It’s an oft-repeated truism that the Covid pandemic has changed life as we know it. For many of the most-discussed issues however – the great resignation, growth in work from home, the shipping/logistics crisis – the pandemic simply accelerated changes that were already afoot and brought issues into much sharper focus.
Fintech Lenders Come Through for Pandemic-Struck Business
Fintech, for example, has been steadily expanding for at least a decade. According to most experts, the 2008 financial crisis vastly reduced consumer confidence in traditional banks and paved the way for alternative lending institutions, which have been steadily growing since the mid-2010’s. The ease, speed, transparency and superior customer experience offered by many fintech platforms have helped contribute to this growth
The initial stages of the Covid pandemic, of course, introduced almost unprecedented uncertainty and risk for all businesses. Many midsize and small enterprises (MSE) needed additional financing to survive and adapt, regardless of whether it was to cover rent on a shuttered business or to increase their workforce to handle more orders.
With the first wave of closures, private lenders (including direct lenders and private debt funds) drastically increased pricing in response to increased levels of risk. Strict rules limiting the conditions under which banks could grant loans – put in place after the 2008 financial crisis and designed to prevent banking collapse – brought bank-originated lending to an almost complete stop.
With limited options, uncertain prospects and immediate need, many business owners turned to digital lending platforms to quickly obtain the financing they needed. In addition to being easily accessed during closures, fintech lenders leverage technology-based sources of credit data and electronic processing platforms that enabled them to approve more loans for small and midsize organizations, more quickly, and often with better terms than private lenders could (or would).
As a result, lending platforms reported a 25% increase in users during the Covid crisis, and some digital lenders have reported increases of up to 5000% in the number of loan applications from prior to March 2020.
Fintechs Match Banks in Consumer Trust
While desperation drove many businesses to seek out alternative lenders, satisfaction has led them to remain. In a recent Harris Poll survey, almost three fourths of the businesses that turned to alternative
lenders to get the assistance they needed to survive the early stages of the pandemic have no intention of returning to traditional lenders should they need help again. McKinsey found that customers trust fintechs roughly as much as they trust traditional banks.
What some of these satisfied, trusting customers may not realize, however, is how vulnerable they are. Rapid fintech advances have often left consumer protection behind. In the US, the Consumer Financial Protection Bureau, the agency responsible for ensuring the fair practices of banks, lenders and other financial institutions, is playing catch-up, struggling to issue regulations that address new fintech models and keep pace with their growth.
Protecting Consumers Protects Your Business
For the short term, this regulatory lag has freed alternative lenders from the compliance burdens faced by traditional financial services firms. But this compliance-free window will not last long: Regulators are hard at work to catch up.
Perhaps more importantly, despite the Covid-spurred bump in alternative lending and high customer satisfaction with fintech options, most potential borrowers want assurance that the financial institutions they work with are regulated and compliant, and that their interests will be protected should something go wrong. Fintech investors are likewise reluctant to take on heightened risks associated with companies that operate outside of industry regulations and might be exposed to costly lawsuits and negative publicity.
For these reasons, as well as because consumer protection agencies will ultimately catch up to new financial models and issue new regulations, smart fintech organizations build compliance processes into their operations even before regulations are issued. Integrating processes to comply with still-unwritten regulations might sound inefficient, and indeed, it often is. Companies that try to apply regulations and frameworks developed for traditional financial institutions are likely to find that the old rules are often irrelevant and hard to adapt. And once new rules are issued, they may well have to undo processes based on incorrect guesses on what new rules will be.
Anticipating Regulation with Proactive Compliance
A wiser approach for fintech firms is to seek the areas of most commonality with traditional finance, and integrate compliance from the very start, using guidelines based on existing regulations which are closest to those with which they will ultimately need to comply. In virtually every case, customer experience is the area that is likely to remain most stable. After all, regardless of how the loan process is done, all customers want assurance that they are safe, protected and their needs attended to.
Integrating compliance procedures that are not strictly necessary (yet) in a non-regulated fintech business accomplishes a number of goals – especially if consumer protection regulations are used as the beta:
- It forces fintech organizations to create regtech processes that are flexible and easily accommodate changing regulations, since it is clear from the start that the regulations will change.
- It lays the groundwork for business growth, since easy integration of new regulations significantly shortens the timeline and expense involved in expanding to diverse jurisdictions
- It integrates compliance as an essential organizational function from the ground up. That means that data gathered during regulatory oversight such as, for instance, consumer interactions, is available as a valuable resource from the start.
- Finally, voluntarily complying with consumer protection regulations provides fintech businesses with a clear competitive edge by laying many reservations on the parts of both consumers and investors to rest.
Consumer protection agencies worldwide, together with bodies responsible for overseeing financial institutions, are hard at work on new generations of financial regulations. Ensuring that your fintech has compliance regtech in place allows it to rapidly adapt as new standards are issued and quickly expand to new markets. In the still-emerging fintech marketplace, demonstrating corporate responsibility and concern for customer protection sets your brand on the fast track to growth.
“Training and monitoring of consumer-facing employees will be critical to ensure that an organization is compliant. Technology will support and help the credit and collections industry meet demanding obligations with ease and efficiency, in order to produce the outcomes a regulator wants to see.”
Consumer Financial Services Regulatory & Compliance Group
“Our challenge going forward is to position our industry and our companies as desirable places to work. We must implement diversity, equity and inclusion in our workplaces, and get the word out that we have changed. Ask your newest employees for feedback—what would make our workplace desirable for their friends and acquaintances? In this post-pandemic world, getting people to crawl out of their comfortable cocoons may be difficult, but it can be done!”
“In the last few years, the buzz of the call centers faded away. Now that many people still have the opportunity to continue to work from home, performance directors need to pivot their focus. We need to ensure that the training is effective in this new environment. The move is from hours in a classroom setting to immediate, personalized micro-learning units that enforce the corrective behaviors.”
“The digital collections movement continues to be in full steam and we are excited to see all of the new technologies that are coming into the ARM industry to help drive enhanced collection performance in a compliant manner. We anticipate additional M&A consolidation globally in the ARM industry, as more digital ARM companies look to accelerate market entry and obtain blue-chip clients and deploy digital-first solutions.”
“Digitization will be critically accelerated in 2023. Recovery organizations may be required to furnish consumers’ account data through consumer-selected platforms that will likely be different from organizations’ traditional payment portals. Organizations should start preparing their technology and operations for that contingency now to harness the trend to their benefit.”
“Data is the new oil, and extracting data from all sources, especially voice, will be a must-have in 2023. We are in the age of machine learning, and ML runs on data. Getting ALL the data and getting it into one place for the ML to do what it can are the key differences between organizations that will make it and those that don't.”
“In 2023, collectors and creditors will be required to work closer together. Reg F oversight requirements have created a new reality of shared compliance responsibility. Servicers and creditors can better collaborate by using new data-driven compliance platforms that provide all parties with critical insights and generate the transparency and trust needed to succeed in a tightening regulatory climate.”
As Gen Z enters the workforce, you’ll have up to four generations in your agency. Everyone learns differently. Young people learn from TikTok videos, and there is a professional term for this: micro-learning. Such short videos are especially efficient when sent out close to the time when the violation occurred.
Barron & Newburger
The most efficient training systems I’ve seen are those which build surgical, data-driven compliance content and provide agents the exact training they need when they most need it. This approach avoids wasting time and money on training which does not address the need. Continuous, role-based training programs that focus on the needs of each individual agent are some of the most efficient and effective I’ve seen.
Bedard Law Group
“Training is only going to be effective if it's done at or near the time the violation occurred. As agents handle hundreds of calls a week they will not have the capacity to remember particular moments of each consumer interaction. Therefore, effective monitoring will be critical to address the deficiency when it happens, in order to remediate quickly so that it does not become a systemic problem going forward.”
Consumer Financial Services Regulatory & Compliance Group