America made its choice. Republican Donald Trump will become the 45th president of the United States, with the backing of a GOP majority in both the House and the Senate. What does that mean for fintech companies? It could mean a lot.
Overall, the push for fintech regulation could decrease. Trump has publicly stated his opposition to both the Dodd-Frank Act and the Consumer Financial Protection Bureau. One of his first goals in office is to issue a moratorium on new nonessential regulation.
With that said, the fintech space stands to lose a potential ally in the CFPB. While a few regulators, like the CFPB and the Office of the Comptroller of the Currency, have tried to work with fintechs, the CFPB would likely be a key source for clarity on potential rules affecting the space. If Trump is able to eliminate or downsize the bureau, it is likely that fintechs will still eventually be regulated, but perhaps now by a less friendly organization.
Beyond regulation, uncertainty in the space has the potential to slow investment. Many fintech companies rely heavily on venture capital and institutional funding. A clear example of how political uncertainty impacts this type of funding can be seen in the U.K. following the Brexit vote. Venture capital data provider Pitchbook shows a 34% year-over-year decline in VC activity in the U.K. and Ireland for the third quarter of 2016.
Beyond the macro aspects, we point to a few key areas of fintech outlined in S&P Global Market Intelligence's recently published industry primer.
Digital lending is likely to be one of the most heavily impacted areas under a Trump presidency.
During his campaign, Trump said he plans to reinstate Glass-Steagall. This would most likely involve banks being forced to separate commercial and investment banking businesses. While reinstating Glass-Steagall has long been a campaign topic for both parties, little has been done to advance the cause. Trump will likely face an uphill battle for any change, even in a friendly environment.
If new legislation is passed, newly separated commercial banks will need to find additional sources of revenue in order to grow. The once too-small-to-bother-with customer base currently served by digital lenders may start to look more attractive. What remains to be seen is how banks will capture these customers. Despite new technology, it is still costly to go after new customers, especially those outside a bank's depositor base.
The most likely scenario is banks continuing to partner with digital lenders. We have seen a wave of partnerships over the past few years involving large incumbents like JPMorgan Chase & Co., Regions Financial Corp., and BBVA Compass Bancshares Inc.
Student lenders and student loan refinancers are likely to benefit the most from a Trump presidency. While various rules related to the Health Care and Education Reconciliation Act in 2010 led banks to exit the private student lending market, Trump wishes to put student loans back in private hands. The GOP platform for 2016 states that "the federal government should not be in the business of originating student loans."
With already strong brands and copious amounts of borrower data, digital lenders in this space could see an increase in originations if the federal government exits the student loan business. While these lenders have historically focused on refinancing student debt, largely because of the inability to compete with government rates and guarantees, the door may now be open to a broader array of products including direct origination.
SoFi exited the direct market for MBA student loans in 2013, saying "the combination of lower loan rates and guaranteed government protections made it hard for us to justify choosing a SoFi loan while in school." CommonBond currently offers MBA loans, while Earnest does not. SoFi attempted to re-enter the market in 2014 but again ceased lending in early 2016.
Digital wealth managers, or robo-advisers, will likely feel a minimal impact from a Trump presidency. The main issues facing robo-advisors are regulatory, and Trump is likely to reduce, not increase, regulation. One area to keep an eye on is the soon-to-be-enacted Department of Labor fiduciary rule for retirement accounts falling under ERISA.
There is still a good deal of regulatory uncertainty for robo-advisers, including whether or not they should act, or even can act, as a fiduciary. The elimination or reexamination of the DOL rule could give companies in the space more time to make their models compliant with a fiduciary standard.
The digital payments space will likely receive a boost from the elimination or decrease in power of the CFPB.
Blockchain technology remains one of the biggest unknowns, not only in this election, but also in the global environment. While it is clear that the use cases for blockchain are promising, it is unclear how widely the technology will be adopted. With that said, this election could be a catalyst for decentralized technology.
Trump has campaigned on a platform of closed borders and an "America first" attitude that could cool desires from traditional banks to expand into new international markets. Blockchain-centered solutions would be the net winners, as money still needs to move between countries, and a decentralized payments platform would serve these needs.
Overall the fintech sector will likely experience net gains from a friendlier regulatory environment. While Trump has stated that he wishes to break up banks, eliminate the CFPB or at least replace its director, and repeal Dodd-Frank, it is unlikely that the political will is there, even with a friendly legislature.
With that said, some potential changes, such as a Glass-Steagall-like regulation, could force banks to decide whether fintechs are friends or foes. We see this as an opportunity to create partnerships, but it could easily create more competition. Banks like GS Bank have already decided to go on their own and compete directly. And if certain Obama-era creations like the CFPB are eliminated, fintechs could have a harder time finding friends in the regulatory environment.