Lawmakers are putting the fast-growing financial technology industry under the microscope, while two newly formed trade groups are hoping to influence the debate.

The American Fintech Council and the Financial Technology Association formed in March, as fintechs seek to usurp traditional banks in providing some services while partnering with them in providing others.

The AFC has more than 50 members, including Affirm Holdings Inc. and Cross River Bank. The FTA, meanwhile, has just 11 members, including Afterpay US Inc. and QuadPay Inc.

Daniel Gorfine, a senior policy adviser at FTA, told S&P Global Market Intelligence that one of his group's top priorities is "encouraging responsible and equitable private sector innovation and competition through modernized regulations and approaches."

In general, fintechs face fewer regulations at both the state and federal level than do traditional financial institutions.

But Senate Banking Committee Chairman Sherrod Brown, D-Ohio, said March 17 that fintechs need to work within the same regulatory framework as banks.

"We can’t allow Silicon Valley to play by a different set of rules," Brown said, speaking at a summit hosted by the American Bankers Association.

Meanwhile the committee's top Republican — Sen. Pat Toomey, R-Pa. — said he would take a more measured approach to regulating financial technology companies.

"I think it depends on the activity they engage in," Toomey said, speaking separately at the same event. "If a fintech company is engaging in comparable types of activity to a regulated bank, then it should be subject to the same type of regulation."

The American Fintech Council stressed that policymakers should not lump all fintechs together when considering regulation.

"Not all fintechs are created equal," said Phil Goldfeder, AFC's senior vice president for public affairs. "Too often with policymakers, all fintech is … the same. We have really tried to draw a line between good actors and bad actors."

Online financial companies are providing a vast and growing number of services, including payments systems, lending platforms and underwriting, personal finance applications, and investing. Artificial intelligence and machine learning are also emerging as ways to automate transactions and create financial service platforms.

Armen Meyer, vice president for public policy and regulatory strategy at LendingClub Corp., one of the AFC's members, said the group is focused on "self-regulation" as part of the overall rule structure for fintechs.

"We want to create more self-regulation looking at models in the banking space," Meyer said in an interview. "We want to make regulatory technology work for everybody."

For AFC's members, one key self-imposed rule is that they do not levy an interest rate of more than 36% for any of their loans, Meyer said. That cap matches the one set by the Military Lending Act for loans to service members, he said.

Bank-fintech partnerships

Both the AFC and FTA plan to encourage the growing trend of partnerships between fintechs and traditional banks.

Many of those partnerships are forming to help traditional financial institutions provide core services to their customers more quickly.

The FTA's Gorfine says his group "believes bank-fintech partnerships can yield substantial consumer benefits, including with respect to access to capital, lower costs, and more choice."

At the same time, he said, "it is critical that there be clear guidance and clarity around such partnerships."

The Office of the Comptroller of the Currency attempted to provide some clarity in October 2020 when it issued a rule that lays out when a bank makes a loan and is the "true lender" in the context of a partnership between a bank and a third party.

Under the rule, if a bank is named as the lender in the loan agreement or if it funds the loan, then that bank would be considered the true lender. The rule also specifies that if a bank is named as the lender in the loan agreement and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan.

Additionally, the rule clarifies that as the true lender of a loan, the bank retains the compliance obligations associated with the origination of that loan.

Chris Cole, senior counsel at the Independent Community Bankers of America, said his group is "aligned" with fintech groups in supporting the rule, which has come under heavy scrutiny. Three Democratic members of Congress recently introduced legislation to use the Congressional Review Act to repeal it, saying the rule allows lenders to evade consumer protection laws.

Regardless of the outcome of the "true lender" rule, Rob Morgan, the ABA's senior vice president of innovation strategy, said bank-fintech partnerships are the wave of the future, but oversight is still needed.

"Supervision is important to ensuring these protections are being applied uniformly, which is why bank-fintech partnerships are so powerful," Morgan said in a statement. "When banks and fintechs partner, consumers get the latest technology from a trusted partner."