Trumponomics

When it comes to regulation in the financial industry and its impact on the FinTech space, President Trump’s new administration could leave us with unanswered questions

Only time will tell what will happen now that Donald Trump is President of The United States. Whether President Trump’s economic and regulatory vision will be achieved is unknown but one way or another, the financial industry in the US will be impacted. What the exact impact will be in particular to the FinTech space is still unclear.

In foreshadowing 2017, competition between banks and FinTech companies could increase. A stricter FinTech regulatory landscape could emerge, or the FinTech industry could slow down. As mentioned in our previous blog post on the US FinTech hubs, we stressed that we feel the current FinTech landscape is lagging behind. We would also argue that the US is already playing catch-up in terms of innovation and regulation, when compared to hubs including the UK and others in the Asia-Pacific region, for example Singapore. It is unknown if President Trump’s administration will accelerate or hinder developments in this space; however financial regulation, or deregulation, was a big talking point in his campaign.

Below we have listed the areas subject to reform in the US that we believe will have the biggest influence on the FinTech industry and play a pivotal role in the Trumponomics vision.

Dodd-Frank Wall Street Reform and Consumer Protection Act


Overview
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Enacted by President Obama in 2010 as a direct response to the aftermath of the 2008 financial crisis. The Act installed multiple regulation oversight agencies tasked to oversee banking activities in particular. The Act forces firms which are deemed “too big to fail” to keep high reserves and take other precautions as those firms may pose a systematic risk to the US economy
TrumponomicsTrumponomics Icon REPEAL – President Trump believes the Act has been a burden to American businesses and the financial industry as a whole
Impact on
FinTech
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The removal of the Dodd-Frank Act would mean deregulation from the federal government in the financial industry; thereby creating a more open environment for financial institutions and FinTech start-ups to operate in. It is still uncertain if President Trump will repeal the entire Act or just restructure it. Should he repeal the Act, FinTechs could experience increased competition from the financial service institutions. Considering FinTechs already have relatively more regulatory freedom, increased deregulation might enable incumbents to compete more effectively against FinTechs

Consumer Financial Protection Bureau (CFPB)


OverviewOverview Icon - WP A Dodd-Frank regulatory agency. The Bureau oversees consumer lending including Mortgages, Credit, and Debit Cards. It requires firms to have full transparency of the terms of the loans, fees, and rates. It strictly monitors mortgage brokers as subprime mortgages were the underlying cause of the 2008 crisis
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MODIFY OR SHUT DOWN – President Trump has made statements about his dissatisfaction with the Bureau, however he has not explicitly stated what his action towards it will be. Some speculate that he will shut down the Bureau altogether. Another view is that he will consider supporting the Financial CHOICE Act proposed by Rep. Jeb Hensarling (R-TX) which aims to restructure the Bureau
Impact on
FinTechFinTech impact icon

If President Trump were to shut down the CFPB, it is uncertain who, and if anyone, will be overseeing this space.
Other potential agencies that might step in to oversee the consumer lending space are the Financial Industry Regulatory Authority (FINRA), the Securities Exchange Committee (SEC), or the Office of the Comptroller of Currency’s new FinTech department (the Responsible Innovation Department). The impact of these institutions on the FinTech space is uncertain.
Nevertheless, the potential restructuring / removal of the CFPB could have an interesting impact on the FinTech space. On one side, the shutdown of the Bureau might result in less stringent lending criteria and a renewed focus on subprime lending. This gives FinTechs the opportunity to provide more funding, yet this might make the FinTech space more risky in the long run

 

Glass-Steagall Act (GSA) 


OverviewOverview Icon - WP The GSA was enacted in 1933 as a result of the 1929 stock market crash. The Act restricted banks from being able to conduct both commercial and investment banking activities and it was repealed in 1999. Currently the Volcker Rule exists – which is a part of the Dodd-Frank Act – banning banks from certain investment activities involving hedge funds, private equity firms, or risky trading
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REINSTATE – President Trump campaigned to have a 21st century Glass-Steagall Act. He promoted this as an end to the “too big to fail” banks and enabling smaller banks to compete. If President Trump were to reinstate the 1933 version of the GSA, banks that have Wall Street subsidiaries or mergers will have to separate. This means big banks will lose their investment banking arms and look to other channels for revenue
Impact on
FinTechFinTech impact icon

Competition would increase even more should President Trump reinstate the Glass-Steagall Act.  If banks were to get separated from their investment arm, banks would need to become more innovative in their product offerings and revenue streams. This could mean more competition for FinTechs as banks venture into different paths for lending including digital lending, mergers, or FinTech buy-outs

Immigration Law


OverviewOverview Icon - WP President Trump has not highlighted which part of the US Immigration Laws he will be altering; however the consequences might be far-reaching
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From the early days of his election campaign, President Trump has expressed strong views on increasing and strengthening immigration laws.  Despite this (and the recent travel ban imposed), he has not yet mentioned which specific aspects of the Immigration Laws he would like to act upon
Impact on
FinTechFinTech impact icon

President Trump’s strong views on strengthening immigration laws may have a negative impact on the US FinTech industry. Many start-ups currently use foreign talent and are dependent on international skilled workers. As of 2016, 40% of skilled FinTech workers in Silicon Valley alone were born outside of the US [1]

Financial Services Innovation Act


OverviewOverview Icon - WP The Act, proposed by Rep. Patrick McHenry (R-NC), allows financial service companies like FinTechs to go to market sooner through a regulatory framework that fosters innovation. It mandates that all of the federal regulatory agencies set up Financial Services Innovation Offices (FSIOs) which will enable FinTechs to apply for alternative compliance plans for their products or services. This is known as a sandbox environment
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UNKNOWN – It is currently unknown whether President Trump supports the idea of a sandbox for FinTech and other Tech industries. His recent sitdown with the top 6 Technology executives makes it seem likely that he will sway towards supporting the bill. Also his close relationship with Peter Thiel, who made his $2.7BN fortune through FinTech-like companies, suggests that Trump will not actively hamper the development of the FinTech space
Impact on
FinTechFinTech impact icon

If passed, the Act will create a technology environment where FinTech start-ups can test their innovations within a safe environment and be able go to industry regulators for compliance overview prior to launch. Having a Republican President and Republican majority in Congress will definitely help the bill gain traction as it has only recently been proposed

 


If 2016 is anything to go by, there are likely to be some twists and turns as the year progresses. There is no doubt that this year will be the year of change, and as we look forward, we need to be aware of the changes happening and what type of global impact they would have. Whether the US Congress supports the changes of Trumponomics or not, President Trump’s decisions will have an impact on the FinTech industry in one way or another. The question now is how big of an impact the Trump Transition will have and whether the pendulum will swing in favour of or against FinTechs?

 

 

[1] http://www.ey.com/uk/en/industries/financial-services/…/ey-uk-fintech-on-the-cutting-edge

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