Giving Credit IV: Regulatory Uncertainty
No one knows the future. Regulators even less-so.

The previous two entries this series explored how technology changes and new capital flows are completely upending retail finance. The retail lending revolution is happening now. But these changes are not possible without regulators either overtly approving them, or letting them happen with a wait-and-see attitude.

A couple years ago it looked like the new Consumer Financial Projection Bureau (CFPB) was going to be the new digital sheriff in town. But just a short while later the regulatory environment now looks in disarray. The effect on lenders is whiplash: on some days regulators seem to be putting real regulatory pressures on traditional lenders that can stress any and all aspect of their lending, from compliance to sales to IT; other days regulators play the spoiler, distracting incumbents from rapid changes to the landscape, and on yet other days the CFPB seems to have gone mute, which is perhaps the most unsettling posture of all.

Given the changes and uncertainty in the political landscape, it has hard to blame them for not quite finding their way. The CFPB took a few initial but bold steps towards defining its role by assuming some mission elements of other overseers across the broad financial system (the Federal Reserve, FDIC, OCC, etc). Now, if the CFPB is forced to back down, who will fill the vacuum? How will the other regulators react -- boldly, or will they lay low too?

For example: the CFPB spent 2016 signaling the market that it looked askance at the practice of 0% introductory offers, particularly those where interest accrues from the date of purchase if the balance is not paid off in full before expiration of the no-interest period. Many expected the CFPB to implement a final ruling eliminating or severely restricting banks’ and lenders’ ability to charge interest retroactively. Such a ruling (and the resulting higher real interest rates) would have upended the typical rules for both incumbents and new entrants by limiting how both could adjust consumer fees and terms downward. The CFPB also has open docket items on payday lending and other high-cost installment loans, debt collection practices, equal opportunity in lending, and credit reporting practices. Will these happen? No one knows.

In Europe and elsewhere in the world, high-touch regulatory populism is a way of life; there is little doubt in my mind that the US will eventually head in that direction. In the interim, the uncertainty in what that change will look like is giving some lenders a cause for concern, and new lenders opportunities to take advantage of.

So, if you are a retailer, the confluence of these trends – technology change, the rapid expansion in sources of capital, and a complete lack of regulatory clarity – will favor the innovators and new entrants who have less to lose.

If you are a retailer, your portfolio of lending partners will surely look different next year or even next month. Will you be ready? More important, will you control that process, or will it control you?