CAS has created specialized industry insights for each of its’ main outsourced business services sectors (accounts recievable management, revenue cycle management, customer relationship management, and FinTech/debt settlement) to provide easier access to relevant information for our publics.
Read the full FinTech & Debt Settlement insights here.
CAS cites regulatory changes that are predicted to continue to shape specialty finance.
The nature of the fintech industry is rapidly changing as we enter 2021, with surging growth particularly for fintech lenders as they morph into banking roles to survive revenue volatility associated with the pandemic.
As discussed in CAS’ Q4 2020 newsletter, fintech lenders were positioned to thrive in 2020 given their robust online infrastructures, giving them an advantage over many traditional banks that struggled to move offline processes online. Adoption rates for online financial solutions, such as contactless payments and digital bank accounts, have soared as consumers and business owners alike sought new solutions. Due to the rise of e-commerce, contactless check deposits and money transfer, and payment processors with high exposure to online sales, fintechs blossomed in 2020 without the regulatory burdens of a bank.
Fintechs in general have expanded access to financial services during the pandemic. Most firm types in this space reported strong first-half growth compared with the pre-pandemic period a year earlier. On average, firms in areas such as digital asset exchanges, payments, savings, and wealth management reported growth in transaction numbers and volumes of 13 percent and 11 percent respectively, according to the World Bank. However, the digital lending sector dropped 8 percent by volume of transactions and experienced a 9 percent jump in outstanding loan defaults. Loan originations for both traditional and alternative lenders dropped as much as 36% in 2020 for personal loans, small- and medium-sized business loans and student loans.
Despite the challenges presented by the pandemic related to decreases in origination volumes, fintech lenders who have survived the pandemic are positioned to thrive in the coming years, particularly after they have distinguished themselves as competitive alternatives to traditional banks. S&P Global Market Intelligence is projecting that, beyond surviving, fintech lending will rise significantly, surpassing 2019’s pre-COVID levels by 2024. Personal loan fintech lenders are projected to rise by 51%, to $47.9 billion in originations annually. Small- and medium-sized business fintech lenders are expected to rise by 16.1% to $15.8 billion. And the student lenders are forecast to rise 152% to $32.8 billion. Given this newly acquired market position, many FinTechs are now shifting gears and obtaining a financial role similar to those of traditional banks, some of which are fully embracing their banking capabilities by obtaining bank charters. For example, pioneer fintech consumer lender Lending Club has also obtained a banking charter. After the acquisition of Radius Bank, Lending Club is a primary example of alternative lenders taking the role of traditional banks after the pandemic. After acquiring its banking charter in 2021, the company has since added $600M to its market cap.
While this movement from fintech to pseudo-bank comes at the cost of regulatory independence, there are many advantages to the banking role that leading fintech lenders are embracing. This involves lower funding costs and a diversification of product offerings. Additionally, loans issued in 2020 decreased significantly for fintech lenders, leading to some revenue volatility. Alternative lenders focused on small businesses experienced disproportionately high default rates due to economic burden for small businesses caused by the pandemic. Among other advantages, banking charters can provide revenue consistency in exchange for higher regulation. Additionally, as conversation of fintech regulation increases in Congress, many fintech lenders are independently increasing compliance efforts to bank-like levels.
For alternative fintech lenders under pandemic-induced pressure, independence has become a less attractive option, leaving some to enter into mergers with larger companies. As such, M&A activity within the fintech lending space is currently very strong. For example, Kabbage, a fintech startup that helped transform the funding landscape for small businesses during the pandemic, was purchased by American Express last year. Looking out into 2021, providers, whether new or old, will seek to buy solutions that expand their solutions, integrate the customer experience, give data-backed insights back to the customer, and simplify previously arduous processes.
The debt settlement industry experienced strong growth during the economic downturn associated with the pandemic, caused by the countercyclical nature of the industry’s revenue streams. As the economy recovers at an increasing rate as vaccines are rolled out and financial certainty is gradually regained, the debt settlement industry is expected to decline slightly as default rates gradually decrease. However, this decline is expected to be delayed as debt built up throughout the pandemic continues to default, with household debt still at $14.56 trillion in Q4 2020 (a 1.4% increase from Q3). In general, demand for debt settlement is projected to remain consistent in 2021.
While shortage of debt is a low-risk factor for the debt settlement industry, the sector faces the greater challenge in 2021 of increased regulatory control under the Biden administration, the CFPB, and state legislators.
As previously discussed in CAS’ Q3 2021 Newsletter, while federal politics have substantial effects on the debt settlement space, debt relief regulation is also a state issue that does not always abide by partisan lines. 61% of households have full access to debt settlement firms, a number that may decline in 2021 as states such as New York, North Carolina and California continue to push forward on bills banning debt settlement practices in their respective states. In particular, the North Carolina Senate halted HB 1067 from reaching the floor with bipartisan support in June 2020 in order to maintain the benefits debt settlement brings to consumers. However, in February 2021, NC lawmakers moved again to shut down debt settlement companies. The bill would also let NC civilians already under contract with debt relief companies make existing contracts void, and the bill received backing from the State Employees Credit Union. The bill asserts regulated consumer credit counselors as an alternative to debt settlement, identifying lowered credit scores and misleading advertising as primary drawbacks of the debt settlement process.
In addition, a number of debt relief companies have been banned in FTC settlements for the existence of phantom debts. In March, in an going nationwide enforcement initiative with state and federal law officials focused on bad actions, the FTC announced it reached a settlement in two cases resulting in a ban on defendant’s operations in the debt collection industry. Additionally, a coalition of 41 state attorney generals, led by NY, announced a settlement with a bankrupt debt collection agency to resolve a multistate investigation into a 2019 data breach. In conclusion, CAS has identified a trend of legislative action taken in 2021 against debt relief companies, which may pose a threat to the growth of the debt settlement industry in the future.
Furthermore, CAS has identified increased activity taken by the CFPB against debt settlement companies since President Biden’s appointment of Rohit Chopra as the director of the CFPB. The main regulatory body, the CFPB, has gradually augmented its focus on the industry, as discussed in the CAS Q4 2021 Newsletter. CFPB lawsuits against specific debt relief firms increased in 2020 across multiple states, citing violations such as illegal telemarking before terms of debt are settled, lack of transparency, misleading marketing and guarantees, and illegal advance fees, all of which violate the Telemarketing Sales Rule (TSR). As anticipated, lawsuits against the debt relief industry has increased under Chopra’s leadership for violations of the TSR and CFPA. CAS expects that this increased regulatory control will continue in 2021 on the federal and state levels, making compliance a mission critical priority for debt relief firms throughout the United States.
Continue to the full FinTech & Debt Settlement insights here.