Regulatory Scrutiny Heats Up On Fintech Firms

As the burgeoning online lending industry braces for a wave of scrutiny from U.S. policy makers, leading financial-technology firms are scrambling in Washington to figure out who’s a friend and who’s a potential foe.

Prominent small business lenders including On Deck Capital Inc., Kabbage Inc. and PayPal Holdings Inc. have formed a group to highlight their differences from other companies. Their alliance is an extension of the payments trade group, the Electronic Transactions Association.

Named the Online Small Business Lending Task Force, the new initiative seeks to promote “the importance of online lending as a source of capital” and “prevent hasty or overly restrictive regulations,” according to Scott Talbott, the group’s lobbyist.

Lawmakers from both parties are seeking information on the vast promise and potential risks in financial technology, or fintech, amid the industry’s explosive growth. Online lenders helped arrange more than $20 billion of loans in the U.S. last year and the figure could climb to more than $120 billion by the end of the decade, according to Morgan Stanley research.

Promoting Innovation

U.S. Representative Patrick McHenry, a North Carolina Republican, has drafted a letter to the Government Accountability Office calling for more study of the benefits of fintech startups. McHenry, who is vice chairman of the House Financial Services Committee, is also working on legislation aimed at promoting innovation in the industry.

“Innovation does not thrive when the heavy hand of government stifles creativity and collaboration,” McHenry wrote in a draft copy of the letter obtained by Bloomberg News. His letter is a response to efforts by some Senate Democrats who have expressed concern that the companies could harm borrowers.

Senators including Sherrod Brown of Ohio, Jeff Merkley of Oregon and Jeanne Shaheen of New Hampshire previously asked the GAO and the Treasury Department in letters for more information about marketplace lenders to help determine whether fintech startups may fall “between the cracks” for federal regulators. A lack of oversight could result in “predatory lending, consumer abuse or systemic issues,” their letters said.