Weekly Industry Update: FinTech Partnerships Continue; Debate on Regulatory Reform

By August 27, 2017Blog

Partnerships between traditional financial services and FinTech continued this past week. Wells Fargo announced a partnership with FinTech startup Blend to improve the mortgage application experience. Retail giant Walmart and Google Express announced a partnership to challenge Amazon’s online dominance of e-commerce.  Overall, the news is a part of a larger trend of traditional financial services firms partnering with data and analytics oriented startups; PeerIQ’s own Series A financing fits the trend as well.

Ten Years After the Financial Crisis, a Tentative Win for Regulators

This week, amidst a period of global synchronized growth, central bankers gathered in Jackson Hole to reflect on regulation ten years after the Great Recession. Fed Chair, Janet Yellen, whose re-nomination prospects remain uncertain, largely defended the sweeping regulatory reform introduced post-crisis.

The Fed Chair cited bank profitability, growth in lending, and strong capital levels, and positive (albeit too slow) economic growth as indicia of success to the “forceful” post-crisis policy response. Yellen cited evidence that the bulwark of regulatory infrastructure–loss absorbing capacity, resolution authority, stress tests, and improvements in capital and risk management–have made the financial system safer.

However, Yellen did acknowledge there is scope for “modest” reform. The Chair indicated regulations may be impacting market liquidity, and that there could be benefits to simplifying the Volcker rule and reviewing the interaction of the supplementary leverage ratio with risk-based capital requirements.

Voices of Dissen

JP Morgan CEO Jamie Dimon in his annual letter would agree that the banking system is safer and stronger today. Nevertheless, Mr. Dimon believes that economic growth and lending is below potential. For instance, JPM estimates $1 Tn in loans could have been generated in recent years generating an additional 50 bps in annual GDP growth thru regulatory reform.

The specific regulatory reform areas Mr. Dimon identified include:

  • Simplification of the annual stress-testing process
  • Release or enable banks to deploy excess capital towards small business loans, lower middle market, and near-prime mortgages
  • Rationalization of supplementary leverage ratios and operational risk capital
  • National servicing standards for the mortgage servicing market
  • Federal Housing Administration (FHA) reform
  • Complete securitization standards to encourage private capital and reduce exposure to taxpayers

Role for 3rd party risk infrastructure to strengthen markets

Since the Great Recession, the origination and funding of consumer credit post-2008 has changed substantially. Large money centers and regional banks, in response to regulatory capital and liquidity requirements, have exited various direct lending businesses (see JPM’s sale of student lending portfolio to Navient, or Barclay’s sale of subprime credit card originator to CreditShop, or Citi’s divestiture of OneMain to name a few).  Non-banks and institutional investors–including FinTechs, specialty finance companies, asset managers,’40 Act Funds, private equity firms, BDCs–have emerged to fill the lending gap and expand direct access to credit.

Large banks are increasingly playing the role of financial intermediaries that connect non-banks to the capital markets. Banks are providing liquidity facilities (“lending to the lenders”) and capital-light securitization programs. Although Yellen is right that lending continues to grow, critically, the nexus of credit formation–including for a majority of personal loans, auto loans, student re-fi loans, and even mortgages–now takes place between a consumer and a non-bank.

Under this new landscape, the soft underbelly of the credit markets has shifted from bank wholesale funding to non-bank wholesale funding. And when investor confidence seizes, the transmission mechanism connecting policy to the real economy can break down. Spreads widen, funding costs increase, and markets freeze exactly when policymakers seek to ease financial conditions.

We at PeerIQ believe that risk infrastructure can play an important role in promoting the smooth functioning of lending and capital markets. Sound risk infrastructure–data and  analytics, clearing and settlement, 3rd party pricing and other tools–creates greater standardization, transparency, and liquidity for all market participants.

Conferences:

  • Ram will speak on the “Trends in Online Consumer Lending: Less Tech, More Fin?” panel on Monday, September 18 at ABS East in Miami, FL.

PeerIQ in the News:

Industry Update:
  • U.K. Subprime Lender Plunges More Than 70% (Bloomberg, 8/22/17) Provident Financial Plc’s shares and bonds tumbled after the British subprime lender forecast a full-year loss and revealed it’s being probed by regulators amidst data integrity issues.
  • Zopa Warns on Credit Conditions and Bank Competition (FT, 8/22/17) Zopa said it was profitable in the fourth quarter last year, but added it was watching credit performance and consumer indebtedness closely due to “concerns associated with continuing growth of consumer unsecured debt” in the UK.
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