September 28, 2018

House Financial Services Subcommittee on Financial Institutions and Consumer Credit “Examining Opportunities for Financial Markets in the Digital Era”

Key Takeaways

  • Desire for Innovation: Subcommittee Chairman Blaine Luetkemeyer (R-Mo.) noted a recent study that determined over 50 percent of millenials are still interested in accessing actual people rather than machines. Fir Commonwealth Financial Corporation’s Price replied with another study’s results showing that 46 percent of people still walk into bank branches, while 54 percent do things digitally, noting that usually people like to have face-to-face interaction when solving problems.
  • Data Protection: Throughout the hearing, Fidelity Wealth Technologies’ Rubinstein stressed the importance of protecting consumer data, stating that different firms are held to different standards, and that Fintech firms are not subject to these standards, causing an unlevel playing field. He also stressed the importance of consumers being able to monitor the secure connections they have with third parties on an ongoing basis, as well as the ability to revoke their consent.
  • International Standards: In response to a question from Rep. Robert Pittenger (R-N.C.) on international standards the U.S. should consider when developing their own standards, Hogan Lovells’ Cutler recommended the Financial Conduit Authority (FCA) in the UK, adding that the Treasury report also lists them. 

Witnesses

Opening Statements

Rep. Blaine Luetkemeyer (R-Mo.), Chairman, House Financial Services Subcommittee on

Financial Institutions and Consumer Credit

In his opening remarks, Luetkemeyer noted that in the year since the last hearing on financial technology (Fintech), technology has already changed. He continued that the Treasury report that was released in July 2018, “Nonbank Financials, Fintech, and Innovation,” offered recommendations to the industry about modernizing the existing regulatory framework, adding that legislative proposals could go further to offer new products and services to customers. Luetkemeyer stressed that while innovation is “critical” to the financial industry, consumer data protection is also important, lauding Treasury for making this a priority. He concluded that harmonization between state authorities must also be a priority.

Rep. Keith Rothfus (R-Pa.), Vice Chairman, House Financial Services Subcommittee on

Financial Institutions and Consumer Credit

In his opening statement, Rothfus explained how technology and regulatory reform can help the financial services industry “regain its vibrancy,” noting that partnerships between Fintech and banks are “common” and help access and offer new services to consumers. He stressed that nonbanks and Fintech lenders continue to be subject to “clear and robust rules” allowing “healthy competition.”

Testimony

Aaron Cutler, Partner, Hogan Lovells LLP

In his testimony, Cutler noted his support for regulation creating safe, sound, and innovative products and services for consumers, adding that the Treasury report states that a third of U.S. consumers use “no less than two Fintech services.” He continued that the Treasury report recommends third parties be covered under the definition of “consumer” in Dodd-Frank, allowing for the sharing of account data between Fintech companies and financial institutions. Cutler discussed how Fintech companies are subject to state banking departments and other regulatory agencies, often being required to have state licensing and registration, and that the Treasury report recommends uniformity to streamline this process.

Dion Harrison, Director, Elevate

In his testimony, Harrison discussed consumer statistics, breaking them down by race and stressing the need for addressing the lack of diversity in the Fintech and financial services industry. He noted that partnerships between Fintech companies and banks are “essential” to offering services to consumers. Harrison listed three guiding principles to create a more inclusive financial system: 1) Regulation should be pro-consumer and enable innovation; 2) Encourage partnerships between banks and Fintech companies; and 3) Embrace diversity. He lauded the House for passing H.R. 3299, the Protecting Consumers’ Access to Credit Act of 2017, and that he hopes H.R. 4439, the Modernizing Credit Opportunities Act, is also passed.

  1. Michael Price, President and Chief Financial Officer, First Commonwealth Financial Corporation, on behalf of the Pennsylvania Bankers Association

In his testimony, Price focused on three points: 1) Banks are innovating and partnering; 2) Community banks are critically important; and 3) Consumers deserve consistent treatment. He cautioned that while there should be investments in technology to provide innovation to consumers, products must be safe before being offered. Price then stressed the need for regulations and supervision to be activities-based rather than focused on the type of company conducting the activities, resulting in a more level playing field.

Scott B. Astrada, Director of Federal Advocacy, Center for Responsible Lending

In his testimony, Astrada explained that the priorities of the Center for Responsible Lending are to: 1) Preserve the progress made by state and federal stakeholders to guard consumers from predatory debt trap loan products; 2) Ensuring Fintech lending evolves in cadence with existing and developing consumer protection laws; and 3) Preserving state usury laws. He cautioned that payday lenders could adopt Fintech by using the “veil” of innovation, and that “a bad loan is a bad loan, regardless if it’s delivered through storefront or Fintech.” Astrada urged Congress to ensure appropriate consumer protections are applied to any new products and services.

Stuart Rubinstein, President, Fidelity Wealth Technologies

In his testimony, Rubinstein focused on data aggregation services and ways to make sharing information safer and more secure. He stressed that protecting personal financial data has become challenging due to the use of third-party companies using “screen scraping” to login to websites on behalf of the customer by gaining their username and password and then “scrape” the data, often times being outside the scope of services offered by the third party, including personally identifiable information (PII) about the consumer. Rubinstein then listed five principles to help guide the industry when it comes to data sharing: 1) Fidelity strongly supports a consumer’s right to access their own financial data and provide that data to third parties; 2) Data access and sharing must be done in a safe, secure, and transparent manner; 3) Consumers should provide affirmative consent and instruction to financial institutions to share their data with third parties; 4) Third parties should access the minimum amount of financial data they need to provide the service for which the customer provided access; and 5) Consumers should be able to monitor who has access to their data, and access should be easily revocable by the consumer. He concluded with this support for recent legislation that would have a single federal data breach notification standard, stressing that consumers would benefit from such language and eliminate the problem of having 50 different state laws to abide by.

Questions & Answers

Regulatory Sandbox

Luetkemeyer asked whether Fintech companies should be allowed in the regulatory sandbox prior to being affiliated or get a charter, to which Cutler replied that they should access the sandbox early on in the process to get the most benefit. Subcommittee Ranking Member Wm. Lacy Clay (D-Mo.) also asked about the sandbox and if there should be any parameters. Astrada replied that a regulatory sandbox is a “bad deal for consumers,” as it “trad[es] well-established consumer protection laws for the promise of innovation.”

Desire for Innovation

Luetkemeyer noted a recent study that determined over 50 percent of millenials are still interested in accessing actual people rather than machines. Price replied with another study’s results showing that 46 percent of people still walk into bank branches, while 54 percent do things digitally, noting that usually people like to have face-to-face interaction when solving problems.

Data Protection

Throughout the hearing, Rubinstein stressed the importance of protecting consumer data, stating that different firms are held to different standards, and that Fintech firms are not subject to these standards, causing an unlevel playing field. He also stressed the importance of consumers being able to monitor the secure connections they have with third parties on an ongoing basis, as well as the ability to revoke their consent.

Rep. Barry Loudermilk (R-Ga.) focused his questions on cybersecurity and protecting personal privacy, asking why it would be helpful to have a uniform standard for protecting data rather than having different laws in different states. Price replied that while banks are subject to Federal Financial Institutions Examination Council (FFIEC) guidance, the standard is higher for banks than their Fintech partners, so a level playing field is needed, as well as appropriately tailored regulations.

Fintech/Bank Partnerships

Rothfus asked about the partnerships that banks and Fintech companies develop. Price explained that for his company, partnerships are made through their technology provider as smaller banks are unable to purchase Fintech companies, placing them at a slight disadvantage.

Rep. Andy Barr (R-Ky.) also asked about partnerships with community banks, to which Harrison replied that currently there is a lack of regulatory clarity regarding engaging with banks, although once it is worked out Fintech companies will ensure they are in compliance with all regulations.

In response to a question from Luetkemeyer, Cutler stated that partnerships with the big banks should be encouraged, but also those startups that are interested in partnering with Fintech companies, stressing the need for these startups to be able to access the capital required to make these partnerships.

International Standards

In response to a question from Rep. Robert Pittenger (R-N.C.) on international standards the U.S. should consider when developing their own standards, Cutler recommended the Financial Conduit Authority (FCA) in the UK, adding that the Treasury report also lists them.

For additional information about this hearing, please click here.