Donald Trump has struggled to make substantial gains on a wide range of the divisive policies that catapulted him into office in 2016 – but one campaign promise the president’s administration has managed to follow through on is his pledge to reform chunks of the sweeping Dodd Frank Act implemented by his predecessor.
On 24 May, President Trump signed a bipartisan bill into law that will drastically ease the ‘one-size-fits-all’ capital requirements for regional and community financial institutions (RCFIs) that were introduced under the Volcker Rule. It’s not a wholesale rollback, but there are very real fears the new freedoms could have negative implications for fintechs.
Dubbed Volcker 2.0, the new law will raise the threshold regulators use to judge whether market participants should be subject to federal oversight from an asset base of $50bn to $250bn. Meanwhile, financial institutions with $100bn in assets are only being asked for partial compliance, and banks with under $10m in assets will be exempt from restrictions on proprietary trading.
At first glance, it seems that leaves only eight large-cap incumbents working under full Dodd Frank compliance – and an overwhelming majority of US lawmakers from both aisles have lauded the rollback. They argue it’ll enable RCFIs to bolster lending capabilities and unveil new community offerings thanks to a huge slash in the regulatory burden that’d previously been squashing them under Dodd Frank.
What exactly was the cost of compliance? It’s been difficult to quantify – with projections ranging from initial Government Accountability Office estimates of $2.9bn, to centre-right thinktank the American Action Forum toting a figure of $38.9bn. Yet regardless of the actual figure, the loosening of rules under Volcker 2.0 will undeniably leave banks with higher levels of liquidity and resource.
Consequently, there’s fresh concern among existing fintech vendors and startups that banks could start to spend this additional time and money developing their own, proprietary fintech products – and the influx of competition could cripple business for fintechs.
Yet according to Letitia Seglah, COO of London-based consultancy Startup Manufactory, that panic could ultimately be overstated.
“There’s always a bit of noise whenever there’s new regulation or some change occurring in the market – and most of the organisations I’ve worked with don’t jump into doing something straight away with a vendor or with a technology,” she says.
“It’s more of a wait and see how mature the market gets, or what is the inflection point within the market to actually start adopting some technology change or some business process change. So, I’d say we have a bit of a way to go yet in terms of who’s going to make a first move.”
It could turn out to be a pretty long wait. After all, on one end of the spectrum, incumbent G-SIBs like Bank of America were never really pushing for a Dodd Frank repeal, anyway.
Not only could BoA afford the cost of compliance, but CEO Brian Moynihan pointed out to the Economic Club of Washington in February that the bank’s formidable fintech presence had already tallied up 40 blockchain patents. This sort of competition is nothing new, and will remain largely unchanged as a result of Volcker 2.0.
On the flip side, community banks and smaller B2C institutions like credit unions are already being well-served by a marketplace populated with a fresh crop of fintechs like the New York-based Narmi, which specialises in offering competitively priced and easy-to-implement online banking solutions that more than 11,000 RCFIs have already adopted.
Regardless of enhanced liquidity and loosening restrictions, credit unions and regional banks will need to do quite a bit of soul-searching to decide if proprietary technology development is truly cost-beneficial and compatible with organisational culture. For many US RCFIs, it’s difficult to picture that soul-searching resulting in the widespread rollout of internal fintech solutions.
Bearing that in mind, the easing of Dodd Frank may not ultimately place a huge dent in the B2C space. If Volcker 2.0 has any sizeable effect on fintechs, it will take place in the B2B market. Even so, Seglah argues incumbents already have the upper hand in that segment, anyway – but with creative funding techniques and nimble founders, fintechs may yet be able to penetrate that market to find new opportunity despite existing competition.
“I believe it can create an opportunity – but at the same time, there are still many barriers to entry. Part of the reason many incumbent, brokerage and investment banks don’t necessarily look at smaller fintech vendors is because the problems many fintechs have looked at in the past five-to-ten years have traditionally not resolved or focused on the complexities that an investment bank – or even a small boutique or medium enterprise bank – has,” she says.
“If fintechs can find that sweet spot that gives them an opportunity to serve a market and understand who they’re serving in that market, there can be an opportunity to provide some competition to traditional incumbent banks – but from a fintech point-of-view, you need to understand what those opportunities are to be able to move into the market outside of the traditional retail element many fintechs have focused on.”