takeaway: Just like personal finance, workplace finance has long been dominated by major players catering to mass markets, with firms like BlackRock and Prudential serving employers like Ford and EY. This ecosystem is ripe for personalization and disruption, and recent policy changes mean more individuals entering the market can be served by fast-movers
Ben White works on Policy R&D at Plaid. He's passionate about building a financial services system that benefits everyone.