Federal: Statement for the Record to the Senate Subcommittee on Financial Institutions and Consumer Protection

Examining Overdraft Fees and Their Effects on Working Families

Senate Subcommittee on Financial Institutions and Consumer Protection

May 4, 2022

Statement for the Record from the American Fintech Council

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Thank you, Chairman Warnock, Ranking Member Tillis, and Members of the Subcommittee for convening this hearing to examine overdraft fees and their effects on working families. Member companies of the American Fintech Council (“AFC”) have pioneered many of the game-changing technologies and business models that have challenged overdraft fees and other high-costs for credit and services offered by incumbents.

We have welcomed the Administration’s focus on fostering robust and fair competition in consumer financial markets. As the National Economic Council and other federal regulators have long recognized, vigorous competition can keep prices low for consumers and ignite innovation that yields product improvements and new offerings. AFC member companies and importantly, our advocacy, reflect the Council’s commitment to fair, transparent and responsible financial services. Our member companies are recent entrants competing in a heavily concentrated sector. They must achieve scale and profitability while competing in a highly regulated market dominated by large firms with cheaper access to capital.‍

I. Financial technology companies are facilitating availability, accessibility & affordability across consumer finance markets through competition and partnership with the nation’s banks and credit unions‍

AFC members are at the forefront of fostering competition in consumer finance and pioneering ways to better serve underserved consumer segments and geographies. Through a variety of business models, AFC members are refinancing higher interest rate credit cards, higher cost student debt and higher annual percentage rate (“APR”) auto loans. Financial technology (“fintech”) is also lowering the cost of financial transactions – marketing, underwriting, debt subordination, payments - allowing providers to meet the demand for high-quality, affordable products.

The sector also facilitates competition through partnerships with community banks and credit unions. AFC members provide technology solutions that expand customer-reach, cut application processing times, improve service levels, and support expansion into new markets all while lowering costs. This approach allows community banks and credit unions to profitably offer products and services that their scale would not have previously allowed. Community bankers as well as the Federal Reserve have acknowledged that partnerships with fintech can ensure that community banks remain competitive and vibrant. A 2018 study found that 71% of banks were interested in partnering with a third-party digital platform for consumer loan origination.

A. Availability – fintech competition is expanding financial options for working families and small business owners regardless of where they live or work

COVID-19 has magnified the challenge of ensuring the availability of high-quality financial services and products. Banking deserts and underserved census tracts are proliferating and in thousands of communities across the country bank branches closed at record rates during the crisis. De novo charters are nearly non-existent and consolidation through mergers continues. An analysis of majority Black, Latino and Hispanic communities found low levels of bank concentration as measured by the Herfindahl-Hirschman Index, relative to their majority white counterparts. Fintech companies are enabling competition - consumer lending, payments and digital banking – and choice even for those that live in banking deserts.

B. Accessibility – fintech is ensuring the broadest spectrum of borrowers is served

U.S. Treasury Department reports in 2015 and 2018 cited and subsequent research has also documented that new lending channels provide opportunities to expand credit to underserved segments. The 2015 report cited the potential for technology to expand access to creditworthy borrowers who might not be scoreable under traditional credit “scoring” models. Researchers have also documented that fintech enabled bank lending in banking deserts, low-income communities and to the “invisible prime” - consumers whom other lenders might overlook or overprice.

C. Affordability – fintech competition facilitates a marketplace with affordable options

Assessing how competition facilitates more affordable options for consumers also requires a deeper dive into several factors, including credit score profiles, product types, provider structure, and state law and regulation. Researchers at the Federal Reserve, for example, found considerable interest rate and APR savings from debt consolidation through marketplace lending after calculating spreads and analyzing data across nine credit score bins as compared to average credit card offer rates. Industry research supports these findings for various products and loan sizes. In the auto lending market, for example, where higher rates and hidden dealer mark-ups can be common, Lending Club, a fintech platform that has recently become a bank, found that the company’s average APRs saved borrowers nearly 5 percent compared to their previous loans, translating into an average savings of more than $4,000 over the life of the loan. Fintech platform, Oportun, found that for a $500 loan, competitor products cost 7.8 times more on average.

A research study by Dr. Michael Turner examined various credit profiles and credit needs and compared bank-fintech partnership loans to other credit alternatives available to consumers. The study found that: (1) borrowers who received partnership loans were a distinct and higher credit risk population with fewer credit options than the traditional prime credit population; (2) that these consumer were accurately assessed for credit risk and received competitive terms commensurate with their risk level; (3) that these consumers would not have qualified for more competitive terms and conditions for credit of the same duration; and (4) likely would otherwise have had to resort to higher cost credit options offered by fringe financial institutions to meet their real credit needs if the partnership were to stop offering loans. As a result Colorado established a “safe harbor” for lending partnerships with a 36 percent maximum APR.

II. Fintech competition is transforming overdraft and other penalty fees

Financial technology companies have been pioneering ways to eliminate and prevent overdraft, lower other penalty fees, interest paid by consumers and costs to financial institutions of providing a range of financial products and services. Media reports document the competitive pressure on the nation’s megabanks and large regional banks to change their overdraft fee policies – pressure created by overdraft-free startups and neobank competitors. For example:

• Varo, founded in 2015 and chartered as a bank in 2020, offer banking and savings deposit accounts with no monthly fees or minimum balance requirements, a large fee-free ATM network and automatic savings tools.
• Start-up, Chime Financial, offers fee-free accounts, and has covered $7 billion dollars for consumers under its fee-free overdraft program, Spot Me.
• Research by real-time wage access provider Daily Pay, for example, found that users see savings of $1,200 a year from overdraft fees or late fees.
• Marcus’ high-rate online savings account has no minimum balance requirements, no fees/penalties, and unlimited withdrawals.20 Several banks have started to lower these fees and the total volume of fees has started to go down.

Today’s hearing and the renewed discussion about overdraft and other penalty fees has highlighted key policy consideration around the banking system that financial technology, through competition and partnership, is helping to answer, such as: reducing the structural barriers to banking services; lowering the high cost of small-dollar and short-term credit for vulnerable consumer; and facilitating greater financial inclusion and financial health.

Minimum balance requirements leave too many consumers without access to a bank account. Fintechs are providing lower cost, overdraft-free alternatives. A significant share of overdraft users see it as a means of short-term borrowing with more than 60% of overdrafts coming from consumers who intend to use the service. Nearly 20 percent of frequent overdraft users did not have credit scores, complicating efforts to obtain traditional credit. Industry survey data demonstrates that earned wage access/on-demand pay, for example, helped consumers avoid and replace payday loan fees, bank and credit union overdraft fees, bill late fees and loan payment late fees. Buy-now-pay-later (BNPL) companies, like Affirm, prequalify borrowers to make small dollar purchases without charging late fees. Fintechs are also using alternative data and underwriting models that can identify individuals currently overlooked by standard measures of creditworthiness, such as credit score.

AFC welcomes the opportunity to collaborate with federal policymakers, regulators and other stakeholders on market-based solutions to three key issues that regulators and others have emphasized throughout the public discussion around overdraft fees:

1. Improving options focused on consumer financial health and financial capacity: AFC members have incorporated features in their products and services that focus on consumer financial health, and we are working on better understanding the outcomes.
2. Small-dollar, short-term credit: AFC members are interested in providing more innovative products that address consumer demand for small-dollar, short-term credit that is responsible, fair, safe and sound and want to work in partnership with federal and state regulators to scale responsible options in the marketplace.
3. Strategic Partnerships: AFC members are service providers that want to work in strategic partnership with smaller financial institutions, who are believed to be charging overdraft but are not tracked, to lower their cost of providing financial products and services in order to facilitate their ability to compete with larger players on price to the consumer.

III. Conclusion‍

We urge federal regulators and policymakers to remain open and receptive to financial technologies, business models and specific use cases that are competing and partnering with more established traditional financial institutions.