After chaos in D.C., fintechs find a path to normalcy
History will remember Wednesday for the anti-democracy domestic terrorism that resulted in death, injuries and damage inside the U.S. Capitol — but did not thwart the process of confirming the presidential election. It was also a day that Georgia's Senate runoff gave much-needed clarity to the fintech sector.
Raphael Warnock and Jon Ossoff won long-shot victories in the Senate runoff, giving Democrats the presidency and both houses of Congress for the first time since early in the Obama Administration. But the margins are narrow and portend a centrist government that requires bipartisanship. The Democrats will control the Senate only by virtue of Vice President-elect Kamala Harris's tiebreaking vote, and Republicans made gains in the House in November's election but fell short of the 218 votes needed to retake control.
And fintechs got something they wanted after four years of uncertainty over U.S. politics and Brexit in Europe: clarity. That means less time wondering who will be making the rules and more time focusing on how the rules govern new paths to reach consumers and businesses.
The most immediate impact will be less partisan rancor and tweet-infused drama. There will be an end to sweeping threats from Trump, who threatened to ban remittances and skilled worker immigration at the start of his presidency and cut off Alipay and WeChat Pay at the end. Even if firms don't like all of the new rules or the election's final outcome, incremental bureaucratic change should be preferable to unpredictable missives.
"For traditional payment players and fintechs, clarity on the regulatory and political environment is always better than uncertainty," said Eric Grover, a principal at Intrepid Ventures.
A green light for cannabis payments
As for specific short-term opportunities for financial services, the Senate results give an added boost to cannabis banking, given a heavier Democratic presence and the reduction of power for Kentucky senator and outgoing majority leader Mitch McConnell, who was one of the main sources of pushback against cannabis legislation. New York Sen. Chuck Schumer, who is more friendly to legalizing cannabis, is the new majority leader.
Shares of publicly traded cannabis companies soared on Wednesday in anticipation of federal moves to legalize cannabis. Legal weed is an area of nominal bipartisan support and momentum in both red and blue states. That makes it an emerging revenue source for card brands, banks and payment processors.
"It seems likely that this will be a major boost for cannabis banking in the near term," said Gilles Ubaghs, a senior analyst at Aite Group, noting the SAFE Banking Act was passed with bipartisan support in the House before getting blocked in the Senate. "This would seemingly clear the decks for it to finally get passed … support of legal cannabis and subsequently financial services support is rising everywhere and is pretty bipartisan so it's an easy win," Ubaghs said, adding financial institutions and payment companies will move into cannabis quickly upon passage.
Looking left, coming to the center
The narrow control for Democrats means other liberal policies like postal banking, digital dollars and pressure on large technology companies' encroachment into financial services will get a hearing, even if they will have a difficult path to fruition. Many of these issues would likely be blocked from consideration if the GOP retained Senate control.
The U.S. Senate Committee on Banking, Housing and Urban Affairs, chaired by Idaho Sen. Mike Crapo, will likely be led by Ohio Democrat Sherrod Brown, who has protected the Dodd-Frank law and supports FedNow.
"There will be more support for the Davids rather than the Goliaths of the U.S. banking industry, with community banks and credit unions benefiting from programs like FedNow," said Alexandra Roddy, chief marketing officer and executive vice president of partnerships at Zafin, a financial technology company based in Toronto that does business in the U.S., adding there will be policy to encourage open banking in the U.S. "There will be a greater emphasis on financial inclusion, giving a boost to the many mission-driven fintechs looking to improve America's financial literacy and welcome the under and unbanked into the financial system," Roddy said.
Writing for PaymentsSource in November, Grover predicted heavier regulation from the Biden Administration, including card interchange caps and potential antitrust pressure for card brands. A narrowly Democratic Congress creates a runway for these moves, but also more of a view into predictable left-of-center policy. There will still be partisan differences, but the impact of Trump will wane, along with the uncertainty of what the balance of power will look like in the future.
"Fintechs and VCs can generally deal with a bad rule if they know what it is," Grover said.
Payment companies and fintechs of course operate internationally, and Brexit has been an added source of uncertainty for payment companies and fintechs that have operated without a clear path on how business will work in the U.K. Some of that uncertainty has also eased due to a negotiated Brexit trade deal near the end of the year.
"The Brexit deal removes uncertainty for everyone," Grover said, adding there are still incomplete rules for financial services that will result in dual licensing in the U.K. and EU. "That's the cost of doing business."