A certain level of regulation makes sense when markets cannot naturally balance themselves and competition is thrown out of equilibrium.
Factors such as geography, unequal income distributions, and more made that historically true in the banking sector. Because policymakers and regulators recognized the need to protect people's assets, the banking sector became one of the most heavily regulated industries in the U.S. economy.
But as the playing field shifts and banks face increased competition through technological advances, now would seem to be an opportune time to reassess the level of regulation in the financial sector.
Traditional banks face an uncertain future as assets shift to other players in the financial market. Should regulations continue to stifle how banks can adapt to this seismic shift? Do these new entrants into the financial world need to come under some umbrella of regulation? How will consumers benefit the most?
While interlopers have been chipping away at banks for decades, the trend has accelerated rapidly over the past decade. A recent report from McKinsey consulting company described consumers' preference for depositing their money anywhere other than banks as an "exodus".
McKinsey found that between 2015 and 2022, more than 70 percent of the net increase in financial funds went to insurance and pension funds, sovereign wealth funds, the private capital market, and retail and institutional investments, rather than banks.
McKinsey warns that banks could be approaching a "tipping point" that could "fundamentally alter the nature" of the banking industry.
For generations, banks served the needs of their customers through their geographical locations. They built relationships with customers by providing their checking accounts, serving their loan needs, creating investment opportunities, and more.
Technology eliminates that geographical advantage and consumers grow more comfortable handling all their financial needs online. However, those geographical advantages and relationship-building services no longer apply.
The regulatory environment that separates traditional financial institutions from new fintech companies works both for and against banks as they adapt to the changing industry.
For decades, outsiders believed regulations provided a moat for the financial services industry that kept innovators on the outside. There were many services they could not provide to consumers without climbing under the regulatory umbrella.
Still, banks hold the advantage of being the only places that can offer FDIC-protected deposits. This spring's bank failures, however, exposed the flaws in that system. Many depositors exceeded the FDIC coverage, and regulators had to step in to provide extra funds to cover those deposits.
Banks now find themselves hamstrung from providing new services for customers. They first must get the services approved by regulators, which at best becomes a cumbersome and time-consuming process.
Banks also find themselves less equipped to gather data from their customers. Other fintech companies quickly gather and bend to their advantage.
The Clearing House represents a number of the nation's largest banks. They recently recommended lawmakers look at imposing more regulations on the largely unregulated sectors of the financial services industry. The idea was to create a more level playing field for all parties.
However, this could shift the advantage back to traditional financial institutions. They already have the structure in place to deal with regulatory agencies, whereas newer fintech companies would need to build those structures.
A better idea, and certainly one that would serve consumers better, would be to look at ways to ease the regulatory burden on banks and traditional financial institutions.
A more competitive market would offer consumers the protections that many regulations are intended to provide.
Banks would gain the ability to adapt more quickly and provide new services to their customers. Banks also could easily cooperate with fintech startups and tech giants to provide services to customers. This is through means and platforms that are already familiar to consumers.
A financial world with fewer regulatory restrictions would first and foremost benefit consumers. People would have more options available for where to deposit their money, how to get a greater return on deposited funds, the ability to access those funds from multiple platforms, more options for loans and better terms, and more.
Banks would be able to benefit from their relationships with customers by continuing to offer innovative services while maintaining the stability and trustworthiness that have made them a bedrock of the financial sector for centuries. They could find new partners among tech startups and tech giants to expand services to their customers. Also, they could expand their customer base beyond their largely geographical locations.
Fintech innovators and startups also could gain access to more traditional customers through their interactions with banks. Particularly, companies that want to gain leverage with customers by offering loans. If they have a limited pool of money to lend, they might be able to find more buyers for their loan pools among traditional banks that currently would not be allowed to purchase such unregulated loans. Or at least, they may not have to jump through as many regulatory hoops and can complete deals more quickly to keep cash flowing to consumers.
Tech giants who want to serve their users through all aspects of their lives also could gain greater access to cooperation with existing financial services companies. Consumers already are comfortable dealing with these providers and enjoy having extra financial services available at their fingertips.
This vision of a less-regulated future might not have to be so far in the distant future. However, financial services companies still need to grow and thrive in the current environment. Garnet Capital Advisors works with companies across the spectrum to assist in the purchase and sale of loan packages.
Our experts assist both heavily regulated companies and those with fewer regulations to traverse the current environment to successfully complete loan package transfers. We match sellers with buyers and ensure all regulatory rules are met to complete transactions in a timely manner. Contact our experts today if your bank, credit union, or fintech company is in the market to sell or buy loans.