On January 30, 2018, the House Financial Services Committee’s Financial Institutions and Consumer Credit Subcommittee held a hearing entitled “Examining Opportunities and Challenges in the Financial Technology (“Fintech”) Marketplace.”
According to the Committee Memorandum, the purpose of the hearing was to “examine the current regulatory landscape [for fintech], the need to amend or modernize the regulatory landscape or the necessity to amend existing financial laws or develop new legislative proposals that would allow financial services entities to use fintech to deliver new products and services to consumers.” The witness list included: Mr. Nathaniel Hoopes, Executive Director, Marketplace Lending Association; Mr. Brian Knight, Director, Program on Financial Regulation and Senior Research Fellow, Mercatus Center, George Mason University; Mr. Brian Peters, Executive Director, Financial Innovation Now; Mr. Andrew Smith, Partner, Covington and Burling, LLP; and Professor Adam J. Levitin of Georgetown University Law Center.
Mr. Knight commented on the importance of keeping the consumer “always in mind first and foremost” when it comes to balancing innovation and an appropriate regulatory framework. “There’s nothing sacred about any particular type of financial service. It’s all about what serves the customer’s need,” he noted. In his view, we should strive for an environment where “regulators can engage with companies in a scalable way, that companies can try new things out with the understanding that they must protect their consumers. If consumers are harmed due to a violation of the law, the company stand ready to make them whole.” This idea centers around a federal and state regulatory regime that would allow pilot projects with safe harbors for entities to be able to develop a product.
Mr. Peters highlighted how many of our financial laws were written kind of in an earlier era, which makes it important to continually look for opportunities to update our regulatory regime “consistent with the modern world that we’re operating in.” One of the bigger challenges, he noted, “is just the fractured nature, particularly of state by state, regulation. There have been some efforts at the state level, which are commendable, to gain some level of uniformity.” He noted that state money transmission licensing is :a very significant delay to entry in the market,” which, in his view, “holds consumers from — back from accessing, ultimately, what they ought to be able to get equally and easily across the country.”
Mr. Smith noted how fintech can actually help traditional banks serve their customers better by serving customers that they would not otherwise serve, to offer products they would not otherwise offer, and to diversify risk in a way that they would not otherwise be able to. In characterizing fintech as “really do or die for community banks,” Smith cited an ABA study that estimates that there is a $100 billion pool of profits for community banks generally in the fintech space. “If community banks are able to capitalize on financial technology to offer new products, they may be able to grow that pie by — the estimate is $15 billion. If they don’t, that pie gets smaller by $20 billion,” he stated. In short, if community banks are unable to capitalize on financial technology to offer new and innovative products to their customers, they will face a significant swing in potential profits. In Smith’s view, that is something we should not jeopardize by depriving community banks of the ability to access financial technology by partnering with fintech firms. Mr. Hoopes further elaborated on the evidence that shows that partnerships between originating banks and marketplace lenders “are delivering products to underserved communities, places where bank branches have closed and delivering products that are more affordable than the products that were available from traditional institutions and doing so by using advanced techniques that go beyond just looking at a traditional FICO score.”
The witnesses agreed that while fintech companies are subject to certain regulations, but Professor Levitin noted that they are not subject to the “same supervision mechanism.” For example, he commented on how the Consumer Financial Protection Bureau (CFPB)’s supervisory authority “does not cover most fintechs.” Mr. Hoopes highlighted how bank partnerships subject the fintech company partner to additional regulation and supervision. As an example, he noted how the Federal Deposit Insurance Corporation (FDIC), in the case of state charter banks, or the OCC, have the ability to directly supervise third parties.
A main question posed to the witnesses concerned what Congress and prudential regulators can do to facilitate the adoption of fintech in the U.S. without putting consumers at risk. Mr. Knight remarked that they could “create an environment where firms can innovate while maintaining appropriate consumer protection,” where we provide certainty to the relationships with banks, streamline the licensing requirements, and look at “ways to allow state-licensed entities to operate on a national basis, sort of like we do with state-chartered banks.” Mr. Smith noted how it typically takes “two years and a couple of million dollars” to get a license and build a platform through the state by state licensing system. “But what we have in this country are a variety of different regulatory models, right, so the state by state model works for some,” he noted, which raises the importance of ensuring we preserve “the benefit of all of those regulatory systems.” Mr. Peters seconded this notion of preserving the “optionality” that exists in the current regulatory system.
With respect to virtual currency and cryptocurrency, Professor Levitin opined that “there needs to be some sort of regulatory framework for virtual currencies or cryptocurrencies,” but, in his view, “there’s a fine line, though, between creating such a regulatory system and putting a stamp of legitimacy on virtual currencies as investments.” If they are regulated in a safe and prudent fashion, then he thinks the concerns about legitimizing virtual currencies as an investment are reduced.
Subcommittee Chairman Blaine Luetkemeyer (R-MO) noted that the subcommittee will continue to “deliberate measures surrounding fintech that will promote freer and fairer lending to more American families and businesses.” He stressed the need to “be careful not to unnecessarily stifle access to capital” as these issues are examined. “We should aim to foster a better understanding of the many facets of fintech and create an environment that fosters responsible innovation without jeopardizing consumer protections or creating an uneven playing field,” he stated. He also noted that it is his intention to hold a number of hearings on fintech.
It is interesting that neither Joseph Otting, the new Comptroller of the Currency, nor any other federal or state regulator, was on the witness list. Comptroller Otting has not yet taken a public position on the special purpose national bank (SPNB) charter proposal. Press reports indicate that Jelena McWilliams, President Trump’s nominee for Federal Deposit Insurance Corporation (FDIC) Chair, offered some enlightening and hopeful comments in her confirmation hearing last week. She is reported to have said that she did not believe the FDIC’s grant of industrial loan company (ILC) charters to fintech and other nonbank companies would pose a safety and soundness risk for the broader financial system and intended to look into why the FDIC has delayed its review of applications for such charters. Ms. McWilliams also reportedly stated that her enthusiasm for moving quickly on those reviews should be viewed as an invitation for more such charter applications.
We will keep you updated on further developments coming from Capitol Hill, including a recap of the Senate Banking Committee’s hearing next week on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.”