It takes the right legislation and regulations to ensure a safe and secure experience, but how does that apply to personal use applications such as Venmo, Cashapp, DoorDash, and buy now Pay Later services?

Keeping fintech applications modern and competitive globally while maintaining that safety can feel like an uphill battle, and yet it’s an essential practice for fintech to survive in the states and overseas.

That’s why people like Penny Lee, President and CEO of the Financial Technology Association, step in to stand at the intersection of regulatory changes, financial crises, and innovative product development.

Lee holds a unique blend of knowledge around politics, policy, and investing, giving her a clear picture of how they intersect and why they must work together — for Lee, balancing the needs of consumers and regulators is practically second nature and she leverages all of her experience to help foster positive impact, even amid a financial crisis.

Innovation in fintech during financial crisis and economic turmoil

Coming out of the financial crisis of 2008 — where thousands of people lost their homes, were laid off, and experienced general lifestyle turmoil — fintech innovation may have been the last thing on people’s minds, but that didn’t mean it was less needed.

“You see a lot of products that came out in response — similar to Upstart — and others that were filling a marketplace gap because there was still the need for access to affordable credit in a way that could reach those that might be underbanked, underserved, but do it in a way that's not predatory,” Lee said.

These apps and products came forward to provide a way for people to buy a home or finance a car without going into crippling debt. 

Today in 2024, we’re seeing a similar uptick in innovation and adoption in response to the COVID-19 pandemic, where remote/digital banking surged and continues to rise in popularity and consumer expectations.

“A lot of the innovation in this space has been from changing how we interact with financial services and how we get the delivery of money,” she said.

Consumers and small businesses have access to more digitized financial support than ever. Apps such as DoorDash and Instacart may seem easy and convenient on the outside, but there’s a host of fintech innovations behind those services that make it possible. 

If necessity is the mother of invention, a financial crisis is an incubator for fintech innovation in service of the betterment of individual financial health. Even still, there are risks attached to fintech advancements.

The evolution and risks of Buy Now Pay Later (BNPL) products and services

BNPL is still a somewhat new, convenient, zero to low-interest product that allows users to make four payments over six weeks to pay for an item — clothing, goods, and so on — spreading out the impact of the purchase.

“It allows people to have an alternative payment method — if they need to spread their payments to meet their paychecks or address an emergency immediately, they can do it in a way that has zero interest, so when they pay it off in four payments, they don't incur any other fees attached to it,” Lee said.

Today, BNPL tends to exist as a marketing practice for brands with minimal warnings of the risks. If one were to take out multiple BNPL loans, it could negatively affect their ability to build positive credit in the eyes of credit bureaus.

“It's hard for credit bureaus to capture the positive aspect of somebody that uses by now pay later in a responsible manner, in a way in which they're paying it off each cycle, or each four week period,” Lee said. “Because, right now, what happens if you take out one, two, or three different BNPL loans or use BNPL products? You're maxing out your amount of available credit, which could seem like a negative.”

Credit bureaus were not built to capture daily to two-week transactional information, and until those pain points are solved, BNPL should not move beyond standard retail transactions, such as applying to car or home payments. 

Before those advancements can happen, they need to understand: 

• Payment frequency
• Payment amount
• Regular payment cadence

“Each credit bureau viewing this data in a very different way is something that is just too cumbersome for the companies to report into because it will be translated differently depending on the company in which they're engaged,” Lee continued. 

With the average use of BNPL on a product sitting at a cap of $147.00, it has a ways to go before tackling higher-cost payments.

Why earned wage access plays such a large role in financial health

Here in the United States, it’s common for employees to receive their paycheck every two weeks or once a month — earned wage access does tide people over between pay periods.

“Back in the day, it would be a cash advance, and it was money taken out of the till at the end of the night and given to you and with the promise of being paid back — earned wage access is in that same vein, now in a digital manner,” Lee said.

Earned wage access allows people to have access to their wages daily, based on what they have already earned. This offering can provide peace of mind and decreased financial stress when properly leveraged, especially during times of personal financial crisis.

Fintech continues to change the landscape of what is possible in the sphere of individual financial health, building credit, and, as a result, building the life they want without drowning in red tape and debt. 

Though there are still many gaps and risks to address in new fintech products and services, there are countless bright minds dedicated to delivering the safest and most secure environments possible — it’s only the beginning. 

Stay tuned for new episodes every week on the Leaders in Lending Podcast.