The Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Examining the Fintech Landscape” on September 12, 2017. The witnesses were: Lawrance Evans, Director, Financial Markets, U.S. Government Accountability Office (GAO); Eric Turner, Research Analyst, S&P Global Market Intelligence; and Frank Pasquale, Professor of Law, University of Maryland Francis King Carey School of Law.

The hearing focused on the opportunities fintech may bring, the various ways fintech is interacting with and impacting the financial system, how these new technologies can help Americans who are currently underserved by the traditional banking system, and the current regulatory supervision of the fintech industry. Given the recent data breaches, particular issues such as data security, data collection, and the proper regulatory treatment to ensure that consumers and the financial system are safeguarded were emphasized.

Mr. Evans’ testimony was based on the GAO’s April 2017 report that provides a high-level look at four commonly referenced fintech sub-sectors – marketplace lending, mobile payments, digital wealth management and distributive measured technology. He noted that the GAO is currently undertaking work that will support congressional efforts to strike the appropriate balance in ensuring an effective regulatory framework while not creating barriers to entry for innovative firms with “socially beneficial products.”

Mr. Turner’s testimony focused on the five key areas that his firm has identified as fintech’s impact on consumers in the financial industry today. These include digital lending, mobile payments, digital investment management, insurance technology and distributed ledger technology, which includes Blockchain. According to Mr. Turner, “the industry is still young and challenges remain. Regulation has been unevenly applied to the sector and in many ways the introduction of a clear regulatory framework could help boost innovation.”

Mr. Pasquale focused his testimony on the consumer protection issues associated with fintech, and express reservations about deregulation and legislative or regulatory efforts to federally preempt state laws now applying to fintech. He also stressed that improving financial cyber security should be “an essential goal of fintech policy.” According to Mr. Pasquale, “we should be very worried about the ability of technology alone to solve much larger social problems of financial inclusion, opportunity and non-discriminatory credit provision.”

The witnesses were asked to address what are some of the most significant fintech risks that Congress should evaluate. Mr. Turner opined that “the biggest risk right now is a fractured regulatory system.” He observed that fintech companies “have looked for regulation wherever they can and right now it seems that they’re just trying to fit themselves into a system that wasn’t made for them.” Mr. Pasquale highlighted cybersecurity and the “opaque algorithms being used to access credit” and the “many different types of data sources” that could play a role in credit decision-making. In light of recent data breaches, there was widespread agreement that consumers should know exactly how their data is being used.

The witnesses seemed generally supportive of a “regulatory sandbox” approach that has been implemented in the United Kingdom which allows firms to operate on a limited basis to test different ideas while under regulatory supervision, but without needing to comply with the full regulatory enforcement regime.

The witnesses agreed that the best opportunity posed by fintech is enhanced and sustained financial inclusion, with the potential downside of certain “bad actor” companies gaming the system as a means to market high-cost loans to individuals. Going forward, Mr. Turner emphasized the need for fintech companies to have a framework that allows them to decide whether to be a deposit-taking institution and be like a real bank, or have some sort of defined regulatory structure specific to fintech companies. He also stressed the need for Congress and regulators to think long and hard about the scope of any definitions they formulate (such as what a digital lender is and what a peer-to-peer payment company is), as a means to help ensure a proper regulatory framework and level playing field across the lending industry.

Senator Brian Schatz (D-HI) noted that it would be helpful to have a dedicated innovation office within the federal government that is thinking comprehensively about the many different issues and questions that pertain to fintech. As he observed, “[t]his could be a one-stop shop in the government for fintech businesses to figure out which regulations apply to them and a mechanism for coordinating among the regulators. It will be a wild West without some attempt to coordinate. You already have regulators with varying degrees of aggressiveness in this space and enthusiasm for this space. But we need someone who is thinking around a few corners, rather than just sort of narrow questions of compliance for particular companies.” Senator Mark Warner (D-VA) and the witnesses agreed that this is something that should strongly be considered, especially given the problem of interagency cooperation.

Given the strong bipartisan interest in fintech issues, we anticipate additional congressional hearings in the months to come.