Defending the Value of Community Banks in the Age of Fintech
Today, Americans have more financial tools and options at their disposal than ever before. This surge in financial innovation is largely due to substantial investments from banks and technology companies of all sizes, who have identified market gaps and responded accordingly. However, a concerning mindset seems to be taking hold in the fintech sector that could potentially undermine the role of small, community banks.
Frank Gargano
Community Banks: A Critical Asset
Recently, Zach Perret, the CEO of Plaid, suggested that many small-town banks “should be consolidated.” This statement reflects a growing belief among some fintech leaders, policymakers, and regulators that smaller, community banks lack the resources and expertise to adopt new technologies. Critics argue that these banks fail to deliver sufficient value to their customers. Yet, it’s worth noting that community banks consistently earn high praise from the consumers and small businesses they serve. Furthermore, they play a vital role in underserved communities, such as rural America, where many larger financial institutions do not have branches.
Beyond the Number Game
The question isn’t whether we need 4,000 banks or 400; the market will ultimately decide that. The real issue is who gets to make this decision. Should it be consumers and businesses, or Washington bureaucrats and tech executives?
Unfortunately, federal regulations have increasingly made it difficult for midsize and regional institutions to compete since the introduction of the 2010 Dodd-Frank Act. Consequently, there has been increased pressure towards consolidation.
The Open Banking Rule: A Double-Edged Sword?
Take, for example, the Consumer Financial Protection Bureau’s Section 1033 “open banking” rule. While it is pitched as a pro-consumer policy, it requires banks and credit unions to provide major technology companies and data aggregators access to their infrastructure and customers’ data at no cost. This essentially puts smaller institutions on the hook to implement costly new systems and compliance regimes, a burden that discourages innovation rather than fostering it.
The Path to Real Innovation
Real innovation doesn’t stem from forcing consolidation among smaller institutions. It comes from fair competition, secure data protocols, and clear rules that apply equally to banks and fintechs of all sizes. If a financial institution can’t meet consumer needs, it should lose customers. Conversely, if a new platform offers something better, it should win on merit — not through regulatory favors or federal mandates.
The Trump administration rightfully paused implementation of Section 1033 and reopened the rulemaking process. However, it’s time to reconsider the broader legacy of Dodd-Frank and the unchecked authority of the CFPB. These structures have imposed significant burdens on smaller banks, increased systemic risk by pushing consolidation, and shifted key decisions from the marketplace to regulators.
The Need for Market-Driven Decisions
Americans don’t benefit when a handful of platforms become the default gateway for financial access. They benefit when multiple institutions experiment, adapt, and serve people according to local needs and personal preferences. Policymakers should reject the consolidation-at-all-costs narrative, including rulemaking from agencies with too much discretion and regulation that substitutes bureaucratic judgment for consumer choice.
We may not need as many banks as we have today — but that’s for the market to decide. Not Washington. Not Silicon Valley. And certainly not those who benefit from rigging the system.
If we want a financial system that remains strong, competitive, and open to innovation, we should protect the principle that built it in the first place: freedom to choose.
Original Source: Here
