Consumers Pay the Price as State Regulation Fractures FinTech Scale

Killing the Goose That Laid the Golden Eggs

Over the last decade, FinTech firms have attacked the frictions of legacy consumer finance in material ways, only to watch state law break national products into fifty different variants.

The core pattern is that software‑driven models designed for scale encounter legal categories written for storefront lenders, money transmitters and offline decisioning, and states then assert jurisdiction in divergent ways.​ The result is a maze of licensing, disclosure, and pricing rules that undermines a single national product design.​

Embedded‑finance and marketplace‑lending models face similar fragmentation. Marketplace lenders that rely on bank partnerships run into state “true lender” attacks and divergent usury interpretations, forcing constant restructuring of APRs, fees and ownership structures by jurisdiction.​

Digital‑asset rails and AI‑enabled decisioning add new layers of fragmentation. Crypto exchanges, wallets, and stablecoin‑based payments have had to navigate overlapping state money‑transmission and crypto‑specific licensing frameworks, with different capital, KYC, and reporting obligations.

Now, AI‑driven underwriting, fraud detection and financial‑advice tools face emerging state AI laws, especially in New York and California, that impose local transparency, audit and fairness requirements on automated decisions in credit and employment, on top of federal fair‑lending rules.​

A Lesson From New York’s Check‑Cashing Regime

New York’s regulation of check cashers offers a revealing precedent for how state policy choices can freeze market structure in low‑income financial services.

Under Article 9‑A of the state banking law, cashing checks “for a consideration” requires a state license, meaning the regulator controls who can enter, where they can operate and under what conditions. Over time, this licensing model evolved into a tight system of geographic and competitive controls. Regulators and courts scrutinized relocations and new branches to prevent “encroachment” on incumbent licensees, effectively protecting existing storefronts from new competition.​

The state similarly asserted itself on pricing. In 2005, New York became the only state to grant automatic annual increases in maximum check‑cashing fees, pegging the cap to inflation and allowing the ceiling to drift upward over time. In 2023, the Department of Financial Services adopted an updated rule that both lowered and tiered fees and eliminated automatic CPI indexation going forward.

By combining strict entry controls with detailed geographic and price regulation, the state locked in a particular channel — licensed check‑cashing storefronts — as the dominant way for many low‑income consumers to turn paper or electronic checks into spendable cash, even as better, more digital alternatives were technically possible. And available to the consumers who need the service.

The CFPB Steps Back as States Step In

Against that backdrop, the CFPB’s recent shift away from aggressive, front‑and‑center regulation of BNPL illustrates how federal retreat can catalyze state activism rather than mute it.

Under the Trump Administration, the agency has announced that it will not prioritize enforcement based on the Biden-Era interpretive rule and has signaled an openness to revisiting or rescinding it as part of a broader rollback of those initiatives.​

Many pundits view this as a victory, but that framing obscures a more complicated reality. When the primary federal supervisor steps back, 100 new forces step in. Fifty state regulators and fifty state attorneys general — all of whom are increasingly willing to apply existing lending and unfair‑practices statutes to nonbank products — and private litigants who test new legal theories in the courts.

BNPL in a Fifty‑State Maze

BNPL is a natural test case for this new state‑driven environment because it sits uneasily between traditional categories of credit and payments. In the absence of a single, binding federal standard, states have started to fit BNPL into whatever local frameworks are already on the books.

For a BNPL provider trying to build a uniform product across the country, this diversity is more than a compliance footnote. In practice, firms are forced into one of three unattractive strategies: engineer to the “most restrictive state” and impose that standard nationwide, exit or sharply limit operations in hardline jurisdictions, or invest in complex, state‑by‑state product variants that are costly to maintain and hard for consumers to understand.

Earned Wage Access as the New Battleground

Earned wage access is even more explicit evidence of the pull of state‑level regulation in a post‑CFPB‑dominant era. Originally pitched as a safer, lower‑cost alternative to payday loans, EWA quickly exposed the limits of traditional loan‑versus‑non‑loan categories.

Some providers structure advances as purchases of receivables, others as tips‑based services, and still others as employer‑sponsored benefits. And  the question of whether these arrangements constitute “credit” has become a focal point for legislators and regulators.

In some states that have taken a strict “treat it as a loan” stance, prominent EWA providers have paused or exited operations rather than operate under regimes they argue are ill‑fitted to the economics and risk profile of the product.​

AI Yi Yi

The same forces that are splintering nonbank credit oversight are now visible in AI, with states like New York and California racing ahead even as the White House tries to reassert national control.

President Trump’s recent executive order on AI aims to curb a “patchwork of 50 different regulatory regimes” and push toward a single, lighter‑touch national framework. But it does not, on its own, shut down state initiatives or guarantee lasting federal preemption.

The likely result is not uniformity, but years of litigation and negotiated coexistence in which ambitious state laws around AI safety, transparency and discrimination continue to shape how technology companies operate.​

How State‑Driven Regulation Impedes FinTech Scale

The combined effect of these trends is not so much to ban nonbank innovation as to hobble its operating thesis and economics.

FinTech models such as BNPL, EWA and other embedded‑credit constructs rely on scale: they spread underwriting, technology and compliance costs over large, relatively homogeneous user bases, often across multiple states.

When each jurisdiction defines the product differently and attaches its own mix of licensing, fee caps, disclosure templates, and supervisory expectations, the basic economic logic of these models starts to unravel.

Smaller firms without large compliance and legal teams are discouraged from entering or expanding; larger incumbents, often with existing bank partnerships and multistate licenses, are better positioned to absorb the friction.​ But not necessarily the costs of doing business.

In that sense, the problem with nonbank innovation in a post‑CFPB‑dominant world is not that it is “unregulated,” but that it is regulated everywhere and harmonized nowhere.

The question for policymakers is whether they can design a federal framework for nonbank credit that preserves room for experimentation while preventing abuse, or whether they will accept a future in which the geography of state law, rather than consumer need or technological possibility, decides which FinTech ideas ever get the chance

 

Find more observations and insights from Karen Webster about what may lie ahead:

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