We are seeing an explosion of new products allowing consumers to purchase goods and services on credit or to take advances when money runs out before payday. Some are balloon-payment loans, repaid in full with the next deposit or paycheck. Others are repaid over time, some in four installments, others over a longer time period. Some of these products are free, some purport to be free but have hidden or deceptive costs, others charge interest.
Some new types of financing products are seizing opportunities posed by gaps or failures in the current marketplace. If well designed, they may have a place in meeting consumers’ needs. Other fintech liquidity products appear primarily to be designed to evade consumer protection laws.
I am worried about credit products that claim not to be covered by federal or state credit laws. Even credit products that can help consumers to manage their finances need to be covered by basic consumer protections, including interest rate limits, underwriting for ability-to-repay, cost transparency, dispute rights and fair lending laws.
However they are styled, products that provide funding or cash today and that are repaid later are credit. The use of new technologies or models does not make these products fundamentally different than forms of credit that have been around a long time. Shiny fintech garb does not remove the need for basic consumer protections to ensure that credit is affordable, responsible, transparent, and fair.
We must keep a close eye on how products evolve, as products may not stay free or low-cost. The ultimate business model may not always be or remain what it appears.