The Federal Reserve and Fintech: The Start of a Beautiful Friendship?

As a result of the fallout from the Covid-19 crisis the Treasury Department and SBA have opened lending under the Paycheck Protection…

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As a result of the fallout from the Covid-19 crisis the Treasury Department and SBA have opened lending under the Paycheck Protection Program (PPP) to non-bank lenders including “fintechs”. Separately, the Fed has set up an expanded liquidity facility for PPP lenders, accepting their loans as collateral. This will increase the volume of loans that can be made. Initially the facility only covers banks, but it explicitly mentions that the Fed is “working to expand eligibility to other lenders that originate PPP loans in the near future.” Those other lenders include fintechs.

One unresolved question is what mechanism the Fed will use to get money to fintech lenders. Banks have ongoing relationships with the Fed, including accounts with a regional federal reserve bank. Fintechs do not. Are fintechs going to get accounts with regional Fed banks? Are they going to need to work with a commercial bank that has an account with a Fed bank as an intermediary to get the loans from the Fed? Is Jay Powell going to show up at their offices? (Spoiler: no)

How that question is answered may have some important implications down the road. The Fed working directly with non-bank fintechs now could potentially open up the door to more integration in the future. For example, if the Fed has a good experience working with fintechs it may be more open to non-banks gaining access to the payments system (something I have called for in the past). This would likely require action by Congress but such action is far more likely to happen if the Fed supports it than if it opposes it. Of course, the opposite is also true: if fintechs are seen as not ready for prime time it will set their cause back.

It is possible that the Fed will continue to keep fintechs at arm’s length. Or that any tighter integration will be unwound after the crisis. But fintechs may, as my colleague Joe Brunk points out, use this opportunity as an impromptu fintech sandbox where regulation has been changed to allow experimentation. If fintechs use this opportunity to demonstrate both their value and their competence they may pave the way for a closer relationship with the country’s central bank in the future. (Whether or not this would be on net a good thing is another debate for another time.)